Reval presented yesterday at the annual Association of Finance Professional (AFP) meeting in Los Angeles on the contentious topic of FAS 157, the Financial Accounting Standard Board’s pronouncement on Fair Value Measurement. FAS 157 came into effect for fiscal years starting after 15 November 2007 for companies complying with US GAAP. The standard provides guidance on how to fair value, not what to fair value. It also includes guidance on how to present fair value in three different levels, with Level 3 being fair values deemed least transparent. FAS 157 is a principles based standard not rules based and should allow for more flexibility of interpretation of the standard for preparers. Recently FAS 157 has been blamed for the financial crisis where many banks have been saying that the standard forces banks to mark to market their positions in an inactive market where the fair values are not representative of the true value of the asset. In his speech, Reval CEO Jiro Okochi noted: “I don’t think bank lobbyists and others get it. FAS 157 is not the cause of the financial crisis today and you can’t blame the blood test for the disease. The FSP put on out on 3 October on how to fair value transactions in an inactive market reiterate the principles behind it and says you can use cash flow type models in the event there is no observable market, just have supporting documentation that supports your assumption as best you can.” He added: “Abolishing FAS 157 doesn’t mean you do not fair value, but just how you fair value. What they should focus on is changing the qualifications for what you fair value and allow for exemptions to put securities in available for sale or trading portfolios into held to maturity portfolios and allow them to be amortized over the life. Again it’s not going to fool any investor, but at least it removes the volatility component.”
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