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FASB 157 — Delayed, or Not?

Posted By Barry Ritholtz On November 15, 2007 @ 8:15 am In Corporate Management,Earnings,Valuation | Comments Disabled

On Monday, a rumor was circulating that FASB Rule 157 was going to be delayed. This helped to power markets higher.

  We will save the discussion of why markets would rally on the idea that
publicly traded financial firms would be allowed to conceal large and ill-defined losses from shareholders for another time.

It appears the Day of Reckoning is here. FASB Rule 157 [1]  (mostly) takes effect today.

What that accounting change requires is that all of the crappy paper on  the balance sheets of various funds, banks and brokers — RMBS, CDOs, CDS, etc. — must be "carried at fair value on a recurring basis in financial statements."

In a news release at 12:05 [2] am this morning, the Financial Accounting Standards Board:

"Reaffirmed its vote against a blanket deferral of Statement 157, Fair Value Measurements. For fiscal years beginning after November 15, 2007, companies will be required to implement the standard for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. As a result, Statement 157 becomes effective as originally scheduled in accounting for the financial assets and liabilities of financial institutions.

The Board did, however, provide a one year deferral for the implementation of Statement 157 for other nonfinancial assets and liabilities. An exposure draft will be issued for comment in the near future on this partial deferral. The audiocast of the November 14th meeting is currently available at www.fasb.org. More information about topics discussed and decisions reached at the meeting will also be posted on the FASB website in the coming days."

In other words, no more mark-to-model or other accounting fantasy. I have some questions as to what exactly "nonfinancial assets and nonfinancial liabilities" are, but there will be further clarifications coming from FASB over the next few days. Since they are dribbling this news out in little spurts, my assumption is that its its more shareholder than corporate friendly.

UBS’ noted that even this partial delay is not a positive. Their derivative department noted that the
implementation of the full FASB 157 being partially delayed "suggests that banks’ balance sheets
are not sufficiently strong to cope with that shock at the moment.
Whilst this undoubtedly gives banks more time to work out their
problems, that is actually bad news as it will mean the financial
markets remain in a state of closure for longer, and the process of
removing capacity will take longer to materialise."



Before you applaud FASB for requiring fair and transparent disclosure of holdings by Financial institutions — something that most reasonable folks would describe as a no-brainer — allow me to point out that a total deferral for a full year nearly passed. After various lobbying efforts by groups like Financial Executives
International, the seven-member FASB rejected such a proposal by a
four-to-three vote. 

That is a reminder of exactly how pathetic and shareholder unfriendly the corporate infrastructure remains. When I get the names of the members who voted against this rule, I will be sure to post it for public shaming.


Summary of Statement No. 157 [1]
Fair Value Measurements   

FASB Rejects Deferral of Statement 157 for Financial Assets and Liabilities [2]
Business Wire, 2007-11-15 00:05:07 –

Macro Derivatives Sales Daily
Thursday 15/11//07

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URL to article: http://www.ritholtz.com/blog/2007/11/fasb-157-delayed-or-not/

URLs in this post:

[1] FASB Rule 157: http://www.fasb.org/st/summary/stsum157.shtml

[2] news release at 12:05: http://www.pr-inside.com/fasb-rejects-deferral-of-statement-r301808.htm

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