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Pluris Says FASB’s “Fair Value” Revisions Gut Standard

Pluris Says FASB’s “Fair Value” Revisions Gut Standard
February, 4 2009

Espen Robak
Pluris Valuation Advisors LLC

David P. Kowal, APR
Kowal Communications, Inc.

NEW YORK, N.Y., April 2, 2009 – Revisions to the “fair value” accounting standard (FAS 157-e) approved today will weaken the standard and create inconsistencies in valuations, according to Espen Robak, president of Pluris Valuation Advisors LLC.

In a comment letter filed with the Financial Accounting Standards Board (FASB), Robak said that FAS 157-e will help financial institutions, but hurt companies that have been diligent about complying with “fair value” accounting standards.

“The revisions to FAS 157 appears to be designed to alleviate capital adequacy problems at banks and credit unions, as many financial institutions that would benefit from this guidance have requested retroactive application,” Robak said. “In our view, those issues are best addressed by regulators and law makers, not by the FASB, which has the vital role of setting Generally Accepted Accounting Principles (GAAP) for the U.S.”

The FASB approved the revisions today.

Problems Robak cited with FAS 157-e, entitled, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed,” include:

  • The revisions assume that “inactive” markets are the same as “distressed” markets.
  • Few companies will be able to achieve Level 2 status when valuing illiquid or distressed securities. As a result, the assets will be classified in Level 3, which is a step backward from existing rules.
  • Most companies will face significant challenges in meeting the tight deadline required for the proposed amendment.
  • The revisions are ambiguous; many terms are undefined and the one example given provides inadequate guidance.

As approved, FAS 157-e will reduce investor confidence in financial statements, according to Robak, and “we will no longer have balance sheets we can believe in.”

Rick Martin, CPA, vice president of Pluris, added that the revisions take the focus off of the “exit price” as a measure of an asset’s “fair value” and could force companies to use hypothetical data produced by models, rather than market-based data.

“The whole purpose of ‘fair value’ accounting has been to produce representative valuations using market-based inputs,” according to Martin. “The revisions would reverse course and result in inconsistencies. FAS 157-e represents a departure from ‘mark-to-market’ accounting.”

About Pluris Valuation Advisors

Pluris Valuation Advisors LLC of New York, N.Y., is a full-service valuation firm specializing in the valuation of restricted securities of public companies, auction-rate securities, stock options, bankruptcy claims and other assets that lack liquidity. Pluris valuations are used for financial reporting, tax purposes, business transactions and litigation support. Additional information is available

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