What is this fearsome beast accountants call FAS 157?
Simply put, it lays out the latest expectations for how companies — and hedge funds — are supposed to value assets and liabilities.
In particular, FAS 157 emphasizes that fair value is a market-based measurement whose purpose is to reflect the price one would get for selling an asset on the open market. It differentiates between three levels of assets: those that have readily observable market prices, such as stocks or bonds; those that are not as easily priced but whose value can be determined by underlying interest rates; and those for which there is no discernible market and whose values are arrived at through sophisticated models too complicated to explain here.
As far as banks were concerned, FAS 157 was supposedly a nonevent because they had already adopted mark-to-market accounting. But in the little more than a year since 157 became part of generally accepted accounting principles, the Bloomberg U.S. banks index has declined by nearly 50 percent. Without FAS 157 maybe banks would have been freer to do accounting that’s less market-driven and their books would have looked a lot better.
There’s more to come.
First, in 2009, those sections of 157 that deal with intangible assets, contingencies, asset retirement obligations and goodwill — the arcane things that mergers and acquisitions bankers need to worry about — will go into effect. Next, companies will have to start applying FAS 141R, which revises the standard on how to book a merger or acquisition, though the U.S. Chamber of Commerce and others have called for a reprieve, for the time being, on its implementation.
After that — fasten your seat belt — comes FAS 161, perhaps the mother of all hedge fund accounting rules, effective starting in 2009 and designed to provide better disclosures about a business’s derivatives and hedging activities. Specifically, FAS 161 will require qualitative disclosures of the objectives and strategies behind the use of derivatives and hedging and quantitative disclosures in tabular form of the fair value of derivatives.
