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Home > Blog > FAS 157 Amendments Lack Substance, Alter Integrity Of Financial Reports

FAS 157 Amendments Lack Substance, Alter Integrity Of Financial Reports

Proposed revisions to the fair value accounting standard known as FAS 157 have garnered harsh criticism from those who say the changes are ambiguous and undefined, lack substance and will create further inconsistencies as banks assign value to some assets. 

Under current FAS 157 rules, three different valuation levels exist for banks to price their mark-to-market holdings. Level 1 assets have readily observable prices and trade in active markets. Level 2 assets do not trade actively nor do they have easily obtainable prices. Level 3 assets include the most problematic holdings, such as collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs) and other exotic derivatives created by prime and subprime mortgages.  

Level 3 holdings are considered illiquid, with market prices so scarce that companies use internal models to gauge their value. In other words, placing a value on these assets is subjective and largely depends on assumptions or opinions. For this reason, Level 3 valuation is often referred to as “mark-to-myth” or “mark-to-imagination.” 

The new proposals for FAS 157 assume that “inactive” markets are the same as “distressed” markets. Moreover, the revisions essentially would allow banks to move more hard-to-value assets into Level 3. This means a company will be able to “handpick” the most appealing value for its assets, while casting aside any that might cause them financial turmoil. 

The bottom line: The proposed amendments to FAS 157 appear to squash the intended purpose of fair value accounting altogether. 

The Financial Accounting Standards Board plans to vote on the revisions to FAS 157 on April 2.

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