Fair Value Accounting: A Critical New Skill for All CPAs

Ideal for self-study or on-site training!

Gain insights into the conceptual and practical reasons for using fair value as the required (or optional) measurement attribute for a number of new and existing accounting standards. The course covers the conceptual and practical issues which arise when fair value measurement is implemented under existing FASB standards and provides examples of these issues. In addition, the measurement and estimation challenges that confront preparers and auditors in making, and attesting to, fair value measurements are presented and related guidance is provided. 

Objectives: 

• Understand key terminology in SFAS No. 157
• Apply the Fair Value Hierarchy to appropriate approaches to measurement
• Identify and evaluate the impact of the key measurement components as they pertain to management's representations and auditors' responsibilities
• Apply fair value accounting to certain FASB Statements and Interpretations that require measurements of assets or liabilities at fair value

Prerequisite: Basic understanding of accounting principles

The video offers expert commentary on this technical topic and a lively panel discussion, of implementation issues. In this video, moderator Lawrence J. Gramling, Ph.D., CPA, Professor of Accounting at the University of Connecticut in Storrs, CT, discusses the required (and permitted) use of fair value accounting under FASB standards with Mark A. Alimena, CPA, CFE, Director of Financial Due Diligence and Investigative Services at Marden, Harrison & Kreuter, CPAs, PC in White Plains, NY, Teresa D. Thamer, CPA, CFE, Associate Professor at Breneau University in Gainesville, GA, and Mark L. Zyla, CPA, ABV, CFA, ASA, Managing Director of the Atlanta-based CPA firm of Acuitas, Inc.

*(145-min. video) The DVD disk contains the video presentation and a viewable copy of the Manual.
**The Additional Manual is for group study training only. Unlike other formats, it has no exam answer sheet and cannot be used to earn self-study credit.

Chapter 1

Overview of Fair Value Accounting

Learning Objectives

After studying this chapter participants should

• Understand the impact the changing economic environment is having on financial accounting standards in the United States.
• Become familiar with the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) Convergence Project and the impact on existing and future financial accounting standards.
• Understand how Fair Value is viewed in light of the FASB's conceptual framework.
• Identify the role Codification will play in accessing authoritative guidance concerning Fair Value Measurements in accounting.
• Identify the current standards which require the use of Fair Value Measurements.

Introduction

Over the past several years, there has been what seems to be a proliferation of exposure drafts, changes in both standard setting bodies and the processes and membership of those bodies as well as a shift in the focus of financial statements to include transparency and management's acceptance of responsibility for those financial statements. These changes are indicative of the on-going changes facing both business and the accounting profession.

There are a variety of reasons for these changes, many of which are interrelated. This chapter will address four of these reasons:

• The changing economic and regulatory environments facing business today
• The FASB and IASB Convergence Project
• The FASB's Conceptual Framework Project
• The implementation of Fair Value Accounting in U.S. Generally Accepted Accounting Principles (GAAP)

The Changing Economic and Regulatory Environment

Welcome to the 21st century! Just as the Industrial Revolution hailed the arrival of the 20th century, certainly the 21st century could be called the Information Revolution. The speed at which information is generated and communicated continues to escalate, and that has had a tremendous impact on both the economy and society of not only the United States but of the world in general.

Information is at everyone's "fingertips." This access to information has changed the way people view the world as well as make decisions. Financial information is immediately available. The focus of the Securities and Exchange Commission (SEC) on Management Decision and Analysis (MD&A) as well as transparency of financial data, including projections, has served to increase the expectations of investors and Wall Street analysts. This, in turn, has served to influence stock prices. Many feel this has also exerted pressure on companies to manipulate earnings. Certainly some of the accounting and management scandals of the 1990s are the result of this pressure.

Competition has also changed dramatically. Companies now trade and do business globally whereas, in the past, this was left only to the largest Fortune 500 companies. Global competition has also changed. Not only are domestic companies doing business outside the United States but foreign companies are actively doing business within the United States. New markets in former third-world countries continue to emerge. Foreign companies eagerly seek to trade their stock on United States stock exchanges. This has resulted in trade deficits for the United States as well as increased competition in investor markets.

The increased complexity of financial transactions has also played a significant role in effecting changes in business reporting in recent years. Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs) were virtually unheard of until the late 1990s. The banking and investment arenas have generated a myriad of complex financial instruments which have resulted in a variety of rules and interpretations not originally considered in accounting pronouncements. What was once a simple matter of reporting is now a maze of interpretations and complex standards.

The traditional economics of the 20th century no longer seem relevant in the 21st century. The fast-paced global environment of business continues to escalate, creating new and continuing challenges for management, investors, and government.

With the passage of the Sarbanes-Oxley Act (SOX) in 2002, the differences between public and privately-held companies were highlighted and expanded. Not only were the auditors of publicly-held companies held to new rules, but management's responsibility for the financial statements was also expanded. SOX not only re-emphasized the oversight responsibility of the SEC but broadened it to include authority over generally accepted accounting principles. Under federal law, the SEC has the mandate to determine accounting principles for publicly-held companies. But it has generally ceded that authority to private-sector accounting bodies such as the Financial Accounting Standards Board.

SOX also established the Public Company Accounting Oversight Board (PCAOB). This body, charged with the authority to amend, modify, repeal, or reject any auditing standard, has adopted six new auditing standards, AS 1 - AS 6, since its inception (AS 5 replaced AS 2). As a result, the AICPA's Auditing Standards Board (ASB) has issued more than a dozen new Statements on Auditing Standards (SAS) in order to keep wording and other areas of emphasis the same for audits of public and private companies.

Historically, the SEC has focused on additional disclosure requirements, leaving measurement issues to the FASB. For example, the SEC expanded the coverage of Management's Discussion and Analysis (MD&A), the extensive narrative disclosure that is required to be appended to the financial statements. Over the years, the SEC has continued to move to an integrated disclosure system as demonstrated by the registration and required proxy statements and other filings. Sarbanes-Oxley has only served to provide additional emphasis and authority to the SEC in the regulation of public companies.

A Vision from the CEOs of the International Audit Networks

In response to the changes in the economic and regulatory environments, the Global Public Policy Symposium released a "white paper" on meeting investor needs in an evolving global market in November, 2006. The paper entitled "Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks" is reproduced as Appendix A to this course. The symposium was sponsored by the six largest accounting firm networks - PwC, KPMG, Deloitte, E&Y, BDO, and Grant Thornton. What is of significant interest in this paper is that the "vision looks at what changes are required in global financial reporting and public company auditing to better serve global capital markets."

As expressed by the CEOs, the accounting profession "has undergone a fundamental change from being largely self-regulated to regulated around the globe." That change will require that "all stakeholders look to the future and consider how investors' needs will change in a rapidly evolving global market."

While far from comprehensive, the CEOs considered the following six elements to be vital:

• Investor needs for information are well defined and met;
• The roles of the various stakeholders in these markets - preparers, regulators, investors, standards setters, and auditors - are aligned and supported by effective forums for continuous dialogue;
• The auditing profession is vibrant, sustainable, and providing sufficient choice for all stakeholders in these markets;
• A new business reporting model is developed to deliver relevant and reliable information in a timely way;
• Large, collusive frauds are more and more rare; and
• Information is reported and audited pursuant to globally consistent standards.

Perhaps most significant among the changes cited by the CEOs is the kind of information investors will need from corporate reports in the future:

• The value of many companies resides in various "intangible" assets (such as employee creativity and loyalty, and relationships with suppliers and customers). However, information to assess the value of these intangibles is not consistently reported.
• Billions of people around the world now have the ability to access information instantaneously. Yet when it comes to financial reports, investors must wait for companies to publish data only once a quarter, every six months, or annually.
• The information technology revolution has made data customization easy to use and broadly expected. However, today's financial reports remain largely one-size-fits-all, and are not sufficiently accessible to many investors.

"In short, the same forces that are reshaping economies at all levels are driving the need to transform what kind of information various stakeholders want from companies, in what form, and at what frequency. In a world of "mass customization," standard financial statements have less and less meaning and relevance. The future of auditing in such an environment lies in the need to verify that the process by which company-specific information is collected, sorted and reported is reliable and the information presented is relevant for decision making. Moreover, because many enterprises increasingly are doing business in multiple countries while investors increasingly are buying the shares of companies from around the world, stakeholders and investors in particular want to know that the information they are getting is compiled, classified, reported and audited on a consistent basis across countries."

The strengthening of financial reporting and the audit function are accomplished in the near-term by convergence. The report cites the following recommendations:

• Complete the effort by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to harmonize differences between international and U.S. reporting standards, as currently envisioned. Complex rules must be resisted and withdrawn. Today's rules can produce financial statements that virtually no one understands. Standards need to be principles-based.

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