FASB Considers the Need for Valuation Guidance

Diversity in valuations struck a high chord in recent forum discussions.

June 7, 2007
from BNA Tax and Accounting

by Steve Burkholder, BNA Staff Correspondent

NORWALK, Conn. — Is there a need for some organization to write guidance on how valuations are performed for financial reporting purposes? If so, who should write the guidance, and what process should be used?

These questions and more were debated during an April 30 forum held by the Financial Accounting Standards Board (FASB) and in comment letters sent to FASB in response to its January invitation to comment on the topic. FASB received approximately 80 comments.

The forum was motivated in part by recent actions by FASB offering guidance on how to measure fair value, and permitting optional use of fair value for an expanded range of financial instruments — both seen as setting the stage for further use of fair value rather than historical cost accounting. In this environment, how values are arrived at becomes more significant. In its new standard on Fair Value Measurement (SFAS 157), FASB offered "some measurement guidance, but it does not address many specific valuation issues'' that companies, auditors and valuation professionals face, FASB said in its invitation to comment.

In general, most participants in the FASB forum — which included valuation analysts and others — felt there was some level of need for guidance on valuations in the financial reporting context.

Views differed on whether the guidance should be offered in conceptual language, like accounting standards, or in more detailed implementation guidance or publication of best practices. There was also less agreement on how that guidance should come into being.

Debate among participants in the forum also revealed differences of opinion on appraiser independence, as well as on the role existing professional appraiser groups might take in setting guidance for financial reporting purposes.

Existing Conflicts

Diversity in valuations formed a significant backdrop for the discussions.

Valuation analysts and other participants in the FASB roundtable acknowledged existing conflicts between auditors and appraisers over specific valuations. They also noted that staff accountants at the Securities and Exchange Commission sometimes question values used by public companies.

"It's an antagonistic situation,'' said Charles Stryker, of Trenwith Valuation LLP, an affiliate of accounting firm BDO Seidman. "The appraiser and the auditor are fighting'' over the appropriate value for specific assets.

FASB member Edward Trott made the point that appraisers often seem biased in favor of their client, rather than offering an independent view. Paul Barnes, of Duff & Phelps, an investment banking and advisory firm that performs valuations, objected that Trott's comments presuppose client bias, when it may not exist.

James Dondero, of Huron Consulting, said there is a dearth of rules or standards on valuation. A practice aid of the American Institute of Certified Public Accountants on in-process research and development continues to figure in valuations "because there isn't a lot of other guidance today'' that is authoritative, Dondero said.

The Appraisal Foundation, a standard-setter and recorder of best practices, said it "believes that valuation guidance is needed to determine values that would satisfy measurement attributes for financial reporting purposes.'' The AFT forwarded a recent report on valuation best practices report to FASB.

"It is in the implementation of certain techniques or practices used for valuation for financial reporting purposes where there is a need for guidance,'' AFT said.

Permanent Structure?

Participants in FASB's roundtable also differed on whether FASB should form a permanent valuation-writing panel, similar to the standing Emerging Issues Task Force. Alternatively, a number of participants favored FASB working with existing appraisal groups to devise guidance, which could be a short-term effort.

Deloitte & Touche and Ernst & Young supported having a "VITF'' devise valuation guidance under FASB tutelage.

However, KPMG's Paul Munter, a participant in the April 30 forum, cautioned against creating an EITF-like structure. KPMG and PricewaterhouseCoopers favor the FASB working directly with the International Accounting Standards Board on valuation guidance that would be applied globally in financial reporting.

"We don't know whether there's a need for a permanent structure or not,'' Munter said. He observed that such a group might not know when to call a halt to its activities.

The financial reporting committee of the Institute of Management Accountants and the American Society of Appraisers said they favor forming a separate standard-setting body to handle the task of writing valuation guidance. The IMA panel supports having FASB oversee that body's work.

Role of Existing Valuation Groups

In what observer described as jockeying for position, existing valuation standards organizations, such as the International Valuation Standards Committee and the Appraisal Foundation, argued for a continued role.

The Appraisal Foundation pointed out that the foundation's Uniform Standards of Professional Appraisal Practice "have been cited in hundreds of court cases involving the valuation of all property types,'' a position endorsed by American Appraisal Associates, a San Francisco-based company.

The standards committee of the National Association of Certified Valuation Analysts also favored forming a standing valuation issues task force along the lines of EITF, but with a broader makeup.

However, PwC cautioned against having existing groups such as IVSC, the Appraisal Foundation and the Appraisal Issues Task Force be given the job of writing valuation standards for financial reporting. While PwC applauded those groups' efforts to date, it said, "We are concerned that those organizations may not possess the necessary experience, credibility and authority in the capital markets to assume the role of promulgating valuation guidance for financial reporting.''

Summing Up, and Next Steps

At the roundtable, FASB Chairman Robert Herz said he sensed collective accord on the need for guidance on what he called `second-level' issues — such as discount rates that figure in valuations.

At the end of the three-hour roundtable, FASB member Leslie Seidman said FASB plans to study the comments made at the forum, together with the comment letters. It will then determine what its next steps will be in the research project, she suggested.

Meanwhile, the board and its staff plan to study how FAS 157 is applied by companies to better gauge the need for valuation guidance.

Situations in which companies assign fair values to assets without direct exchange- or market-derived amounts promise to be most closely watched by rule makers as well as the SEC staff, according to discussions in Norwalk and Washington.

Comment letters on the January 2007 invitation to comment on valuation standards are available at http://www.fasb.org/ocl/fasb-getletters.php?project=1520-100. A brief update on the project, written by FASB's staff, is posted at http://www.fasb.org/project/valuation_standards.shtml. FASB's invitation to comment is available at http://www.fasb.org/draft/ITC_Val_Guide_for_Financial_Reporting.pdf (PDF).

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Copyright © 2007 by The Bureau of National Affairs, Inc., Washington D.C.