'No unintended consequences’ of fair value rules

There have been “no unintended consequences” as a result of the fair value reporting rules introduced in 2006, according to an official review of the accounting rules by the Financial Accounting Foundation (FAF).

Some sections of the private equity and venture capital industry have previously complained that the rules create unnecessary additional audit costs and administrative requirements. 

Advisors have also raised concerns that auditors are not evaluating their fair value (or mark-to-market) estimates in a way that syncs with industry practice. 

However, FAF’s post-implementation review of Financial Accounting Statement No. 157: Fair Value Measurement (later renamed ASC Topic 820) concluded the standard was generally working as intended.

Some industry sources believe that finding is in part due to the relatively small size of the private equity and venture capital industries within the total universe of organizations covered by the rule. Large banks, public companies and many other industries of various types that have incorporated fair value reporting in the preparation of financial statements were also considered as part of the review. 

Moreover, a consultation period on Statement 157 produced a conflicting range of responses from stakeholders. Some respondents, including private equity firms, employee benefit plans and private companies, said the standard was producing too much disclosure information that at times confused investors – while other relatively larger respondents suggested that more disclosures were in fact needed.  

“It would appear as if the review team split the difference, and said the right amount of disclosures were being provided,” said David Larsen, managing director at Duff & Phelps, a financial advisory and investment banking firm. 

The report conceded that certain stakeholders – including private equity firms – were incurring additional auditing and valuation costs to meet the standard. However, it attributed these expenses in part to outside forces, and not necessarily just to the standard itself. 

“Rather, we believe that some of these costs relate to factors arising after the issuance of Statement 157, such as the requirements associated with Sarbanes-Oxley, [Securities and Exchange Commission] reviews, and [Public Company Accounting Oversight Board] inspections. Additionally, some costs may have been amplified by the global financial crisis of 2008,” the report said. 

FASB chairman Russ Golden said in a statement that the board would consider the review team’s finding and provide an initial response in the coming weeks.