The 21st century with all of its technological advancements and so-called progress, has brought about many new and unforeseen phobias. For example, did you know that half of our population now suffers from nomophobia, a fear of being out of mobile phone contact? We even have a name for those who are afraid of technology -- technophobias. If we were honest, most of us suffer to some degree from agmenophobia, the fear that the queue we join will end up being slower than the other one.
While it hasn't technically been given a fancy phobia name yet, there is a new widespread fear that has developed in the past twelve months among U. S. bankers. It is the FAS 157 fear. The Financial Accounting Standards Board (FASB) Statement No. 157 "Fair Value Measurements" became effective for entities with fiscal years beginning after November 15, 2007 in order to regulate the valuation of bank assets. These valuations are of critical importance because they are the basis for all bank lending.
Since none of our readers suffer from gnosiophobia, the fear of knowledge, we know you will want to read this week's Buzz to learn more about the controversy surrounding FAS 157 from our own Joseph Bartlett, Of Counsel at Sullivan & Worcester LLP and Founder of VC Experts.com.
FAS 157 is one of the most controversial accounting protocols in recent memory...blamed by some as the predicate cause of the current credit crisis. Accordingly, we want to share two of the presentations at an October 24th seminar sponsored by PWC and The Johnson School Private Equity Society & Cornell Alternative Investments Club on FAS 157. An earlier version of my presentation at the event, attached as well, is set out in the Buzz Archive, "FAS 157 - Fair Value Measurements Adopted by the FASB - Parts 1 and 2 (3/4/2008 and 3/6/2008). (See also the Buzz Archive, for "Pluris FAS 157 Handbook for Private Equity (3/25/2008).)
The following presentation of Professor Swieringa deserves special attention. Bob was a member of the accounting faculty at the Stanford Graduate School of Business and at The Johnson School before serving as a member of the Financial Accounting Standards Board (FASB) from 1986 to 1996. He was a professor in the practice of accounting at the Yale School of Management before returning to the Johnson School in 1997 as the Anne and Elmer Lindseth Dean from 1997 to 2007 and continues as professor of accounting.
Professor Swieringa's Presentation entitled "It's All Your Fault!" FAS 157 in the Current Economic Environment
One additional point from this corner. Please see pp. 22 through 25 of my presentation, which suggests that FAS 157 may create problems in transparency as assets, once marked down, can be held to maturity . and, if paid, will produce a mark up, perhaps inflating the income statement artificially; the volatility, in other words, can prove troublesome.
Joseph W. Bartlett's Presentation entitled "FAS 157 - Fair Value Measurements Adopted by the FASB"
In fact, a cognate issue is reported in the Oct. 31stFinancial Times p. 19 and, to illustrate, I don't have to do more than quote the piece:
"Deutsche Bank has recorded a profit instead of a loss in its most recent results by using new accounting provisions designed to mitigate the impact of the financial crisis on European banks. .
"Deutsche reclassified almost ?25bn ($32.4bn) of assets as loans that it will now hold until maturity including ?7.1bn of funded leveraged finance loans - which the bank had intended should be sold on - and ?9.7bn in asset-backed commercial paper conduits.
"Through the shifts, Deutsche, which announced ?1.2bn of writedowns, avoided a further ?845m of writedowns on some assets. The changes helped the bank to raise net income by ?538m and meant Deutsche booked a quarterly net income of ?414m. That compares with net income of ?1.6bn in the same period last year.
"Other banks are examining how best to apply the new rules but face hurdles.
"Most importantly, banks have to prove they were intending to hold the assets as of July 1. Any bank that has been selling since then cannot reclassify. Auditors report tough fights with clients over this." (Emphasis added.)
That said, Bob Swieringa makes powerful arguments in favor of FAS 157; see pp. 6-7 of his presentation, where he lists some fundamental points often overlooked by the critics, viz:
The point is that fair value, arrived at through methods, consistently applied, has always been a core element of financial disclosure. Get used to it. To be sure, again as always, the Devil is in the details. But, Bob's reminders are a long overdue wake up call. The "fair value" concept is over 100 years old; it is not going to go away no matter how the critics huff and puff . and audit clients can comply, assuming they put in the requisite elbow grease.
 Wilson & Hughes, "New Rules Help D Bank Post a Profit" FT, Oct. 31, 2008, p. 19.
 Hughes & Wilson, "Rivals Face Hurdles in Copying Deutsche Move," FT, Oct. 31, 2008, p. 19.
Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com
McCarter & English, LLP
McCarter & English, LLP is a firm of over 400 lawyers with offices in Boston, Hartford, Stamford, New York City, Newark, Philadelphia and Wilmington. In continuous business for more than 160 years, we are among the oldest and largest law firms in America.
Clients come first at McCarter & English. Their goals and priorities are what count. Our job is to listen to our clients, stay on top of the frequent changes that can affect their goals, and implement the strategies that will lead to success. Applying this approach effectively and consistently requires dedication and constant attention to many details. This client-centered philosophy has served our clients well and is responsible for our success and stability.
We are honored to be the chosen law firm of clients ranging from Fortune 100 companies to mid-market and emerging growth companies to individual people. When our clients do great things, we are pleased to get the assist.