FASB 157 Partial Deferral Implications

For those not familiar with Financial Accounting Standards Board FASB 157 here is a Summary of Statement.

The above link is not the easiest to understand. A simple explanation is that FASB 157 requires fair market valuations when pricing assets or liabilities on corporate balance sheets. In other words, corporations are not allowed to keep assets on the books at inflated or deflated values.

The target date for implementation of FASB 157 was November 15 but appeals were made to delay the ruling.

On November 14 the FASB Rejects Deferral of Statement 157 for Financial Assets and Liabilities.

Partial Deferral Granted for Nonfinancial Assets and Nonfinancial Liabilities

Norwalk, CT, November 14, 2007—At its Board meeting today, the Financial Accounting Standards Board (FASB) reaffirmed its vote against a blanket deferral of Statement 157, Fair Value Measurements. For fiscal years beginning after November 15, 2007, companies will be required to implement the standard for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. As a result, Statement 157 becomes effective as originally scheduled in accounting for the financial assets and liabilities of financial institutions.

The Board did, however, provide a one year deferral for the implementation of Statement 157 for other nonfinancial assets and liabilities. An exposure draft will be issued for comment in the near future on this partial deferral.

To understand the implications we need to define the terms non-financial asset and financial asset.

Definitions

• non-financial asset : Physical asset, such as real estate or personal property. opposite of financial asset.
• financial asset : A non-physical asset, such as a security, certificate, or bank balance. opposite of non-financial asset.

Implications

It appears to be full speed ahead on commercial paper, mortgages, derivatives, etc. Real Estate (REOs) and other physical assets are exempt. This will benefit banks and lending institutions stuck with lots of foreclosures.

I use the word benefit loosely. The longer banks hold on to REOs the worse the writeoffs will eventually be. Attempting to prop up the books by not marking REOs to market will increase the loss later. Let's face it. We are heading into a recession and real estate prices are going to continue to decline.

Someone needs to tell Lennar (LEN) this because their Mothball Housing Strategy Is Doomed To Fail.

With commercial real estate poised to fall (see my piece Commercial Real Estate Black Hole or Nouriel Roubini's article Commercial Real Estate and Its Massive Forthcoming Losses) bank lending is going to be further restricted as the credit crunch worsens. That would likely have been true with or without FASB 157.

Also note that the results of FASB 157 do not magically appear on November 15th but rather over time along with corporate filings of earnings statements. Thus those expecting some kind of financial meltdown on the 15th specifically related to FASB 157 have been barking up the wrong tree. This was true even before the partial deferment. Nonetheless FASB will take its eventual toll by making it harder to temporarily hide things. This is a good thing even if it is implemented in stages. We should probably be grateful the entire thing wasn't scrapped.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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