Though investment companies are subject to other rules and guidelines, they must still use Statement No. 157 guidelines when preparing their financial statements, for the ease of comparability.
The fair value methods should be used quarterly, as per this statement. This is especially true for those items whose value is determined on the market by observable inputs. Even for unobservable inputs, however, it should be disclosed the impact that the assumptions used will have on the firm's earnings or assets. This is important because the assumptions, particularly for unobservable inputs, can have a significant influence on earnings or asset levels. These disclosures regarding the assumptions allow anybody examining the statements to understand the sensitivity of the results to changes in the assumptions.
Statement No. 157 also is to be used for derivative instruments. The main thrust of this statement is that it nullifies guidance that was previously issued and amends other previously issued guidance. This reflects the FASB's objective that Statement No. 157 begins to streamline the guidance with respect to fair value. Fair value guidance had been scattered throughout a number of different statements and 157 is intended to reduce the number of different statements containing fair value guidance.
The previously-issued statements also did not always adhere to the framework that the FASB uses when issuing its statements. That framework was created with consistency in mind, such that financial statements can different issuers can be easily compared with one another. The process of streamlining the guidance with respect to fair value is part of the move towards increased consistency, beginning with consistency at the philosophical level.
This statement has been ascribed by some as a cause of the current financial crisis. The case has been made before government, for example, that the markets for mortgage-backed securities and collateralized debt obligations were driven down by fear and speculation. The markets, therefore, were behaving irrationally, and irrational markets should not be used as the basis to value an asset (Gross, 2008).
For a couple of reasons, however, this argument does not hold water. The first is that financial institutions have long used mark-to-market accounting (Gelinas, 2008). Remember that Statement No. 157 did not introduce...
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