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Capital Markets Law Journal Advance Access originally published online on February 27, 2009
Capital Markets Law Journal 2009 4(2):133-154; doi:10.1093/cmlj/kmp001
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© The Author (2009). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Financial disclosure and SFAS 157: seeking transparency in a perfect storm

Sharon Brown-Hruska and Shuchi Satwah*
*Dr Sharon Brown-Hruska and Ms Shuchi Satwah are Vice Presidents in the Securities and Finance Practice at National Economic Research Associates, Inc. (NERA). The authors thank Robert Mackay, Tom Porter and an anonymous reviewer for their most helpful comments. The views expressed here are those of the authors and are not necessarily those of NERA or its staff.

The first 150 words of the full text of this article appear below.


Key points

  • The intent of fair value accounting and its articulation in accounting statements like SFAS 157 is to increase transparency of both financial activity and the manner by which it is measured.
  • SFAS 157, issued in September 2006, requires expanded disclosures about fair value measurements of assets and liabilities by implementing a hierarchy of inputs that places current market prices at its pinnacle.
  • When asset markets became illiquid in the credit crisis, the absence of current market quotes posed challenges in valuation irrespective of the adoption of SFAS 157. Typical valuation methods used by market participants in the case of structured products were consistent with the techniques acceptable for estimating fair value as described in SFAS 157.
  • Even before the adoption of SFAS 157, increased dependence on market prices and market-generated inputs created a kind of Grossman–Stiglitz Paradox, as some investors and asset managers chose to rely on analysts . . . [Full Text of this Article]

 

   1. Introduction
 

   2. The role of financial reporting in increasing transparency
 

   3. The evolution of fair value accounting
 
Increased disclosure about fair value
Fair value recognition: investments in debt and equity securities
Accounting for derivatives
Fair value accounting and risk management
Fair value accounting and present value-based measurements

   4. Overview of SFAS 157
 

   5. Controversy surrounding SFAS 157 and fair value accounting
 
Did SFAS 157 require more items to be measured at fair value?
Did SFAS 157 change the way fair value is defined?
Did SFAS 157 make fair valuation difficult in illiquid markets?
Did SFAS 157 over emphasize the role of observable inputs?
Did migration of assets from Level 2 to Level 3 create problems?
Did fair value accounting cause/worsen the crisis?

   6. Conclusion
 

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Capital Markets Law Journal 2009 4: 131-132. [Extract] [Full Text]