New Accounting Standards impact financial statements.

• Author: Daisy, Bill
• Position: Private companies

Three new Financial Accounting Standards (SFAS)--SFAS Nos. 157, 158 and 159--will alter the way many organizations present their financial statements and the way auditors report on those statements. This includes the approximately 70 percent of private companies that prepare U.S. generally accepted accounting principles (GAAP) financial statements, according to the American Institute of Certified Public Accountants. Most experts believe that complying with the new rules will make financial reporting more costly and complex. These same experts predict that compliance will ultimately benefit private organizations that develop strategies for cost-effectively adhering to these new rules.

SFAS No. 157: Fair Value Measurements

This standard offers broader information about the extent to which organizations measure assets and liabilities at fair value, and it expands the information used to measure fair value and the effect of these measurements on earnings.

Under SFAS No. 157, fair value is a "market-based measurement" rather than an "entity-specific measurement." As such, this rule defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." Therefore, organizations now must maximize use of observable marketplace inputs, such as quoted market values, and minimize use of their own assumptions when determining fair value.

In the past, accounting technical literature measuring fair value contained varying definitions and provided limited guidance for applying these definitions. For greater clarity, FASB has created a tiered hierarchy to determine fair value that distinguishes between market-participant assumptions (observable inputs) and the reporting entity's own assumptions about the marketplace based on the best information available in the circumstance (unobservable inputs).

Proponents believe fair-value accounting will allow financial-statement users to gain a clearer picture of a company's true economic state by improving consistency and comparability in financial reporting. It is effective for financial statements issued for fiscal years beginning after Nov. 15, 2007, with the exception of certain non-financial assets and liabilities, for which the effective date has been deferred to fiscal years beginning after Nov. 15, 2008.

SFAS No. 158: Employers' Accounting for Defined Benefit Pension and Other Post-Retirement...