Tactical implementation of fair value rules.

• Author: Karstetter, Edward
• Position: ACCOUNTING

Fair value rules have recently come under fire, gaining unprecedented national exposure. Boards of directors, auditors, regulators and other financial statement users are closely scrutinizing fair value issues, causing a ripple effect in the market--including reductions in value, increased volatility, investor losses and higher costs.

At the same time, the new rules have become increasingly complex, leaving those in charge of interpretation and implementation--such as chief financial officers, controllers and their finance and accounting teams--the difficult job of compliance. They must not only understand the rules and determine their appropriate application, but also gain acceptance by their external auditor and explain the impact to interested parties. That leaves it a stressful and tedious process to complete.

But there is a solution. By establishing the right framework to properly address fair value issues, companies can improve results and ease unnecessary stress. At its core, this framework should include four key components:

* Identifying and understanding relevant accounting rules.

* Establishing a defined yet flexible process.

* Identifying and understanding the critical elements of fair value estimations.

* Maintaining robust and continual communication among all participants.

Identifying and Understanding Relevant Accounting Rules

The implementation of fair value rules is no small undertaking. To be done correctly, up-to-date knowledge of relevant accounting literature and proper identification of those assets and liabilities subject to fair value rules are required.

Consequently, the finance team must remain current with accounting pronouncements--not only as they are introduced, but as they evolve over time. A key is establishing internal requirements regarding individual research and education and providing access to relevant information through educational programs, publications, webcasts and Internet research.

Companies may also consider developing and maintaining regular communication with a network of external advisers, drawing upon on their resources to complement--but never replace--management's knowledge and decisions regarding fair value estimates.

Establishing a Defined Yet Flexible Management Process

It is essential to accurately perform and record fair value estimations. A well-developed management process or processes--depending on the expected number of estimates in question--can help a company do this effectively, helping to manage expectations, minimize expenses and mitigate risk.

Initially, an overall master process should be developed to manage all expected estimates, followed by the creation of individual management processes for specific estimates. This use of multiple process could benefit a company performing estimates related to goodwill impairment, purchase price allocations, embedded derivatives and share-based payments.

Figure 1 above presents a simple overview of the master process and its primary components. First, proper identification of the fair value estimates to be performed must take place, with management then assembling a group to develop and review each estimate individually. Led by a senior executive of the accounting team, the group should consist of a member of senior management, a member assigned to handle required analysis and the...