considered investment property.
Same building, different owner or
user, different values reported to
investors and creditors.
We make an assumption that
companies sitting on investment
properties with significant built-in gains, not yet reflected on the
financial statements, will be motivated to opt for fair value treatment.
Conversely, companies sitting on
assets that have not risen in value
will have zero incentive to go to fair
value treatment. Interestingly, land
for the first time, if treated as an investment, can also be written up (or
down) to fair value.
If there is one conclusion to be
drawn from 37 years of FASB rule-making, it is that the board actively
dislikes choices of different accounting in otherwise similar circumstances.
How long will it be before analysts and journalists start to complain about companies “
managing” their earnings by how they
classify a specific structure? As
written, IAS 40 begs for such disparate treatment, so I would predict
some modification by FASB of the
“free choice” aspect, as well as the
disparate accounting for other wise
identical structures. Any such modification, however, can only go in
the direction of more, not less, use
of fair value treatment of structures.
Once FASB adopts IAS 40 — in the
interest, of course, solely of convergence — I predict that there will be
increasing pressure for expanding
the role of fair value to many more
assets and asset categories.
I could write another article
about all the things that are wrong
with fair value accounting, but close
this piece with discussing but one
problem area. Valuation is not an
exact science; in fact, it is not a science at all. Two equally competent
valuation specialists should come
within 10 percent of each other for
a specific asset. They will not come
any closer than 10 percent, other
than by chance.
A 10 percent range, plus or minus, may not seem significant, but
my experience with impairment
testing leads me to the belief that
companies often are interested in
the effect of accounting and valuation choices that impact EPS by lit-
FROM PAGE 8
erally a cent per share. A 10 percent
range in valuation of material assets
has the potential to swamp results
of operations for a period. I am not
asserting that managements would
ever manage earnings through the
valuation process. But, trust me, the
The FASB decision to consider
adoption of IAS 40, as part of a con-
vergence effort, may seem to be a
minor blip in the course of recent
development in GAAP. To the con-
trary, in this writer’s opinion it is the
start of a truly major revolution in
financial reporting. AT