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April 1, 2008
SEC grapples with "fair value"
According to CFO Magazine, "The Securities and Exchange Commission has sent 30 letters to CFOs, offering guidance for use of the new fair-value accounting standard that took effect January 1." The SEC also posted a Sample Letter on the SEC web site.
The key disclosure requirement involves a discussion in the MD&A section of the financial report with an explicit discussion of the methodology used to price the assets. In other words, SEC is using the old math teacher approach of "show your work." Don't just give me a number - tell me how you got there.
This could have a positive impact in helping increase acceptance of intangible-backed lending and securitization. One of the key concerns over using intangible as collateral is valuation. An SEC approved disclosure system for the valuation of currently hard-to-price assets will set a good precedent for all "exotic" asset classes. And forcing companies to discuss their valuation methodologies will foster a greater scrutiny and evaluation. That should lead to greater standardization of the methodologies and a more transparent (and less risky) way of deal with these assets. With greater understanding should come greater acceptance of the use of intangibles as an asset class.
Posted by Ken Jarboe at April 1, 2008 1:04 PM
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