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FAIR VALUE ACCOUNTING AND SUB-PRIME Michael r. Young INTRODUCTION A proposition creeping its way into the discussion about the financial market dislocations arising from sub-prime loans is that its really our accounting system that is to blame. The argument is that new accounting rules are requiring writedowns that actually exaggerate losses and that financial markets are thereby being driven to levels that are artificially low. A consequence, as summarized by The Wall Street Journal, is a “rebellion” by those who are “blaming accounting rules” for exaggerated losses and calling for new rules that would, in essence, dampen financial market volatility. That is certainly one way of looking at it. And, no doubt, the billions in writedowns of mortgage-backed instruments and accompanying volatility in financial markets since this past summer have been no fun. Still, we should be slow to blame the accountants or new accounting standards for the sub-prime meltdown. To the contrary, some may be expected to point out that the aftermath of the sub-prime difficulties has put to the test a financial reporting system that has responded as it should. BEHIND THE SCENES: FAS 157 For those inclined to blame the accounting, the real culprit in the sub-prime mess is a fairly new standard, “Statement of Financial Accounting Standards No. 157” or “FAS 157.” Issued in September 2006 and scheduled to take effect this past November, GAS 157 speaks to the valuation of certain kinds of assets, namely assets that should be recorded at fair value. Applicable to, among other things, financial instruments of the sort relevant to sub-prime loans, the standard specifies that such assets are to be recorded at the price for which they could be sold, that is, “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.” Among accountants, this concept is referred to in shorthand as the “exit price.” In speaking to the proper valuation of assets, FAS 157 is the latest contribution to one of the oldest debates in accounting. That is whether assets are better recorded at “cost” or at their “fair”（or market）value. The issue is one that has been vigorously debated for years, one of the reasons being that each side has had excellent arguments to support its position. Advocates of the “cost” approach assert that cost is the best, most reliable, and most objective indication of “fair value” at the time a transaction takes place. The existence of an invoice or a contract typically makes the evidence supporting the asset value all but irrefutable. Making the valuation even more reliable, such concrete evidence can be independently examined by an outside auditor of the financial statements. Accordingly, under the cost approach, there is comparatively little need for judgment and, therefore, little opportunity for blunders or the manipulation of financial results. But that is only one side of the argument. The other is that historical cost, while objectively reliable at the moment a transaction takes place, can become outdated fairly quickly. That is particularly so for assets that are traded in active markets such as financial instruments. What is the logic, the fair value adherents assert, of keeping a share of stock on the books at its purchase price when the price has increased or decreased in market trading thereafter? More broadly, insistence upon cost as the ultimate measure of asset value can lead to reported results that make no sense. A FASB member made the point at one meeting through the example of an office building. Under GAAP, the building would be recorded at cost and then, over the succeeding quarters and years, depreciated. The result would be that, for financial reporting purposes, its reported value would go down. At the same time, the economic reality may be that its value was actually increasing. Hence, the “cost” approach would have two results. The first is that the information would be objectively reliable. The second is that it would be completely wrong. The present dtente in this debate is an approach to accounting that seeks to acknowledge the good points made by each side. The approach is to require certain assets to be recorded at fair value and other assets generally to be recorded at cost. Among those assets to be recorded at fair value are certain kinds of financial instruments, the thinking being that financial instruments are often traded in active markets with an observable price. It is hardly an insurmountable challenge, the logic goes, to look up the price each time the financial statements are updated. While that may be true in many or most cases, though, it is not true all the time, and then things start to get a little tricky. FAS 157 acknowledges that there may be instances in which assets will have to be recorded at fair value but in which an observable market price in an active market does not exist. FAS 157 deals with this through the adoption of an approach that focuses attention on the methods used to estimate fair value. Basically, FAS 157 puts in place a “fair value hierarchy” that prioritizes the inputs to valuation techniques according to their objectivity and observability. At the top are “Level 1 inputs,” which are defined as “quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.” Next down in the hierarchy are “Level 2 inputs,” which are inputs “other than quoted prices included within Level 1 that are observable for the asset or liability” such as quoted prices for similar assets or liabilities in markets that are not active. Lowest on the list are “Level 3 inputs” which are simply “unobservable,” i.e., there really are no active markets. Under Level 3, inputs are to be “developed based on the best information available in the circumstances.” Often that will mean that, in the absence of an active market, resort will be had to models that seek to figure out what the price to be received in a hypothetical sale of the asset would be. When a draft of FAS 157 was circulated to the financial community for public comment, not everyone was enthusiastic about its three-level approach, and thoughtful commentators were understandably concerned about the reliability of hypothetical values that would result from the use of Level 3 inputs. Still, the standard seemed to be the best available resolution to a knotty problem. Some large financial institutions even adopted FAS 157 earlier than required. As they implemented its approach, overall things seemed to go okay. Among those areas where FAS 157 seemed to be working satisfactorily was financial instruments related to subprime loans. MARKET DISLOCATIONS That changed this past summer. Were all too familiar with what happened. Two Bear Stearns funds ran into problems, and the result was increasing financial community uncertainty about the value of mortgage-backed financial instruments, particularly collateralized debt obligations or “CDOs.” As investors tried to delve into the details of the value of CDO assets and the reliability of their cash flows, the extraordinary complexity of the instruments provided a significant impediment to insight into the underlying financial data. Financial markets can deal with bad news, but an information vacuum is another thing altogether. The problem with CDOs was not disappointing value. The problem was that the value of the underlying assets could not be figured out. As a result, the markets seized. In other words, everyone got so nervous that active trading of many instruments all but stopped. Largely unnoticed behind the scenes was the fact that, with the disappearance of active markets, much CDO valuation was no longer eligible for “Level 1” treatment under FAS 157. For that matter, often there was not even sufficient analogous market activity so that CDOs could be valued under Level 2. So financial officers and accountants quickly found themselves needing to cope with Level 3. That meant they were faced with the need to resort to financial models that would somehow recreate what the price received in a hypothetical sale would be. But they quickly encountered a problem. Because CDOs to that point had been valued based on Level 1, established models for valuing the instruments at Level 3 were not in place. Just as all this was happening, moreover, another well intended aspect of our financial reporting system kicked in: the desire to report fast-breaking financial developments to investors quickly. For those with financial reporting responsibility, therefore, the circumstances were exceedingly uncharitable. To their credit, they wanted to get updated value information on their sub-prime instruments to financial markets fast. But historical approaches to valuation were suddenly unavailable. What to do? Come up with the best possible models under Level 3 as the circumstances would allow. But that was no easy feat. Models valuing sub-prime investments might conceivably want to take into account such imponderables as the future of housing prices, the future of interest rates, and how homeowners could be expected to react to such things. One way or another, well meaning preparers found a way to come up with their best estimates and report them to investors. Not all investors seemed to appreciate, though, the extent to which the reported declines in value, presented numerically and thereby suggesting a level of precision that numerical presentation often implies, were necessarily based upon financial models that relied upon predictions about an inherently unknowable future. It is hardly surprising, therefore, that in some instances asset values had to be revised either because models were being adjusted or because predictions were being updated as things seemed to get worse. To some, particularly to those who never liked fair value accounting to begin with, this was all evidence that fair value accounting is a folly. According to one managing director at a risk research firm, “All this volatility we now have in reporting and disclosure, its just absolute madness.” The frustration is understandable. But defenders of fair value accounting would point out that keeping financial assets on the books at levels well above that for which they could be sold is not exactly a model of transparency in financial reporting. The point is that it is a function of financial reporting to tell people what is going on. And while the news has not been particularly pleasant for anyone, one benefit to fair value accounting and FAS 157 in particular is that it has given outside investors real-time insight into market gyrations of the sort that, under old accounting regimes, only insiders could see. True, trying to deal with those gyrations can be difficult and the consequences are not always desirable. But that is just another way of saying that ignorance is bliss. BUT WHAT ABOUT LITIGATION ? Whatever one thinks of fair value accounting, though, one feature of the sub-prime aftermath has the potential to be completely counterproductive. It is the extent to which our system of litigation and regulatory oversight results in unjustified assertions of “fraud” against those who were doing their best under circumstances that were exceedingly difficult. In this regard, the aftermath of the sub-prime mess may be a harbinger of things to come. For the very aspects of fair value accounting that make it susceptible to second guessing the absence of concrete data, the need for judgment, the importance of predictions are likely to increasingly become more prominent features of financial reporting generally. That is particularly so as the United States seeks to evolve beyond a preoccupation with detailed rules into a more principles-based system. At issue in the aftermath of the sub-preime valuation challenges, therefore, is going to be the extent to which our system of litigation and regulatory oversight puts in place legal penalties in situations where there is no practical alternative to making tough judgments. If it does turn out that financial statement preparers and auditors are to be penalized where good faith judgment calls turned out to be wrong, then continued progress in financial reporting at least in the highly litigious environment of the United States will foreseeably be frozen in its tracks. No responsible accountant or auditor will want to make difficult judgment calls when doing so is almost necessarily a career-terminating event. The sub-prime crisis, therefore, may present the opportunity for us to come to grips with a much bigger question. That is the extent to which we are to permit our present system of litigation and regulatory second-guessing to impede continued evolution in financial reporting.March 7, 2008公允价值会计和次贷 导言一个关于由次级贷款产生的金融市场混乱的命题逐渐进入我们的讨论，这确实应该由我们的会计制度负责。该论点是，新的会计规则要求划减，这实际上夸大了损失，这样金融市场推动的水平，是人为地压低的。以华尔街日报来归纳，结论是那些为了夸大损失而“指责会计规则”的人是“叛乱”，另外呼吁制定新的规则，这将在本质上，抑制金融市场波动。这当然是从一个角度来看待它。毫无疑问，由于数十亿的住房抵押贷款文书的划减以及伴随金融市场的波动，致使今年夏天以来一直不景气。尽管如此，我们应该为了解决次级而稍后责怪会计师或要求新的会计标准。与此相反，一些可以被指出在次优困难考验财务报告制度之后，作为它应该的来回答。幕后：FAS 157对于那些倾向于责怪会计来说，真正致使次优混乱的罪魁祸首是一个公允的新标准，也就是在2006年9月发布的美国财务会计准则第157条又称FAS 157以及预定在今年十一月生效、针对某类资产估值的GAS 157，即资产应当按公允价值记录。适用于除其他外，金融工具的排序有关次级贷款的标准规定，这些资产将被以他们可以出售的价格来记录，也就是“价格将在测量日，在一个有秩序的交易市场中以市场参与者之间出售资产或转移支付的赔偿责任来确认。”在会计师中，这一概念作为“出口价格”被称为速记。在谈到对资产的合适估价，FAS 157是对在会计中最古老的争论之一的最新贡献者。那就是资产是否以“成本”记录或以它们的“公允”（或市场）价值记录会更好。这个问题已经激烈讨论了很多年，原因之一是每一方都进行了很好的论据来支持其立场。那些倡导“成本法”计算资产的认为成本在交易发生时能最好、最合理、最能客观反应“公允价值”。一张发票或者一合同的存在典型地使支持资产价值的证据变得几乎不能反驳。为了使估值更加可靠，这种具体的证据可以由外部的审计员对财务报表独立审查。因此，在成本计算法下，相对来说很少需要去判断，所以，失误或操纵财务财务结果的机会也就很少。但是，这只是争论的一个方面而已。在另一方面，虽然历史成本在交易发生时是客观上合理的，但它很快就变成过时的。尤其是那些在活跃的市场上交易的资产-如金融工具。公允价值拥护者主张的逻辑是以它的购买价格来拥有一份股票的话，之后当价格在市场中上涨或下降时交易。一FASB的成员在一次会议上通过办公楼的例子指出了这点。根据GAAP原则，建筑以它的成本记录，并在以后的季度和年度中计提折旧。对于财务报告的目的而言，结果将是其报告价值将大大下降。同时,经济现实可能是它的价值实际上在增加。因此，“成本”法有两个结果。第一是信息将客观可靠。第二，这将是完全的错误。目前缓和这争论的方法是寻求由每一方提出的好观点并得到大家的公认的。方法是要求将某些资产按公允价值记录而其他资产仍然是按成本记录。在这些以公允价值记录资产中应该是某些种类的金融工具，原因是，金融工具通常是在活跃市场以一个可观察到的价格交易。这是一个几乎无法克服的挑战，以一般逻辑去考虑，每次查看价格，财务报表都要被更新。然而这在许多或大多数情况下是真实的，虽然并不是在所有的时候都是真实的，然后接下来的事情开始有点棘手了。FAS 157承认有这样的例子存在：某些资产必须以公允价值来记录但却不存在一个活跃市场及一个可观察到的市场价格。FAS 157 通过使用以下方法来处理这一问题：通过观察以前曾使用的方法来估计公允价值。FAS 157基本上已建立了一个“公允价值层级”，把所输入的估计方法通过它们的客观性和可观性区分优先次序。顶部是“一级输入”，它被定义为“在活跃的市场中有相同的资产或负债的报价(调整)，报告主体在测量日有权利使用。”下一层是“二级输入”，这是输入“除了包含在一级中可见的资产或负债以外的报价”，比如在市场有相似的资产或负债但并不活跃的报价。在这个列表中最低的“三级输入”，就是最简单的“不可观察”,也就是说,这些真的不存在活跃市场。根据第3级，要输入的是“在这样的情况下基于最有效的信息”。 通常这将意味着，如果没有一个活跃的市场，不得不采用这样的手段模式：设法找出在假象销售该资产的情况下，该资产将是什么样的价格，并以该价格记录。为了征求社会公众的意见，FAS 157的草案分发给了金融各界，当时不是每个人都热衷于它的三个级别的做法，那些深思熟虑的评论家非常担心由于使用三级输入而假设出来的价值的可靠性。仍然,该标准似乎是这一棘手的问题的最佳解决方法。一些大型金融机构,甚至早于规定地采用了FAS 157。因为他们采用了该方法，总体事情似乎往好的地方发展着。那些FAS 157似乎运作的另人满意的领域就是与次级抵押贷款有关的金融工具。市场混乱这改变了今年夏天。我们都太熟悉了发生了什么。两个贝尔斯登基金相继出现运营问题，这结果就是增加了金融界对于金融工具抵押支持债券的价值的不确定性，特别是债务抵押债券，又成为“CDOs”。 由于投资者试图深入地研究CDO资产的价值和他们现金流量的可靠性，工具的复杂性对洞察潜在的财务数据造成了重大障碍。金融市场能够处理那些坏消息，而信息的真空是另一回事了。CDOs的问题并没有令人失望的价值。问题在于相关资产的价值无法被计算出。因此，市场开始动荡了。换句话说，每个人都开始紧张，把许多本来积极交易的工具全部停止了。在很大程度上忽视幕后的事实是：随着活跃市场的消失,许多CDOs的估值在FAS 157的规则下用“一级”方法不再合格。就因为这样，那些通常甚至没有足够类似的市场活动的CDOs以二级规则来作为价值。所以财务人员和会计师很快发现自己有需要去应付三级。这意味着他们所面临的是不得不依赖于财务模型去设法再创造一个假象销售情况下的价格并以此作为记录。但他们很快就遇到了一个问题。因为CDOs已经在一级基础上被确认其价值，建立一个模型去以三级的标准来估计一个工具的价值是不适当的了。正如所有正发生的一切，再者，我们财务报告系统上的另一个良好方面开始起显现：希望报告能跟着金融投资者的速度迅速发展。因此，对于那些在财务报告上带有责任的人，当时的情况是极其无情的。对他们而言，他们希望能得到关于他们次级工具在价值方面的最新信息以应对金融市场的迅速走势。但以前用过的评估方法却突然不再适用。该怎么办？现在的情况将允许在三级的规则下提出最有可能的模式。但这不是一件容易的事。对次级投资估价的模型很有可能因为未来房价的走势、利率以及房主能够如何应对这些东西而无法估计。一种或另一种方式，以及含义编制找到一种方法，可以拿出他们的最佳估计并报告给投资者。似乎并不是所有的投资者十分欣赏,尽管报告的程度下降提出了数值模拟和价值,从而暗示了水平的精度,数值表现往往意味着,是基于财务模型的必要依赖一种固有的不可知的未来预测。这不足为奇，所以，在某些情况下,资产价值已经被修改，可能是因为模型被调整又或是因为预言被更新,事情似乎变得更糟。对有些人来说,特别是对那些从来都不喜欢公允价值会计的人而言,现在所有的证据表明公允价值会计是一个愚蠢的东西。据一位风险研究公司的主管所说，“所有这一切波动，我们都写入报告并进行披露，这绝对是疯狂的。”沮丧是可以理解的。但是捍卫公允价值的人会指出，把财务资产以高于它们出售价值这一水平记录于账簿上在财务报告中不是完全透明的模式。关键在于，它是一个财务报告上的功能，用来告诉人们正在发生的事情。而这个消息一点也没有使任何人感到愉快,公允价值会计的好处之一特别是FAS 157 它已经给外来投资者实时洞察市场的机会,而在旧会计制度下,只有业内人士才可以看见。的确，试图去处理这些波动是十分困难的，而结果也总不是人们想要的。但那只是另一种说法，幸福的无知。但是何谓诉讼？不管人们关于公允价值的想法如何，次级余波后的特征之一就是有变得完全适得其反的潜在可能。这很大程度上是我们诉讼和监管系统的失败导致那些“骗子”用他们那未被证实的断言来反对那些在当时情况下非常艰辛地尽自己可能做事的人。在这点上，次级混乱的余波可能是将来即将发生的一个预兆。对于公允价值会计的众多方面,使它容易二次猜测缺乏具体数据,需要进行判断,预测的重要性可能日益成为一般财务报告越来越突出的特点。尤其是美国为了寻求发展，以详细的规则摆脱偏见并融入一个更以原则为基础的系统。次级估值挑战的余波在争论中，所以，这在很大程度上取决于我们的诉讼和监管系统在没有任何实际办法去做出艰难的判决的情况下把法律处罚放在什么位置上。如果财务报表的编制者和审计人员自以为是诚信的判断被证实是错误时要受到惩罚被普遍认可，那么在财务报表上接下去的进展至少在美国的高级法院上可以预料在程序上将被冻结。没有一个负责的会计师或审计人员会希望作出艰难的判断，当一旦这样做将几乎成为终结其职业生涯的事件。因此，次贷危机也是为我们呈现一个面对更大问题的机会。这在一定程度上取决于我们认可目前的诉讼和监管系统对阻碍财务报告持续发展的反省。Accounting HorizonsVol. 20, No. 3September 2006pp. 271285Including Estimates of the Future in Todays Financial StatementsMary E. BarthSYNOPSIS: This paper explains why the question is how, not if, todays financial statements should include estimates of the future. Including such estimates is not new, but their use is increasing. This increase results primarily because standard-setters believe asset and liability measures that reflect current economic conditions and up-to-date expectations of the future will result in more useful information for making economic decisions, which is the objective of financial reporting. This is why standard-setters seem focused on fair value accounting. How estimates of the future are incorporated in financial statements depends on the asset and liability measurement attribute, and on financial reporting definitions of assets and liabilities. The present definitions depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for inflows, control over the