FINANCIAL ACCOUNTING STANDARDS
Financial Accounting Standards (“FAS”) are needed so that financial statements will fairly and consistently describe financial performance across industries, as well as ensure a higher level of corporate transparency. Without standards, users of financial statements would need to learn the accounting rules of individual companies. In addition, making comparisons between companies would be difficult. Since the introduction of Sarbanes-Oxley, managing and staying current with your fiduciary responsibilities and corporate governance has never been more complex. Houlihan Smith’s ability as a business financial advisor is world-renowned. When you need help managing and understanding FAS 157 or other standards, call Houlihan Smith & Company Inc.
Financial Accounting Standards are promulgated by the Financial Accounting Standards Board (FASB), a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (“GAAP”) within the U.S. in the public interest. The Securities and Exchange Commission (“SEC”) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. It was created in 1973, replacing the Accounting Principles Board and the Committee on Accounting Procedure of the American Institute of Certified Public Accountants. The FASB's mission is "to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information."
Statements of Financial Accounting Standards are issued by the Financial Accounting Standards Board (FASB) and detail accounting standards and guidance on selected accounting policies set out by the FASB. These statements of financial accounting standards are issued, with the expectation that all reporting companies listed on American stock exchanges will adhere to them. FASB has recently released a number of FAS statements that have a significant impact on corporations. Such statements include:
FAS-123(R) refers to the expensing of share-based awards and can increase a company's expenses dramatically, often by billions of dollars. FAS-123(R) was created to enable investors and regulators to better evaluate a corporation's true option expenses.
FAS 141 requires all business combinations to be accounted for using the purchase method. Further, upon an acquisition, companies are required to distinguish any identifiable intangible assets which must be valued, and record these values separately. Identifiable intangible assets with a determinable economic useful life are amortized over the asset’s life (unless prior impairment occurs). Thus companies are required to identify and value intangible assets such as customer lists, supplier relationships, contractual rights, trademarks, brand names, trade secrets, and patents acquired in business acquisitions.
FAS 142 states that goodwill is no longer required to be amortized. Instead, goodwill acquired as part of an acquisition remains on a company’s balance sheet until such time that it becomes “impaired.” Additionally, the statement requires goodwill and any indefinite lived intangible assets to be tested for impairment at least annually.
FAS 157 requires companies to value assets and liabilities at Fair Value. Fair value is a market-based approach and asserts that the value of the asset or liability is the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in the marketplace. The major changes to fair value measurement under this new definition include:
- Use of an exit price instead of the transaction price;
- Use of market participant assumptions instead of entity specific assumptions;
- Exit price is to be taken from the principal or most advantageous market;
- Exit price is based on the highest and best use of the asset (in-use or in-exchange);
- Need to consider three different valuation techniques: market, income and cost; and,
- Establishes a hierarchy for valuation inputs.
Fair Market Value (“FMV”) is often used interchangeably with Open Market Value, Fair Value, or Market Value, although these bases of value can be somewhat different under some circumstances. In the context of Fair Market Value for accounting and legal applications, FMV is defined as is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” It assumes an “entry price” approach to valuing the assets, liabilities and equity of a company.
Due to the recent pronouncement of FAS 157: Fair Value Measurements, Companies are required to value Fair Market Value