Commercial and General Business Transactions: Legal Blogging (Commercial): “Fair Value” Leads to Volatility; Volatility Leads to Litigation

Legal Blogging (Commercial)

8/15/2008 10:37:18 AM EST

“Fair Value” Leads to Volatility; Volatility Leads to Litigation

Managing Director, The Financial Valuation Group (FVG)

Fair value will be full implemented at the end of this year, impacting fully the first quarter next year. Fair value is part of the change of financial reporting from a rules-based approach to a principles-based one. U.S. GAAP is converging to International Financial Reporting Standards, or IFRS. As a result, U.S. companies will be required to make estimates of asset and liability classes at fair value. These estimates may require subsequent adjustment. The result will be an increase in the volatility of earnings per share, or EPS. Also, early adopters have identified dozens of issues where there is diversity of practice. This will further increase the volatility of EPS. And all of this may lead to more lawsuits.

Corporate financial reporting can do something now. Corporate senior management (CEO, BOD, Audit Committee) can be proactive by adopting a principles-based mindset and an attitude of transparency that embraces the elements of fair value.

“The degree to which fair-value accounting is embraced (or not) will have a major impact on the very nature of corporate finance. In short, Sarbanes-Oxley was just a warm-up for what lies ahead.” (Ronal Fink, “Numbers Crunch: Think reporting has changed since Enron? Just wait.” CFO Magazine, September 1, 2006.)

Fair value leads to volatility; volatility leads to litigation.

For further discussion, I am speaking on a teleconference for on this subject on November 20, along with Tony Yanez Esq. of Willkie Farr & Gallagher in New York, to help attendees prepare with the right fair value philosophies. More info here.

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