SFAS 159

I’m not an accountant.  I have never taken an accounting course in my life.  Yet as an actuary and a financial analyst, I have had to use accounting rules to understand financial statements, both in the production of them, and the interpretation of them.  (I even remember writing a paper explaining the effect of the then-current FAS 52 on foreign exchange when I was a grad student.)


There are a number of Statements of Financial Accounting Standards that I think have been mistakes.  We are between paradigms.  The central question is this: how often do we want to re-estimate the value of balance sheet items, and if they change, how should they be reflected in the income statement?


There are two consistent ways to do this.  Other methods are a kludge in my opinion.  Method one is amortized cost on both sides of the balance sheet.  Method two is the estimation of fair market value on both sides of the balance sheet.


But SFAS 159 allows companies to elect which assets and liabilities (with some restrictions, and subject to SFAS 115) they can value at amortized cost or at fair market value, together with disclosure on how the assets/liabilities are valued.


Now, I know that the FASB is trying to create standards that will be more consistent with international accounting standards, but what they are doing here will make accounting less comparable across US companies, particularly given that adherence to SFAS 159 is optional.


For companies with no long term agreements, SFAS 159 will not have any major impacts, but as for me, given that I follow the insurance industry, this will make my life more complex, without any equivalent increase in understanding.


As I said once to a panel of the IASB and FASB, create two consistent financial statements, one amortized cost, and one fair market value.  This would mean two income  statements and two balance sheets, and one cash flow statement.  They though that was too much work, but I disagree; companies are doing that work now, but they are not reporting it.  Better they should disclose what they know.