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FASB 157 to impact banks dramatically
 While FASB 157, Fair Value Measurements, applies to all companies, regardless of industry or size, financial institutions will feel a more pronounced impact. The Financial Accounting Standards Board has been moving in this direction for some time as evidenced by FASB 155, Accounting for Certain Hybrid Financial Instruments, and FASB 156, Accounting for Servicing of Financial Assets.
The definition of fair value in FASB 157 focuses on the exit price and requires that entities make value measurements from the standpoint of the market, not based on their own assumptions. In the press release issued September 15, 2006, Linda MacDonald, FASB director and fair value measurements project manager, says, "The standard clarified that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the company's mark-to-model value." Needless to say, this requirement will complicate the fair value measurement process, particularly for instruments such as mortgage servicing rights, complex derivatives, private equity, and long-dated derivatives, to name a few.
FASB 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods that fall within those fiscal years. Early application is encouraged if financial statements for the fiscal year, including interim periods, have not been issued.
Wynne E. Baker, member in charge of KraftCPAs' banking industry team, urges financial institutions to adopt FASB 157 early. "We believe 157 will have a huge impact on banks, and the sooner you get your arms around it, the better. You may find that you need professional assistance with some complex fair value measurements, and you don't want to be caught at the eleventh hour, trying to make sense of the guidance with deadlines looming."
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