What is ‘FASB 157’
A Financial Accounting Standards Board (FASB) Statement that requires all publicly-traded companies in the U.S. to classify their assets based on the certainty with which fair values can be calculated. This statement created three asset categories: Level 1, Level 2 and Level 3. Level 1 assets are the easiest to value accurately based on standard market-based prices and Level 3 are the most difficult.
Explaining ‘FASB 157’
FASB 157 was passed to help investors and regulators understand how accurate a given company’s asset estimates truly were. Many firms (including some of the largest in terms of assets) had to write down billions of dollars in hard-to-value Level 3 assets following the subprime meltdown and related credit crisis, which began in late 2006. By making companies report to investors the breakdown of assets, they allow investors to potentially see what percentage of the balance sheet could be open to revaluation or susceptible to sudden write-downs.
Further Reading
- Did FASB 157 cause the financial crisis? – papers.ssrn.com [PDF]
- Did exit pricing under FASB 157 contribute to the subprime mortgage crisis? – papers.ssrn.com [PDF]
- The shortcomings of fair-value accounting described in SFAS 157 – www.sciencedirect.com [PDF]
- The economic impact of SFAS No. 157 – link.springer.com [PDF]
- Financial reporting quality: is fair value a plus or a minus? – www.tandfonline.com [PDF]
- The role of accounting in the financial crisis: Lessons for the future – meridian.allenpress.com [PDF]
- Fair value accounting and the current financial crisis – search.proquest.com [PDF]
- The impact of FSP FAS 157-4 on commercial banks – link.springer.com [PDF]
- Risk and financial reporting: A summary of the discussion at the 1997 AAA/FASB conference – search.proquest.com [PDF]
- Fair value accounting, financial economics and the transformation of reliability – www.tandfonline.com [PDF]
