After the miserable market action of the last week, it feels as though the holidays were months ago, not merely days ago. New Year's Eve will provide a lingering hangover for investors as they sort through the fourth quarter earnings reports. The sticky markets for esoteric instruments like collateralized debt obligations will make for challenging (to say the least) valuations of assets for which no readily available quotes existed on New Year's Eve.

It's not even a Statement 157 world yet: that standard's effective date (recently upheld by the FASB) will be for fiscal years beginning after November 15, 2007. So the fourth quarter will not see the disclosure of fair value hierarchies for financial instruments. Starting with the March quarter however, this will be a reporting reality - one that will be of keen interest to investors, especially those investors who have holdings in the financial industry. With both sides of the balance sheets for these firms composed of mostly financial instruments, investors will want to know whether financial assets and financial liabilities are mostly Level 1, of the highest quality - or if they're mostly Level 3, the most suspect of the three levels of fair value inputs and presentation. If asset/liability presentations depend on Level 2 inputs, then investors will want to know just how Level 2 inputs were derived. Many investors view Level 2 inputs with suspicion: they wonder if logical contortions have been made to get genuine Level 3 valuations moved up a notch, out of the Level 3 dungeon. Scary - and it could happen.

These are serious issues for investors. There's genuine utility to investors in the fair value hierarchy and they seem quite ready to embrace it. The big problem with the hierarchy: it isn't available to investors until the 10-Q (or 10-K, in the case of the fourth quarter) is filed. Firms aren't required to address the fair value hierarchy at the time earnings are released; there's nothing that governs the dissemination of information at earnings release time beyond Regulation. That would be a bit like regulating free speech. The only way that analysts will necessarily hear about fair value hierarchies will be when they ask about them. And there are no guarantees of a robust answer. The companies with the most to hide would be the least likely to volunteer information that would put them in an unflattering light.

The time between the earnings release and the 10-Q can be considerable: a firm can be talking up (or talking down) the next quarter by the time the 10-Q is filed covering the earnings release. By the time the 10-Q is filed, the fair value hierarchy information is stale. Investment decisions have already been made.

How big is the gap between earnings release and 10-Q filing? We did some digging in 10-K Wizard for the third quarter 2007 earnings releases of December year end companies and found 2,336 Item 2.02 8-Ks. We tied the dates of those "Results of Operations" 8-Ks to the filing dates of the associated 10-Qs. The table below summarizes, by sector, the gap between the time the 8-K was filed with the time the 10-Q was filed.

 3Q2007: Median Days Between Filing Earnings & 10Q