Yesterday, the FASB issued an exposure draft entitled "The Fair Value Option for Financial Assets and Financial Liabilities" available for your downloading delight right here.

It's got nothing to do with employee stock options, folks, even though that's the only thing conjured up by the word "option" these days. What this proposal does is something pretty worthwhile, I think: if enacted, it will allow firms to report certain assets and liabilities at their fair value, instead of historical cost.

That's not a bad thing at all. A balance sheet tells its story about an entity's rights and obligations much more clearly when they're stated at what they're worth at the balance sheet date - not what they were worth three months, or one year, or three years ago. At the same time, it's true that what constitutes a "fair value" is going to have its problems too.

The proposal put some limits on what can be "fair valued" in the balance sheet. Barred from the option:

An investment that would be consolidated. (Like a subsidiary.)

Pension and other postretirement benefit plans.

Employee stock option and stock purchase plans, and deferred compensation arrangements

Lease liabilities

Written loan commitments not treated as derivatives

Financial liabilities for demand deposits

Maybe that sounds like a lot of exclusions, but there's still plenty of balance sheet territory where this could be applied. One possible upside to this proposal: if firms are allowed to apply fair value measurement to financial instruments they'd normally hedge, applying fair value to both hedged item and hedging instrument could create a "natural" hedging relationship in the balance sheet. That means there could less need for Statement 133 accounting, with all of its attendant headaches and opaque results.



The downside (apart from measurement difficulties): it's an option, not a requirement. That insures comparability problems between companies.