In the wake of the surprise laid on the market by AIG on Monday, there’s one casualty: Statement 157. And it was just an innocent bystander.

Plenty of commentary has been spewed on the unfairness of fair value reporting, with blame for perceived inequities being laid on Statement 157. Some pundits are saying that this is an example of what's wrong with statement 157 - that it's forcing companies to come up with ridiculous values that are disconnected from long-term reality. Some express concern that trying to report illiquid assets at their fair value is too subjective and arbitrary. Some argue for keeping illiquid securities reported at their cost on the balance sheet.

Back up. First of all: AIG has not adopted Statement 157 yet. Period. Those estimates of losses aren't due to some forced, new fair value reporting; they're the result of good ol' impairment recognition.

It's a basic tenet of financial reporting: when an asset isn't worth what it cost, it's written down to what it's worth. Illiquid assets like factories and buildings, when they're not being used productively, are not carried at their historical cost: their carrying value is written down to an estimate of what they're worth. Would investors prefer that they remain stated at full cost on balance sheets, even if they producing any results for shareholders? Of course not. But there isn't always a market for them - so, by the logic of those who carp about valuing illiquid securities being "fair valued," those losses should be held in suspended animation until there's a sale of the assets. In a "real" market.

Statement 157 aside: what makes valuation issues like this one unsettling is that investors know that it's a "black box" being used to value things that aren't bathed in sunlight. Who knows how a "super senior credit default swap" should be valued? How can investors be comfortable with reported values when there's "model-switching" is going on? (AIGFP's initial model didn't include the value of "structural mitigants" or the benefit of a "spread differential;" Model 2.0 included them in November; the December values won't include the benefit of the spread differential, which helped to the tune of $3.6 billion. And AIG promises to continue to develop valuation methodologies for the year end figures, so there could be yet another version of their Binomial Expansion Technique black box arriving in time for the year end figures. Not a confidence builder for investors.)

Nevertheless - would investors be better served if managers didn't have to step up and disclose values - and how they got there? Are investors better served by "trust me" statements? I don't think so. Estimates of writedowns due to impairments have always been around. Statement 157 doesn't force anyone to use a "black box" to value anything that they haven't had to value or assess for impairments before. What Statement 157 really does is provide a framework for understanding how much investors have to stomach when it comes to black-box valuations. That fair value hierarchy (Levels 1, 2 and 3, often labeled by critics in full snark as "the three levels of hell") paints a picture of the reliability of the reported fair values. It does not expand the use of Level 3 disclosures - they've been around forever. Investors just didn't know it. How does knowing where the valuation risks exist become a bad thing for investors?

It's funny: fair value reporting under Statement 157 is getting criticized widely while asset values are being written down. Wouldn't the risks be greater if asset values were being revised upwards?