Last month, the FASB issued Statement 159 - "The Fair Value Option for Financial Assets and Financial Liabilities." The statement didn’t draw much attention in the financial press. After all, it’s not a standard that will torch earnings with newly-recognized expenses like Statement 123R added when it required accounting for stock compensation, or shine a light on shadowy leverage in balance sheets like Statement 158’s changes in benefit plan accounting. It’s an option, not a requirement; unless firms choose it, life will go on as usual for investors.

And if firms choose to adopt Statement 159, investors should be alert. While more fair value reporting will generally be a good thing for investors, there’s going to be non-comparability in reporting between those firms taking the fair value option and those that don’t. Furthermore, the standard gives firms latitude to selectively apply fair value reporting - so those who take the option might be only employing fair value accounting when it works to their advantage.

Investors need to understand how financials could be affected by the "fair value option" in order to assess whether a firm is genuinely better off from its application, and to take into account differences between the earnings of firms choosing the option and those that do not. They’d better do it soon: while it’s not likely that there will be many early adopters of Statement 159, investors might start seeing its application in financials as early as the first quarter of 2007.