Unlike the previously proposed revisions, Pluris believes the approved FASB (Financial Accounting Standards Board) revisions will not hurt hedge funds. The new revisions cover hedge fund transparency and diclosure issues, starting June 2009.

Espen Robak, president of Pluris Valuation Advisors LLC, praised FASB, “This is great news, not only for investors but for reporting entities as well,”  Robak said.  “As a result of the revisions, public companies will have improved guidance on how to apply the rules and investors will get financial information of a higher quality – and more frequent information, too!”

The FASB stated that its revisions were in response to the comments received regarding its initial proposal.

While many details remain to be worked out, the final revisions reaffirm that the measurement goal of fair value is the “exit price,” which is the price that would be paid based on market conditions on the day the asset is being valued, Robak said.  This “mark-to-market” approach prohibits companies from “taking the longer view” and valuing assets based on their own, more optimistic, views of what market conditions might be like in the future.  The new FSP also states explicitly that “a reporting entity’s intention to hold the asset or liability is not relevant in estimating fair value,” an important clarification for many companies.

Anexample of how the revisions should be implemented also indicates that the FASB clearly favors using transaction data, even when transactions are sporadic and irregular, but with adjustments and analysis based on current market conditions.

“You can’t just blindly take the last trading price and apply it,” Robak said.

The proposed FSP could have been especially problematic for hedge funds and mutual funds, creating a potential disconnect between the net asset value (NAV) of the funds and the true exit value of their portfolios, which could in turn have led to a surge in redemptions.  Fortunately, by reinforcing “fair value” and providing additional guidance, FASB eliminated that problem, according to Robak.

In addition, the revisions:

·         Eliminate the presumption that all transactions in an inactive market are distressed sales.  Instead, financial information and other factors will be used to determine whether a particular deal was distressed.  Pluris filed a comment letter with the FASB describing its research showing that inactive market trades are not always forced or distressed.

·         Require disclosure of changes in valuation techniques and related inputs resulting from the revised regulations and quantification of the impact, if practicable.

·         Require more fair value measurements broken down by a greater number of categories.  This additional “granularity” in financial disclosures will help investors trying to gauge the health of a company’s balance sheet.

The revised regulations will not be applied retroactively and companies will not be required to comply with them until the reporting period ending after June 15, 2009.

“These changes will ensure that investors can review financial statements with confidence in the numbers they’re looking at,” Robak said.  “At the same time, the regulations do not subject corporate entities that hold illiquid assets to undue hardship.”

“As previously written, the rule would have given too much leeway to reporting entities to use their own in-house assumptions – assumptions that would have weakened the comparability and consistency of many valuations,” according to Vice President Rick Martin, CPA.  “As currently written, the standards instead focus on companies’ ability to substantiate their fair value conclusions. That’s an important distinction.”