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Fair Valuation Takes Centre Stage How the world has changed since our first Hedge Accounting Guide of 2008. According to many pundits and bank lobbyists, fair value accounting rules under FAS 157 stood near the epicentre of the financial maelstrom. Who knew accountants were the real masters of the universe dancing around the many bonfires of the vanities

Fair Valuation Takes Centre Stage

by Jiro Okochi, Chief Executive Officer, Reval

How the world has changed since our first Hedge Accounting Guide of 2008. According to many pundits and bank lobbyists, fair value accounting rules under FAS 157 stood near the epicentre of the financial maelstrom. Who knew accountants were the real masters of the universe dancing around the many bonfires of the vanities.

With or without the necessary clarifications of how to fair value under FAS 157 or the pending FAS 157- like amendments to IFRS 7, adjusting fair values for credit is nothing new. Both FAS 133 and IAS 39 clearly reference the need to adjust derivative fair valuations to account for the impact of the credit worthiness of the counterparty. Issued by the FASB in 2006, FAS 157 probably would have been one of those “check-the-box” standards, but thanks to the financial crisis and 200-300 bps over LIBOR AA bank spreads, credit-adjusted fair valuations is the hot topic among our clients and a material concern for their auditors.

Who knew accountants were the real masters of the universe dancing around the many bonfires of the vanities.

As all of us at Reval remain passionate about derivatives, accounting and technology, we were fast to respond, releasing a FAS 157 module before the inception date of the standard in the fall of 2007. Working with leading corporations, banks and the Big 4, we continued to enhance the module, as the best practice interpretations of the standard and real life implementations began to unfold, leading to an award-winning FAS 157 module.

Simultaneously, we enhanced our IFRS capabilities to include credit adjustments for our clients looking to prepare for the inevitable requirements internationally. Our outsourcing service, Reval CenterTM, was also able to provide credit-adjusted fair values for private companies without any publicly available credit data or Credit Default Swap information.

As ever-changing accounting and regulatory requirements continue to be a challenge for treasury departments around the world, you will find this to be a major theme in this year’s Guide, as well as the impact that unprecedented volatility—especially with respect to commodities—has had on the role of treasury.

Spotlight on the Treasurer

From 2007 to 2008, companies saw commodities prices more than double, only to then free fall in a matter of months. This triggered a wake-up call at the C-Level around the world for a need to understand and hedge commodities risk. Treasury departments were called into action to apply their years of experience with handling FX and interest rate risks, as well as their understanding of hedge accounting to commodities risk, which is typically handled by procurement.

Leading treasurers were learning about the difference between bushels and bips and crack spreads and credit spreads. The financial crisis had already put a spotlight on the importance of treasury, and now Tim Geithner far surpassed Tom Cruise in popularity on Google search. Geithner now in fact scores a 100 on a scale of 0-100 for Google searches, while over the same period Tom Cruise only reached 21. The ranking is probably justified as Geithner’s current challenges would make for a good "Mission Impossible Part IV" story line.

For every challenge created an opportunity is born. This environment has given treasury the opportunity to become even more strategic by aligning with procurement and getting more involved with the actual business.

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