Financial statement preparers are subject to new rules for fiscal years beginning after November 15, 2008. Under these rules, companies are required to consider "Fair Market Value" when preparing their financial statements. The change will affect all financial statements prepared according to GAAP (Generally Accepted Accounting Principles).
Unfortunately,"Fair Market Value" adjustments can only be reflected on your financial statements when the value of your assets or liabilities is lower than their cost. What this means is that any devalued assets must be written down to a lower value on your books, while appreciated assets cannot be written up.
Any such changes to the balance sheet are reflected as reductions to your net income. For businesses whose assets have declined in overall value, this reduction in profits comes at a time when they are already struggling to keep their lines of credit open and their financial statements healthy.
And don't expect to see a benefit when you file your income taxes - the adjustments cannot be recognized for tax purposes.
Adding insult to injury, not only will financial statement preparers have to gather new information each year to substantiate the fair market value of your assets and liabilities, they will also have to provide a number of new disclosures in the form of footnotes to your financial statements. This will put pressure on fees for compilations, reviews, and audits prepared by qualified Certified Public Accountants. This may also require you to have certain business assets appraised.
Of course, companies have an option to ignore these rules and include language that their financial statements are not prepared in conformity with GAAP, but few lenders are willing to accept non-GAAP financial statements.
In future articles, we will provide additional information and further details on this subject and the impact of changes resulting from these new rules. (If you can't stand the suspense, you can read the full text of them yourself on www.FASB.org, under Statement of Financial Accounting Standards No. 157.)
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