Seeking to understand new accounting standards impact in credit market chaos.(extra credit)

There has been growing concern over corporate transparency, and trying to determine how much risk companies and financial institutions like banks are exposed to in the current economic climate.

For U.S. companies, the "Fair Value Measurements" (SFAS 157) and "Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159) standards became mandatory accounting practices for fiscal years beginning after November 15, 2007. According to Fitch Ratings, a problem began brewing in the first quarter of the year as early adoption of these standards by some, but not all, U.S. financial institutions started making comparability more difficult because early adopters made their fair value options in the first quarter, and the decision to account for their own debt at fair value was not linked to any deterioration in the company's perceived credit quality.

Similar fair value option standards were implemented under the International Finance Reporting Standards (IFRS) in 2004, entitled International Accounting Standard (IAS) 39, "Financial Instruments: Recognition and Measurement."

"The ramification of the changes in accounting for certain financial instruments and conduits can be significant for a company, particularly a financial institution, in terms of covenant tests, regulatory capital requirements and access to the capital markets," said Dina Maher, senior director, Fitch Ratings.

Sparked by credit market concerns that became increasingly apparent in the third quarter, Fitch released a report, "Market Turmoil and Accounting Impact: 10 Key Questions." Analysts reviewed the new accounting standards and reporting requirements, as well as how early implementation may affect the ability of analysts and investors to obtain information to understand the repercussions from the recent credit market bedlam.

The 10 questions urge investors and analysts to look at how fair value is measured, and why the companies took ...