Special issue: fair value in financial reporting, auditing, and tax accounting.

* SFAS 157 introduces fair value hierarchy, which prioritizes inputs into valuation techniques used to measure fair value. In the next article, James M. Fornaro and Anthony T Barbera discuss the key provisions of SFAS 157's fair value hierarchy, and assess whether the fair value information assists users in making more informed business decisions. They also discuss the influence of the fair value hierarchy on the role of external auditors.

* SFAS 157's fair value measurement guidance applies broadly to financial and nonfinancial assets and liabilities, and there are only a few scope exceptions to this Statement. Although SFAS 123(R), Share-Based Payment, is scoped out of SFAS 157, it requires that share-based payments provided to employees by companies be measured at the fair value of the awards at the date of grant. Because employee stock option arrangements are not publicly traded instruments, the fair value of such options must be estimated using option-pricing models and such measurements are difficult to audit by accounting professionals. Benjamin R. Silliman and Adrian P. Fitzsimons examine the Public Company Accounting Oversight Board's (PCAOB) audit guidance provided in the Staff's questions and answers (Q & A), issued in October 2006. These Q's and A's provide detailed guidance to CPAs who audit the fair value estimates involved in employee share-based payment arrangements. This article discusses some of the difficulties and complexities in auditing the fair value of stock option transactions.

* The article written by Teresa M. Danile and Irene N. McCarthy deals with ethical implications in reporting fair value. Prior to the issuance of SFAS 157, use of diverse and inconsistent methods for measuring fair value promoted abuses. The authors examine whether the enhanced fair value framework and fair value hierarchy established in SFAS 157 improve financial reporting. They conclude that although better consistency and comparability are achieved, serious ethical concerns remain, especially regarding the Level-3 inputs in SFAS 157's hierarchical framework. These are unobservable inputs based on the reporting entity's own assumptions about the assumptions that market participants would use to estimate the fair values of certain assets and liabilities, when observable market data is not available. Level-3 estimates require considerable judgment in terms of both the selection and application of valuation techniques, and therefore require effective controls and competent independent auditors and other corporate governance mechanisms to thwart potential abuses. This article also discusses the implications of SFAS 157 for academic programs.

* The final article in this Special Issue deals with a tax accounting application of the fair value measurement concept. Richard Lai and Laura Lee Mannino review the rules for determining the amount of a deduction for a charitable contribution of a vehicle, as recently amended by the American Jobs Creation Act of 2004. Although charitable contributions of property are generally based on fair market value, the new rules limit the amount of the deduction to the gross sales proceeds from the subsequent sale of the vehicle by the charity.

This volume would not have been possible without the support and collaboration of numerous individuals. First of all, as the guest editors of this special issue, we would like to express our sincere appreciation to Brenda Massetti, Editor of the Review of Business, for her support during the publication process. In addition, we would like to thank all the reviewers for their insightful comments. All manuscripts were reviewed by academics and technical experts in the area of fair value accounting. Each manuscript was revised at least twice before final acceptance.

Endnotes

1. American Accounting Association (AAA), Financial Accounting Standards Committee (FASC). "Response to the FASB's Exposure Draft on Fair Value Measurements," Accounting Horizons, Vol. 19, No. 3, September 2005, 187-196.

2. The IASB has also been working on a similar fair value measurement project. This project forms part of the Memorandum of Understanding between the IASB and the FASB, which sets out a Roadmap of Convergence between International Financial Reporting Standards (IFRS) and U.S. GAAP 2006-2008. The IASB published a discussion paper in November 2006, which indicates the Board's preliminary view of the provisions of FASB's SFAS 157 and its differences to existing fair value measurement guidance in IFRS. The Board invites respondents to comment on its preliminary views, as well as the provisions of SFAS 157, by April 2, 2007. These comments will be considered in conjunction with the development of an IASB exposure draft on fair value measurements, which the Board aims to issue in early 2008.

Patrick A. Casabona, The Peter J. Tobin College of Business, St. John's University

Sylwia Gornik-Tomaszewski, The Peter J. Tobin College of Business, St. John's University