Could something be clearly worth zero?

Implications: How can an SEC Commissioner who is obviously not familiar with Fair Value estimates call for changing the existing guidance? The value of something is zero if that is what you can buy and sell it for.    

Analysis:  According to Commissioner Paul Atkins the SEC needs to issue guidance on how fair value can be estimated for assets when no active market exists.  “Something is clearly not worth zero, “he said.  “Between us and the accounting firms and the investment banks ….we need to come up with some good guidance for people,” he said.  

Perhaps Commissioner Atkins forgot the Financial Accounting Standards Board is still in existence.  He’s also obviously not familiar with the guidance contained in SFAS No 157, Fair Value Measurements. 

The purpose of this article is not to provide an analysis of the standard on estimating fair values.  Instead it is to express my surprise that a SEC Commissioner could be unfamiliar with an accounting standard that he believes should be amended.  

SFAS No. 157 stresses valuation techniques consistent with the market, income and cost approaches to determine fair value. A single valuation technique is appropriate where active markets exist.  In other cases, multiple valuation techniques may be appropriate. “If multiple valuation techniques are used, the reporting entity should evaluate the results (respective indications of fair value), considering the reasonableness of the range indicated by those results. The fair value measurement is the point within that range that is most representative of fair value in the circumstances,” [SFAS 157, par A13].  

Clearly, entities have a great deal of flexibility in coming up with their fair value estimates.  Perhaps what many are objecting to is the requirement to disclose how they estimated the fair value of their assets or liabilities.  

As pointed out above, the cost approach and income approach are available to estimate fair value.  In addition, there several generally accepted financial models available as well.  While Commissioner Atkins may disagree, the value is zero if that is what you can buy and sell it for.