The Economic Impact of SFAS No. 157, “Fair Value Measurements,” on Commercial Banks
Richard Schroeder, Ph.D., Belk College of Business, Department of Accounting, University of North Carolina @ Charlotte, Charlotte, NC 28223, David Schauer, Ph.D. Finance and Economics, University of Texas at El Paso, El Paso TX, 79968
Objective
In September, 2006 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS 157). This pronouncement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands the required disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, rather it clarifies how to value assets and liabilities that must be disclosed on corporate balance sheets at fair value under previously issued pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. During the first three quarters of 2008, many commercial banks reported large losses and some commentators suggested that the requirements of SFAS 157 exacerbated the magnitude of these losses. The purpose of thse study is to evaluate the legitimacy of that claim.
 Data
Our sample was all commercial banks in the Russell 3000.  This resulted in a sample population of 78 companies.
Method
The financial statements and footnotes of all 78 banks were examined to determine the extent of the fair value measurements disclosed. Specifically, the following research questions are addressed in this research:
1.      What proportion of sample banks were affected by SFAS 157 disclosure requirements?
2.      What major categories of financial assets and liabilities were disclosed by these banks?
3.      To what extent is fair value used to measure financial assets and liabilities?
4.      What proportion of financial assets and liabilities are classified under each level of fair value measurement?
5.      Did the adoption of SFAS 157 have a material impact on the sample of banks’ results of operations, financial positions and cash flows?
Expected Results
A preliminary analysis indicates that a large proportion of the sample disclosed fair values measurements and that most of these disclosures relate to financial assets and liabilities. Additionally, given the current state of the economy in the first three quarters of 2008, we expect that our sample of banks has suffered material losses on their financial assets. We also expect to find that a large portion of the banks’ reported losses can be attributed to the disclosure requirements of SFAS 157