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In 1972 (and now) relatively few businesses could be expected to consistently earn the 25% after tax on net tangible assets that was earned by See’s – doing it, furthermore, with conservative accounting and no financial leverage. It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.

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In 1983 Berkshire acquired the rest of Blue Chip in a merger that required purchase accounting as contrasted to the "pooling" treatment allowed for some mergers. Under purchase accounting, the "fair value" of the shares we gave to (or "paid") Blue Chip holders had to be spread over the net assets acquired from Blue Chip. This "fair value" was measured, as it almost always is when public companies use their shares to make acquisitions, by the market value of the shares given up.

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Once the fair value option is elected, the decision is irrevocable. For existing financial assets and liabilities, companies can implement the fair value option when the choice is made to use the guidance in Statement no. 159. In addition, companies can elect to apply the fair value option, after initial adoption, on the date when other eligible items are recognized. As an example, following the initial implementation of the guidance, a company that enters into an eligible commitment can elect to use fair value accounting for that commitment.

1. Background on Fair Value Accounting Fair value accounting was introduced into the U.S in 1994 to address the accounting issues for financial instruments.

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A key for auditors in evaluating the appropriateness of fair value option decisions is to ensure that the guidance is implemented in a manner that is consistent with the underlying objectives of Statement no. 159 and reflects substance over form. Auditors need to exercise the appropriate level of professional skepticism when evaluating facts and circumstances related to using the fair value option. A heightened degree of awareness might be necessary to ensure that businesses are using the option to reflect economic reality, rather than attempting to achieve a particular accounting result.

Wang, Haiping (2012) The Decision Usefulness of Fair Value Accounting in the Debt Market. PhD thesis, Concordia University.

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The fair value option should allow companies to focus more on electing and complying with the fair value option guidance, rather than on designating and documenting transactions to comply with the Statement no. 133 hedge accounting guidance. The option is effective at the start of the first fiscal year beginning after Nov. 15, 2007. (At press time, FASB was considering a delay, in whole or in part, in the effective date of Statement nos. 157, Fair Value Measurements , and 159.)

Companies and their auditors must consider whether the use of fair value option accounting reflects a “substance over form ..

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FASB released Statement no. 159, The Fair Value Option for Financial Assets and Financial Liabilities , in February. The new standard allows companies to measure certain financial assets and liabilities at “market” or fair value rather than historic or original cost. The option does not require companies to comply with relatively complex hedge accounting requirements spelled out in FASB Statement no. 133, Accounting for Derivative Instruments and Hedging Activities .

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Even if the bank could not find a bona fide buyer, it was supposed to write down the property to fair market value on the books and take the loss on its financial statements. The S&L industry, however, was in dire straits. Reporting a loss on the deal would not look good, and might get bank regulators, auditors, and others asking questions. Here is what the bank did to hide its loss. Another developer showed up, with similar delusions of grandeur and an equally pitiful pipedream, except his was twice as large. He wanted a $6 million construction loan. The bank hired an appraiser to make the appraisal for the original empty strip mall that valued it at $5 million, even than the original pie-in-the-sky price tag that the original developer dreamed up. The MAI appraiser would appraise it for whatever number the bank wanted. The bank would tell the second developer that it would loan him the $6 million if he would buy the empty strip mall for $5 million. The bank would loan the developer the money to make the down payment on the empty strip mall, and the first two years of loan payments. The developer never got his hands on money, but the bank held it in escrow and took the money out of the account to make the down payment and loan payments.