Finance

"Opportunistic Adoption of SFAS 159SFAS 159 (currently codified as ASC 825-10-25) allows considerable discretion to com-panies in choosing the specific assets or liabilities for which they exercise the fair valueoption. An analyst needs to verify whether the fair value election has been opportunis-tic with an aim to window dressing the financial statements. Wells Fargo has chosen toexercise the fair value option for prime residential mortgages held for resale (MHFS)and certain interest related to residential loan sales and securitization. What is the effectof Wells Fargo’s fair value choices on its financial statements? The net gain included innet income (for the nine months ending September 2007) because of the fair value elec-tion under SFAS 159 is $445 million. However, an unrealized loss of $226 million onavailable-for-sale securities was not included in net income because the company chosenot to elect the fair value option for investment securities, even though the fair valueestimates of investment securities are more reliable, on average, than those for whichthe fair value option was exercised. This evidence suggests that Wells Fargo was oppor-tunistic in its choice of assets to use the fair value option.Chapter Five | Analyzing Investing Activities: Intercorporate InvestmentsAdditionally, a gain of $1,341 million was included in income because of changes infair value of mortgage servicing rights (MSR) arising from assumption changes, forwhich Wells Fargo chose to exercise the fair value option under SFAS 156. (Note thatthe loss provision of $2,292 relating to MSR would have been made in the absence offair value accounting.) As we note earlier, unrealized gains (or losses) arising from as-sumption changes are highly unreliable and should be analyzed with care"

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