Revised Financial Reporting Alert 08-12, FASB Votes to Issue Proposed Staff Position Clarifying Fair Value Measurement Guidance
Revised October 3, 2008 (Originally Released October 1, 2008)
On October 3, 2008, the FASB issued proposed Staff Position (FSP) No. FAS 157-d, “Determining Fair Value of a Financial Asset in a Market That Is Not Active.” Comments are requested from constituents by October 9, 2008. The Board has scheduled a meeting to discuss comments and finalize the FSP on October 10, 2008. The FSP would be effective for all financial statements issued after the FSP is finalized.
The Financial Accounting Standards Board (FASB) voted on October 1 to go forward with a proposed Staff Position (FSP) to amend FASB Statement No. 157, Fair Value Measurements. The proposed FSP will elaborate on some of the clarifications on fair value measurements discussed in the press release issued jointly by the SEC’s Office of the Chief Accountant and the FASB staff on September 30 by including an example of how to determine the fair value of a financial asset when markets for the asset are not active.
Before the vote, several Board members noted that the proposed FSP will not change the fair value measurement principles in Statement 157 and that the proposed FSP is intended rather to help constituents apply those principles in these “extraordinary times.” The Board reiterated that the objective of fair value measurements for financial assets under Statement 157 continues to be to estimate the price a market participant would pay for an asset being measured as of the measurement date. The purpose of the proposed FSP is to clarify how to apply the key principles of Statement 157 in markets that are not active.
The Board directed the staff to address the following issues in the example to be included in the proposed FSP:
How entities’ internal (entity-specific) assumptions should be considered in the measurement of fair value for a financial asset when relevant market data does not exist.
How observable market information in an inactive market affects fair value measurements.
- How entities should consider the use of broker quotes or pricing services when assessing the relevance of inputs available to measure fair value.
The Board noted that a key aspect to be illustrated in the example is that regardless of the valuation technique (e.g., market or income approach) used to measure financial assets in a market that is not active, entities must include appropriate risk adjustments, such as adjustments for nonperformance and liquidity risk, that market participants would use in pricing the asset.
Because of the immediate need for additional guidance, the Board voted to alter its normal due process by accelerating the comment period to approximately seven days. The staff indicated that the proposed FSP will be exposed for comment by the end of this week, with comments requested from constituents by October 9, 2008. The Board plans to finalize the FSP on October 10, 2008, with an immediate effective date, and noted that the guidance would be effective for periods ending September 30, 2008, for entities that have not yet issued financial statements for that period.