Financial Reporting Alert 07-8: FASB Proposes to Partially Defer Statement 157, Considers Implementation Issues
November 15, 2007
On October 17, 2007, the Financial Accounting Standards Board (FASB or “Board”) decided against a wholesale deferral of FASB Statement No. 157, Fair Value Measurements , but instructed the FASB staff to evaluate other deferral alternatives.
Yesterday, the Board decided to issue a proposed FASB Staff Position (FSP) to defer the effective date of Statement 157 for all nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. Examples of items for which Statement 157’s fair value measurement and disclosure requirements would be deferred include:
- Nonfinancial assets and liabilities measured at fair value in a business combination under FASB Statement No. 141, Business Combinations , but not measured at fair value in subsequent periods.
- Reporting units measured at fair value in step 1 of the goodwill impairment test, nonfinancial assets and liabilities measured at fair value in step 2 of the goodwill impairment test, and indefinite-lived intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets.
- Asset retirement obligations measured at fair value at initial recognition under FASB Statement No. 143, Accounting for Asset Retirement Obligations.
- Long-lived asset groups measured at fair value in step 2 of the long-lived asset impairment test under FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
- Liabilities for exit or disposal activities measured at fair value at initial recognition under FASB Statement No. 146, Accounting for Costs Associated With Exit or Disposal Activities.
Examples of items for which Statement 157’s fair value measurement and disclosure requirements would not be deferred, and for which Statement 157 would still be effective for years beginning after November 15, 2007, include:
- Derivatives measured at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
- Servicing assets and liabilities measured at fair value under FASB Statement No. 156, Accounting for Servicing of Financial Assets.
- Loans measured at fair value in a business combination, in a lower of cost or fair value write-down, under the fair value option in FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities , or for disclosure purposes under FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments.
- Debt measured at fair value in a business combination, under the fair value option in Statement 159, or for Statement 107 disclosure purposes.
The Board agreed to issue the proposed FSP with a 30-day comment period. The FSP would provide an option for entities to early adopt Statement 157 in its entirety. Entities that have already issued either interim or full-year financial statements in which they early adopted Statement 157 must continue to apply the requirements of Statement 157 to all fair value measurements within its scope.
The Board also discussed three Statement 157 implementation issues:
Issue 1: Unit of Valuation/Exit Markets — Constituents have raised questions about whether an asset may be valued on the basis of the sum of its components when that sum would exceed the amount received from selling the asset in its entirety, and whether an exit market should be the market in which an asset could be sold (1) in its current form or (2) after modification. The Board did not support developing an FSP to address this issue since it believes that issuers must use judgment on the basis of their particular facts and circumstances.
Issue 2: Measurement of Liabilities — Constituents have suggested that Statement 157’s fair value measurement requirements for liabilities are based on a hypothetical transfer to another entity that would not typically occur in the marketplace. Typically, liabilities are extinguished directly with the counterparty rather than by paying another entity to assume the obligation. To assist issuers in measuring the fair value of liabilities, the Board agreed to issue a proposed FSP to clarify that the fair value of a liability may equal the amount the reporting entity would be required to receive for an identical liability to be assumed as of the measurement date. However, if, without undue cost and effort, information indicating that market participants would use different assumptions becomes reasonably available, that amount would be adjusted accordingly.
Issue 3: Applicability of Statement 157 Disclosures to Pension or Other Postretirement Benefit Plan Assets — Constituents have raised questions about whether the disclosure requirements in paragraph 32 of Statement 157 apply to fair value measurements made under Statement 157 for plan assets included in the financial statements of sponsors of defined benefit pension and other postretirement plans. The Board concluded that these disclosures do not apply to pension plan assets, but believes that investors would benefit if sponsors of pension or other postretirement benefit plans provide disclosures similar to those required under Statement 157. To that end, the Board agreed to issue a proposed FSP that would expand disclosures of plan assets under FASB Statement No. 132(R), Employers’ Disclosures About Pensions and Other Postretirement Benefits . The proposed FSP is expected to be effective for fiscal years ending after November 15, 2008. The measurement and disclosure provisions of Statement 157 continue to apply to the financial statements of the defined benefit pension and other postretirement plans themselves.