FASB Updates Fair Value Guidance

Editor’s note: This is a sidebar to “Valuations for Financial Reporting in Today’s Market,” May 09.

At its April 2 meeting, FASB voted to release three new pieces of guidance to address concerns over the application of fair value accounting standards in current market conditions. As a result, FASB said it would issue three related FSPs to clarify the guidance in FASB Statement no. 157 for fair-value measurements in inactive markets, modify the recognition and measurement of other-than-temporary impairments of debt securities, and require companies to disclose the fair values of financial instruments in interim periods. The final FSPs will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.

FASB Staff Position no. FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, establishes a process to determine whether a market is not active and a transaction is not distressed. The FSP says companies should look at several factors and use judgment to ascertain if a formerly active market has become inactive. Once a market is determined to be inactive, more work will be required. The company must see if observed prices or broker quotes obtained represent “distressed transactions.” Other techniques such as a discounted cash flow analysis might also be appropriate in that circumstance, as long as it meets the objective of estimating the orderly selling price of the asset in the current market.

FSP no. FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments, deals with other-than-temporary impairment of debt securities (OTTI). Under the new rules, once an OTTI is determined for a debt security, the portion of an asset write-down attributed to credit losses may flow through earnings, and the remaining portion may flow through other comprehensive income, depending on the situation and facts involved.

There will be several new required disclosures about how the charges are split. FSP no. FAS 107-B and APB 28-A, Interim Disclosures about Fair Value of Financial Instruments, will increase the frequency from annually to quarterly of disclosures providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.

Refer to the FASB Web site (www.fasb.org) for more information.