AICPA seeks input for new framework on valuation of financial instruments

The AICPA is seeking input on a new framework to better guide CPAs and financial professionals on the valuation of financial instruments and their underlying components.

The goal of the new framework is to produce a more accurate and transparent method for determining the value of financial instruments such as mortgage-backed securities, credit default swaps, complex bonds, and other derivatives. The difficulty in valuing these instruments has the potential to adversely impact markets and the global economy.

The new framework aims to address the issue by defining the level of documentation necessary for professionals working with securities and financial instruments to effectively demonstrate the valuation performed. This guidance will lay the foundation for a new AICPA credential, Certified in Valuation of Financial Instruments (CVFI), which is expected to launch later this year.

“This framework will ensure that professionals working with financial instruments perform their engagements with independence, objectivity, and consistency. We encourage all stakeholders to review and comment on the draft,” Jeannette Koger, CPA, CGMA, the AICPA’s vice president–Advisory Services & Credentialing, said in a news release.

The exposure draft can be viewed in two parts. The first part, Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (“CVFI”) Credential, makes several improvements to the guidance CPAs use in the valuation of financial instruments, including the following:

• Providing guidance on explaining the characteristics of financial instruments and disclosing how these securities have been valued in a clear way with consistency and transparency.
• Establishing the parameters of documentation requirements.
• Setting definitions of terms that may be unique to the framework.
• Providing a list of accounting, audit, and valuation standards and references to technical literature that applies to the framework guidance.

The second part of the ED, Application of the Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (“CVFI”) Credential, builds upon the first part by:

• Showing how the framework would be applied for areas of valuation that are often either misapplied or insufficiently supported or documented.
• Identifying the most common components in which financial professionals provide a conclusion of value, as well as addressing matters that need better consistency in the application of the approaches and methodology.
• Providing support for matters that require the application of professional judgment and documentation of inputs and results.

The ED comment period is open through Sept. 26.

CVFI credential holders will be required to comply with the new framework once it is finalized. CPAs and financial professionals may sign up to stay informed on the CVFI credential.

—Anslee Wolfe is a freelance writer in Colorado Springs, Colo. To comment on this article or to suggest an idea for another article, contact Jeff Drew, senior editor, at Jeff.Drew@aicpa-cima.com or 919-402-4056.