FASB issues final fair value staff positions

FASB issued three final Staff Positions (FSPs) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.

What has proven to be highly controversial guidance, FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157, Fair Value Measurements.

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures.

FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. FASB reaffirms what FAS 157 states is the objective of fair value measurement — to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.

“This FSP is a further explanation of what is contained in the baseline standard, FAS 157. It does not break away from the notion of fair value,” said Daniel Noll, the AICPA director of accounting standards. “It does remind preparers and auditors that you can use judgment and not necessarily look at the most recent transaction price for a mortgage-related asset.”

“Fair value of illiquid items has always required significant judgment,” Noll said. “It remains to be seen just how significant the changes will be as a result of the new guidance and how the marketplace will react to the resulting information.”

FASB has faced sharp criticism recently for a perceived compromise to the independence of the accounting standard-setting process. FASB Chair Robert Herz acknowledged that the comment period was “accelerated and expedited,” but stresses that the proposals did receive due process.

“Congressional interest in the standard setting process is not new, but fortunately it is infrequent,” Noll said. “What is best for capital markets is to have a private sector body made up of experts without any ties to other organizations setting the accounting standards.”

The FSPs are effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSPs for the interim and annual periods ending after March 15, 2009.

More news