FASB Amends Fair Value Measurements

The Financial Accounting Standards Board has provided new flexibility to allow banks and other financial institutions to re-price their assets during the credit crisis by amending its standard on fair value measurements.

The FASB Staff Position clarifies the application of FASB Statement No. 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive.

At a meeting on Friday, FASB considered the proposed amendment, which it had put out for comment on Oct. 2 on an accelerated schedule (see FASB Speeds up Fair Value Advice). FASB received over 100 comment letters in just a week's time and on Friday the board made some modifications to the proposed staff position and planned to quickly issue it.

"The staff analyzed all the comment letters and the recommendations of the board," said spokesperson Christine Klimek. "The board was in favor of the staff's recommendations and the FSP will reflect that."

Among the suggestions received by the board, the staff had recommended ways to make the illustrative model clearer, she noted.

FASB and the Securities and Exchange Commission are under pressure to suspend fair value and mark-to-market accounting rules altogether as some critics blame the rules for causing or exacerbating the credit crisis. A provision in the recently passed financial rescue bill authorized the SEC to conduct a study of mark-to-market rules. The SEC has commenced work on the study, which it plans to issue by Jan. 2, 2009 (see SEC Begins Mark-to-Market Study).

For now, the FASB guidance leaves fair value in place, though. "Fair value is still here," said Klimek. "We're just providing more guidance on how to value assets in a non-active market."

The American Institute of CPAs was one of the groups that commented on the proposal. Jay Hanson, chairman of the AICPA's Accounting Standards Executive Committee, said the committee supported FASB's proposed staff guidance about how to apply FASB Statement No. 157 and believes the proposed guidance will be helpful in practice. He noted that preparers and auditors may need additional guidance for Level 3 measurements and recommended that FASB clarify that the contractual cash flows used in the example are not appropriate for purposes of determining whether there is impairment under EITF No. 99-20.