The Financial Accounting Standards Board and the International Accounting Standards Board tentatively decided to define fair value as an exit price during a three-day joint meeting this week.
Fair value measurement is one of the thornier issues the two standards-setters are trying to come to an agreement on as they seek to converge U.S. GAAP with International Financial Reporting Standards by June 2011. Fair value, or mark-to-market, accounting has been blamed in some quarters for helping exacerbate the financial crisis. Standard-setters have come under pressure to revise the standards to give financial institutions more flexibility in valuing assets such as mortgage-backed securities that became difficult to trade during the crisis. The two boards have decided to meet on a monthly basis, both in person and by video conference, to resolve outstanding issues in areas such as fair value, revenue recognition, leases and consolidation.
When markets become less active, the two boards tentatively decided that an entity should consider observable transaction prices unless there is evidence that the transaction is not orderly. If an entity does not have enough information to determine whether the transaction is orderly, it should perform further analysis to measure the fair value.
The boards also tentatively decided that the transaction price might not represent the fair value of an asset or liability at initial recognition if, for example, the transaction is between related parties, the transaction takes place under duress or the seller is forced to accept the price in the transaction, the unit of account represented by the transaction is different from the unit of account for the asset or liability measured at fair value, or the market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability.
The boards also tentatively decided to confirm that a fair value measurement is market based and reflects the assumptions that market participants would use in pricing the asset or liability. Market participants should be assumed to have a reasonable understanding about the asset or liability and the transaction based on all the available information, including information that might be obtained through due diligence efforts that are usual and customary. A price in a related-party transaction may be used as an input to afair value measurement if the transaction was entered into at marketterms.
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