The Financial Accounting Standards Board issued a summary of the board's actions when it modified the standards for fair value and mark-to-market accounting in response to congressional demands:

"FASB considered three proposals. ... The first proposal (on FAS 157) relates to how to figure out fair values when there is no active market or where the price inputs being used really represent distressed sales. The FASB ... re-affirmed that the objective of measuring fair value has always been and continues to be the same since FAS 157 was published. The objective is 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. Specifically, companies should look at factors and use judgment to ascertain if a formerly active market has become inactive.

"In trying to estimate fair value in an inactive market, the company must see if the observed prices or broker quotes obtained represent 'distressed transactions.' Other techniques such as a management estimate of the expected cash flows might also be appropriate in that circumstance. However, even if a company analysis is used, it must meet the objective of estimating the orderly selling price of the asset under current market conditions. Some financial institutions have made public statements that they do not expect this proposal to significantly impact their financial statements.

"The second proposal relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. The current rule is that fair values for these assets and liabilities are only disclosed once a year. The board voted [in early April] that these disclosures should be required on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. For commercial banks, one financial asset impacted by this is loans, which will now have disclosures about their fair value every quarter.

"The third proposal deals with other-than-temporary impairment. The proposal would not change when a company recognizes impairment. It could change where in the financial statements the impairment is reported. Under the current rules, unless the severity and duration of a drop in fair value is too great, if a company can assert that it intends and is able to hold a security until the fair value recovers, it need not record an impairment charge on the income statement. ....

"However, if management expects at the financial statement date that all of the cash flows won't be 100 percent collected, an impairment must be recorded in the statement of income."

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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