The Financial Accounting Standards Board has publishedthe "final" versions of its three controversial FASB Staff Positionsto improve guidance and disclosures on fair value measurements.
FSP FAS 157-4, "Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly," providesguidelines for making fair value measurements more consistent with theprinciples presented in FASB Statement No. 157, "Fair ValueMeasurements."
FSP FAS 107-1 and APB 28-1, "Interim Disclosuresabout Fair Value of Financial Instruments," enhances consistency infinancial reporting by increasing the frequency of fair value disclosures. FSPFAS 115-2 and FAS 124-2, "Recognition and Presentation ofOther-Than-Temporary Impairments," provides additional guidance designedto create greater clarity and consistency in accounting for and presentingimpairment losses on securities.
"The issuance of these final FSPs follows a periodof intensive and extensive efforts by the FASB to gather input on our proposedguidance," said FASB Chairman Robert H. Herz (pictured) in a statement.
He noted that FASB had received over 600 written commentletters, along with many e-mails, and held face-to-face meetings and otherdiscussions "with a broad range of affected constituents."
FASB was under pressure to revise fair value andmark-to-market accounting standards from banking interests and Congress. At aHouse subcommittee hearing, Herz was pressed by lawmakers to relax thestandards for how financial institutions could value illiquid assets such asmortgage-backed securities that don't have an active trading market, or facecongressional action (see FASB Compromises on Fair Value).
"Our careful consideration of the input resulted insome changes in the final documents from the guidance first proposed," henoted. "The changes include a number of new disclosures relating to thedeterminations of fair value and to estimated credit losses and credit exposures.Virtually all of the investors providing input expressed the need for greatertransparency by banks. Taken together, these three new documents requiresignificantly expanded and enhanced disclosures."
FSP FAS 157-4 relates to determining fair values when thereis no active market or where the price inputs being used represent distressedsales. It reaffirms what Statement 157 states is the objective of fair valuemeasurement - to reflect how much an asset would be sold for in an orderlytransaction (as opposed to a distressed or forced transaction) at the date ofthe financial statements under current market conditions. Specifically, itreaffirms the need to use judgment to ascertain if a formerly active market hasbecome inactive and in determining fair values when markets have becomeinactive.
FSP FAS 107-1 and APB 28-1 relates to fair valuedisclosures for any financial instruments that are not currently reflected onthe balance sheet of companies at fair value. Prior to issuing this FSP, fairvalues for these assets and liabilities were only disclosed once a year. TheFSP now requires these disclosures on a quarterly basis, providing qualitativeand quantitative information about fair value estimates for all those financialinstruments not measured on the balance sheet at fair value.
FSP FAS 115-2 and FAS 124-2 on other-than-temporaryimpairments is intended to bring greater consistency to the timing ofimpairment recognition, and provide greater clarity to investors about thecredit and noncredit components of impaired debt securities that are notexpected to be sold. The measure of impairment in comprehensive income remainsfair value.The FSP also requiresincreased and more timely disclosures sought by investors regarding expectedcash flows, credit losses, and aging of securities with unrealized losses.
The FSPs are effective for interim and annual periodsending after June 15, 2009, but entities may adopt them early for the interimand annual periods ending after March 15, 2009. Beyond these near-term actions,the FASB also has a joint project with the International Accounting StandardsBoard aimed at more broadly revamping and converging their respective standardson accounting for financial instruments.
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