The Financial Accounting Standards Board has set a new standard that establishes a long-needed framework on fair value measurement and expands related information in financial reports - and the investor community, according to FASB board member Leslie F. Seidman, is going to love it.Though Statement 157, Fair Value Measurements, does not require any new or additional fair value measurements, it applies to over 40 existing standards that require or permit the measurement of assets and liabilities at fair value.

Those multifarious standards prescribed diverse and often inconsistent methods for measuring fair value, especially for items not actively or commonly traded on the open market.

"We're hoping that there will be more consistency in the way companies approach fair value measurement, and less diversity in practice from the user's perspective," Seidman said. "Users should have more confidence that when they look at those disclosures about what is being shown at fair value and the methods used, they'll have better information to use to assess the quality of earnings and how they view the reliability of the estimates being made."

To deal with the full variety of assets and liabilities, the statement establishes a fair value hierarchy that reaches from items that have readily determinable market prices to items that have no observable data that could be used to determine a fair price. The extent of disclosures would be determined by the hierarchical level used to measure a value. At the level without clear market values, disclosures would be required for values that were different from any market values referenced, such as the estimated value of a restricted stock based on the price of unrestricted stock.

In redeliberations following comments on an exposure draft, the standard-setter clarified the use of the framework as, in Seidman's words, "a way of thinking, rather than a prescriptive cookbook."

The board also modified the exposure draft to require additional information on the effect on earnings for items that have to be remeasured under current generally accepted accounting principles using a method that is predominantly based on unobservable data.

The hierarchy is founded on the assumption that fair value should be based on a hypothetical transaction focusing on the price that would be received to sell an asset or paid to transfer a liability at the measurement date. Market assumptions are to include assumptions about risk.

Alleviating a concern expressed by many corporate constituents, the standard does not require the producers of financial reports to make all possible efforts to obtain information about market participant assumptions, though reasonably available information is not to be ignored.

The CFA Institute, long an advocate of fair value measurement, praised FASB's effort.

"Financial statements are the primary information source for investors, and we believe that their value is enhanced substantially by the inclusion of fair value measurement for assets and liabilities," said Rebecca McEnally, CFAI director of capital markets policy. "So we commend FASB for moving forward on Statement 157. We believe that this standard represents a major building block in the FASB standard-setting agenda. Now, preparers, auditors and users will have consistent guidelines for measuring fair values when standards call for such measurement."

In that the framework behind the standard builds on current GAAP, the board does not expect the standard to drastically increase the effort or cost needed to produce financial statements. It sees the benefits of improved comparability among financial statements outweighing any incremental increases in the cost of compliance.

The International Accounting Standards Board plans to issue the FASB statement as a preliminary views document that may eventually become an international standard similar to the American standard.

Though the exposure draft suggested that the statement go into effect at the end of the current calendar year, the board decided that since the statement was being issued late in the year and touched on so many other standards, it would be effective for financial statements issued for fiscal years beginning after Nov. 15, 2007.

Earlier application is encouraged for companies that have not issued financial statements, including interim statements, for that year. The statement is to be applied prospectively, except in three kinds of instruments that were specified in the statement.

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