Reprieve from FASB may be forthcoming on Fair Value Measurements

12/8/2011

By Charles J. Garrison, CPA

Statement of Financial Accounting Standards No. 157, Fair Value Measurements, now known as Accounting Standards Codification No. 820 (ASC 820) became effective for years beginning after November 15, 2007. It requires companies to measure certain assets and liabilities at fair value, “the price that would be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.

While there are accurate market quotes for certain assets, the measurement becomes problematic for assets with no active markets. ASC 820 defines three levels of assets and liabilities: Level 1 have quoted prices in active markets, Level 2 have quoted prices in inactive markets or are based on models utilizing observable market data, and Level 3 are based on unobservable prices.

Level 3 assets such as Other Real Estate Owned or private label mortgage-backed securities, in effect, are estimated using assumptions about assumptions. Not only have such assets and liabilities been difficult and often time consuming to measure, but the output has not proven particularly accurate. The statement read, in part “FASB selected this project because of pervasive concerns expressed by nonpublic entity stakeholders regarding existing fair value disclosures, particularly that many of the requirements are irrelevant to their financial statement users and are very costly to prepare.”

FASB did not indicate a time frame for the project or when a decision would be forthcoming.