SEC and FASB Clarifications on Fair Value Accounting
October 6, 2008
On September 30, 2008, the SEC’s Office of the Chief Accountant and the FASB staff jointly issued clarifications surrounding fair value measurement guidance in FASB Statement No. 157, Fair Value Measurements. These jointly issued clarifications cover questions that need answers on an urgent basis, but the FASB is preparing additional
interpretive guidance.
One clarification addresses which factors should be considered in determining whether an investment is other-than-temporarily impaired. Because US GAAP does not provide bright line rules, determining whether an impairment is other than temporary is often a matter that requires the exercise of reasonable judgment based on the facts and circumstances. However, SAB Topic 5M provides factors that may be considered individually or in combination with other factors, and they include:
- the length of time and the extent to which the market value has been less than cost
- the financial condition and the near-term prospects of the issuer
- the holder’s intent and ability to retain its investment for a sufficient period of time to allow for an anticipated recovery in market value
Another clarification discusses how management’s internal assumptions can be used to measure fair value when relevant market data is unavailable. In these situations, estimates should reflect current market participant expectations of future cash flows and appropriate risk premiums. Statement 157 offers various valuation techniques that may be used to estimate fair value when relevant market evidence does not exist.
An additional clarification addresses how market quotes, such as those from a broker, may be considered when determining fair value, but they are not determinative in the absence of an active market. Additionally, the nature of the quote and whether the quote reflects the result of market transactions should be considered when weighing the available information. Other subjects covered by the guidance included the consideration of disorderly transactions in assessing fair value and transactions in an inactive market being indicative of fair value.
http://www.sec.gov/news/press/2008/2008-234.htm
For more information, contact:
305.789.7548
kara.maccullough@hklaw.com
Esther L. Moreno
305.789.7442
esther.moreno@hklaw.com
toll free: 1.888.688.8500
About Our Public Companies and Securities Practice
About Our Securities Litigation Practice