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Last month the FASB released its final take on fair value measurements (SFAS
157), which will take effect in 2007. However, the landscape of fair value
measurements has already begun to change and evolve in accordance with the
statement. Here are a few thoughts to consider:
- 157 will in effect be issued as an exposure draft for IASB, as the two
bodies are moving to convergence. Convergence is happening in the accounting
world as the FASB continues to push principles-based accounting, which we
hope in the end means that defensible positions rule the day rather than, "this is the
process that you have to follow."
- The statement defines fair value as "the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date". The important
takeaways to remember are that orderly transaction does not mean a forced
liquidation or a distressed sale, value should be considered from the eyes
of a market participant and we can't use entity specific assumptions.
- Value is defined within a highest and best use framework meaning that we
again must consider the use of the asset from the perspective of market
participants even if the acquirer has different plans (yes this gets
tricky).
- The valuation hierarchy is clearly laid out in the statement, which
prioritizes the inputs. As always, highest priority is given to active
markets (e.g. stock price) and the lowest priority is given to unobservable
inputs (e.g. discounted cash flows). Unobservable inputs are basically
management projections, which we all know can be difficult to validate.
While 157 gives us some new insight, the valuation world has been digesting
the new directives formalized in the statement for the past couple of years.

Category(s): Fair Value Accounting
Posted by Brett Suchor at 08:46 PM | Permalink | Comments (0) | TrackBacks (0)