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1. Fair Value Developments Baruch College Financial Reporting Conference
May 3, 2007
Leslie F. Seidman
2. 2 Statement 157, Fair Value Measurement Issued September 2006
Objective: Clarify definition and premise of “fair value” when another standard currently requires or permits fair value measurement
The price that would be received for an asset or paid to transfer a liability in a transaction between market participants at the measurement date.
Simplify GAAP by using the same principle for fair value when it is currently required or permitted.
3. 3 Fair value hierarchy: prioritize observable/ market data and inputs in approaches
Level 1—unadjusted quoted prices in active markets for identical items
Level 2—observable inputs (prices for similar items, rates, etc.) for the item, including market-corroborated inputs, that might need adjustment
Level 3—entity’s own assumptions about assumptions a market participant would use, developed based on best info available without undue cost and effort
4. 4 Fair Value Measurement (cont’d) Expanded disclosure about the use of fair value in financial statements, organized by level in hierarchy
Emphasis on Level 3: reconciliation of balances for items being remeasured and disclosure of unrealized gains and losses in P&L
5. 5 Fair Value Measurement (cont’d) Major changes in practice
Emphasis on exit price and market participant view (e.g., private equity)
Liabilities include entity’s own credit risk (e.g., derivatives)
Block discounts not permitted (PxQ)
Include restrictions if they are an attribute of the asset (generally decreases FV)
Rescinds fn 3 of EITF Issue 02-3 (dealers could recognize upfront g/l, but amounts should reflect market-based “risk adjustment” for uncertainty in inputs)
6. 6 Fair Value Measurement (cont’d) Effective for fiscal years beginning after November 15, 2007; early adoption OK
Transition is generally prospective
However, block discount and EITF Issue 02-3 adjustments (including hybrids) have limited retrospective adjustments through retained earnings
7. 7 Valuation Initiatives Invitation to Comment, Valuation Guidance for Financial Reporting (January 2007)
Seeks input on the need to develop valuation standards for use in financial reporting
What type of items need valuation guidance?
Who should develop it?
Is it a temporary or ongoing need?
Comments due April 15, 2007
Roundtable held April 30, 2007
8. 8 Conceptual Framework Project: Measurement Phase Develop a concept on how to select a measurement attribute for a particular transaction or event
Currently, identifying existing types of measurements and grouping them as “current” and “historical/cost”
Evaluate them against the qualitative characteristics (relevance, reliability, etc.)
Develop concept for how to decide in future standards
Public discussion sessions held in January ’07
Focus on “nearness to cash” and “business activity”
NOT a stealth effort for Fair Value of Everything!