FASB Plans To Issue Final FSP On Fair Value 'Today or Tomorrow'

UPDATE: CORRECTED NAME OF FASB STAFF MEMBER BELOW. At its board meeting earlier today, the Financial Accounting Standards Board voted to proceed with issuing a final FASB Staff Position (FSP) on fair valuing in inactive markets, and FASB project director Russell Golden told the board they plan to be able to issue the final FSP ‘today or tomorrow.’ The board agreed with the staff’s proposed approach to making certain changes to the final FSP based on comments received on Proposed FSP No. 157-d, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active.”

CHANGES THAT WILL BE MADE TO THE FINAL FSP

Transaction-based, not ‘market based’ determination of distressed assets

FASB staff member Cristofer Anderson [staff name corrected from our earlier post; we apologize for error], who led the staff presentation at the board meeting, cited language from the SEC-FASB joint clarification of fair value published on September 30, which discusses orderly transactions and distressed transactions, and concluded, as described by Anderson, “Determining whether a particular transaction is … [distressed] requires judgment. “
FASB Technical Director Rusell Golden said, “We understand that some people might have interpreted the [SEC-FASB joint clarification published in the SEC] press release to say that disorderly markets equal distressed transactions,that was not our intent.

Anderson told the board, “The [FASB] staff believes that the determination that a market transaction is distressed or disorderly should be made at the individual transaction level, and should not be assumed to have occurred based on an entity’s conclusion that an entire market for the asset is distressed.” He added, “Based on the feedback received from constituents, the staff has included language in the [final] FSP for the board’s consideration to provide clarification on distressed sales. "

Wording developed by Board member Leslie Seidman will be added to the final FSP, described informally in plain English at the board meeting (more formal wording will be in the ballot draft sent to board members later today) by Seidman as follows: (1) you can’t just dismiss any prices in market that is experiencing dislocation or disorderliness, and (2) you can’ t automatically embrace any old price in a market, that is disorderly or dislocated; it’s going to require significant judgment, and the rest of the FSP hopefully goes thru a thought process in those cases where it’s inactive, but you do have some data to look at.”

Board member Tom Linsmeier, calling into the board meeting from China, asked, “Are we going to clarify a distressed market does not mean distressed sales, necessarily - that you are looking at transctions, not markets?” Seidman replied, “Yes, I think so.” Linsmeier said, “I think it’s important to make clear we are not talking about markets, but individual transactions, and when we go to the individual transaction level, there is judgment, of both types that you are talking about.” Herz later said, “it gets down to that level, rather than saying ‘everything is inactive’.”
IASB board member James Leisenring, an observer at the FASB board meeting, said, “I think that would be very constructive, I think the whole exercise is very constructive frankly, from an international perspective,” adding, “I got a letter this morning from somebody who should know better, who said all transactions should be ignored because the markets are distressed; that’s just not what 157 says, nor could it remotely be called fair value, so I think it will be very helpful, [to add to the FSP the clarification] you suggest.” The title of the FSP will likely change to reflect this transaction-based vs. market-based determination of ‘disorderly/distressed’ as well.

[NOTE: Reference should be made to FASB’s Summary of Decisions Reached which will be posted later today in FASB’s news center and in the final FSP when it is issued, to see if the reference will be to ‘individual’ transactions per se vs. types of transactions or assets. The thrust of the change is apparently to preclude overgeneralization of ‘distressed markets’ to all types of transactions in those markets.] without looking at the markets for particular types of transactions or assets.]

Changes relating to the example in the FSP
Anderson said “a number of comment letters provided suggestions, staff made changes” to the FSP, a few include: (1) adding additional detail on use of indicative broker quotes, and (2) the reporting entity’s rationale for weighing the different [factors/inputs] for use of the discount rate in the valuation technique.

Clarification will be added to the FSP that, “In determining whether an other than temporary impairment (OTTI) exists, this FSP does not amend or change the requirement in EITF 99-20 to use market participant (MP) cash flows, not contractual flows, to determine of OTTI has occurred.”

NOTE: Anderson said changes discussed at the meeting were just those in broad categories, he said additional changes are being made by the staff in response to comment letters, but they were not described in detail during the board meeting.

Disclosures
Some commenters wanted expanded disclosures relating to this FSP. Staff said they will NOT add new disclosures in the FSP but said they plan to bring to the board another disclosure project in the next 2-3 weeks, with the goal of some additional disclosures being required for year-end reporting.

NO CHANGES WILL BE MADE TO THESE ITEMS
A number of areas of concern noted in comment letters will NOT be changed, said staff, including:

• The board will NOT address whether fair value is the appropriate measurement attribute in this FSP – that is beyond the scope of this FSP (and FAS 157), which are focused on HOW to measure fair value, not when to use fair value as the measurement attribute
• the board will NOT include liabilities in the scope of the FSP,
• the board will NOT change the effective date proposed – i.e. it will be effective upon issuance for financial statements not yet issued,
• the board will NOT define “inactive’ vs. ‘active’ markets, but the ‘indicators’ or factors that can be considered will essentially be copied from the example section of the FSP to the guidance section .

Further details from today’s FASB board meeting will be posted later today in a summary on http://www.financialexecutives.org/. (FEI members only will be able to access the detailed summary, check out the benefits of FEI membership! And be sure to check out FEI’s Current Financial Reporting Issues (CFRI) conference taking place Nov. 17-18 in New York City at www.financialexecutives.org/cfri, including the special package for conference registration and first year membership in FEI! The Chairman of the SEC, FASB and IASB will be at CFRI – you should be there too! And, check out the FEI Hall of Fame Gala Nov. 17 at www.feihall.org, the 2008 Hall of Fame inductees are Susan Schmidt Bies and John F. Ruffle. And, there's more, check out the workshop sponsored by Deloitte: IFRS: Strategies for Adopting a Single Set of Standards," on Nov. 19 in NYC. All of these programs are described further on FEI's website under Networking Events.

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