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Accounting & Auditing More Help on Determining Fair Value of Liabilities By Tammy Whitehouse FAIR VALUE COMMENTARY C orporate accounting departments finally have more guidance to help them pin fair-value measurements onto The following excerpt is from the comment summary for FSP FAS 157-f: As noted in paragraph 4(c), respondents generally supporting issuance of the proposed FSP raised their liabilities—and the guidance re- concerns mainly surrounding paragraphs 9, 10, and 11 of the proposed FSP and the illustrative ex- flects a realization that in some cases, the amples included in the proposed FSP. Many respondents also made editorial suggestions aimed at concept of fair value is much simpler than ensuring that the proposed guidance is consistent with Statement 157, as amended. The paragraphs the practical reality. that follow discuss those and other issues. Almost two years in the making, the Financial Accounting Standards Board Paragraph 9 has completed Accounting Standards Update No. 2009-05 to explain how Two constituents suggested that the Board make clear that the fair value measurement objective is companies should apply the modern con- still an exit price notion—that is, what would be paid to transfer the liability to another market partici- cept of fair value to liabilities, even when pant in an orderly transaction at the measurement date [International Swaps and Derivatives Associa- liabilities are rarely traded in the way a tion (CL # 7) and Ernst & Young (CL #12)]. Two constituents also suggested that the Board make clear fair-value approach assumes. The board the goal of maximizing relevant observable inputs [Deloitte (CL #15) and Duff & Phelps (CL #13)]. needed two separate draft proposals to finalize the guidance it ultimately ad- One constituent suggested that the Board make clear that paragraphs 9(b) and 9(c) reﬂect inputs opted. into a fair value measurement and are not fair value measurements in and of themselves [Pricewater- Fair value for a liability is currently houseCoopers (CL #5)]. Two constituents suggested that if the Board intends to require or allow an defined as the exit price (that is, what a entry price notion to be the measurement attribute for a liability, then the Board should characterize company must pay someone to assume that decision as a practical exception or practical expedient [Deloitte CL #15 and KPMG (CL # 18)]. the liability and take it off the company’s hands) paid in a market-based exchange. Paragraph 10 The definition also says the best indica- tor of fair value is a market price for an One constituent suggested that the FASB clarify its intent regarding adjustments and whether they identical liability. should be made for differences between the principal market of the asset and the principal market of The problem? In the real market, li- the liability being measured [International Swaps and Derivatives Association (CL # 7)]. This constitu- abilities are rarely traded because they ent suggested that if the FASB intends that no adjustment be made, then it should provide a clear usually carry contractual restrictions, rationale for such a decision; if the FASB intends that an adjustment be made, it should provide ad- says Jamie Mayer, senior manager at ditional guidance to aid in application of the proposed FSP. Grant Thornton. Instead, companies typically think about liabilities under Two constituents noted that, without further clariﬁcation, an entity may recognize a day one loss if it a “settlement notion,” or what it would adjusts for the effect of a restriction embedded in the terms of the liability if the principle in paragraph cost to settle a liability, he explains. “But 10(c) of the proposed FSP is followed [KPMG (CL # 18); Deloitte (CL #15)]. These constituents also fair value says you are not settling, but suggested that 10(c) be deleted or conformed to the guidance in paragraph 11 of the proposed FSP transferring the liability.” by clarifying that if the holder of the asset is restricted from selling the asset because of a restriction FASB addresses the issue by telling embedded in the original transaction, the entity should not make an additional adjustment when companies that if a quoted price in an ac-
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