More Help on Determining Fair Value of Liabilities

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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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