The Financial Accounting Standards Board has proposed a FASB Staff Position (FSP FAS 157-d) to clarify FAS 157's application in an inactive market by providing an illustrative example to "demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive."
This proposed interpretation of FAS 157 is being issued as part of the FASB and SEC's recent joint announcement of clarifications on the use of fair value measurements and "mark to market" accounting, particularly in instances of other than temporary impairment. According to the Staff Position, these clarifications of FAS 157 also respond to concerns by certain constituents that FAS 157 does not provide sufficient guidance on how to determine the fair valuation of financial assets in markets that are not active.
The interpretive example in the Staff Position illustrates that in situations in which there is little, if any, market activity for an asset at the measurement date, the fair value measurement objective remains the same under FAS 157, i.e , "the price that would be received by the holder of the financial asset in an orderly transaction that is not a forced liquidation or distress sale at the measurement date." Issues addressed by the proposed staff position include:
- How management's internal assumptions (that is, expected cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair value when relevant observable data do not exist;
- How observable market information in a market that is not active should be considered when measuring fair value;
- How the use of market quotes (for example, broker quotes or pricing services for the same or similar financial assets) should be considered when assessing the relevance of observable and unobservable data available to measure fair value.
The entire text of FASB Staff Position 157-d is available at: http://www.fasb.org/fasb_staff_positions/prop_fsp_fas157-d.pdf
Comments on the proposed Staff Position are due to the FASB no later than October 9, 2008.