FAS 157: Fair Value Measurements
By Linda Cavanaugh, CPA - As many of you are probably aware, the new fair value standard is effective for fiscal years beginning after November 15, 2007. This means the 1st quarter of 2008 for calendar year companies. Below is a quick overview of FAS 157. In the next few days, I will post a 7 step implementation plan and then the disclosure requirements.
Please share the obstacles you have faced in implementing this standard and how you overcame them!!
What is FAS 157?
FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It provides guidance for measuring the value of assets and liabilities that are already required under other accounting pronouncements to be measured at fair value. It does not require any additional assets or liabilities to be measured at fair value.
FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The major changes to fair value measurement under this new definition include:
1. the use of an exit price instead of the transaction price
2. the use of market participant assumptions instead of entity specific assumptions
3. the exit price is to be taken from the principal or most advantageous market
4. the exit price is based on the highest and best use of the asset (in-use or in-exchange)
5. need to consider three different valuation techniques: market, income and cost
6. establishes a hierarchy for valuation inputs
The fair value hierarchy of valuation inputs involves three levels based on observable and unobservable inputs. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability and require additional disclosures.
As usual, the FASB didn’t write this standard in plain English, so send me a note and I will try to translate!
Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.