FAS 157 Is Dead, Long Live Topic 820

Sep 4th 2009
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I would venture to say that FAS 157 has been the most controversial statement ever to come out of FASB. This fair value standard has been blamed for the current recession and there is increasing pressure on FASB to change it. So change is coming. The first change is the name – FAS 157 is now Topic 820.

Other changes to FAS 157 – excuse me, Topic 820, are more substantive. Most of the changes deal with Level 3 inputs and includes the following new disclosures:

1. Effect of reasonably possible alternative Level 3 inputs. For fair value measurements using significant unobservable inputs (Level 3), if changing one or more of those inputs to reasonably possible alternative inputs would increase or decrease the fair value measurement significantly (sometimes also referred to as sensitivity disclosures), the reporting entity would state that fact and disclose the total effect(s) of the changes on the fair value measurement.

2. Transfers in and/or out of Levels 1 and 2. The reporting entity would disclose the amounts of significant transfers in and/or out of Level 1 and Level 2 fair value measurements and the reasons for the transfers.

3. Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), information about purchases, sales, issuances, and settlements would be required on a gross basis rather than as one net number.

The proposed changes would also clarify these existing disclosures:

1. Level of disaggregation. An entity is required to provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. An entity would need to apply judgment in determining the appropriate classes of assets and liabilities.

2. Disclosures about inputs and valuation techniques. An entity is required to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

The comment deadline is October 12, 2009 and if approved the changes would be in effect for reporting periods after December 15, 2009.

FASB Exposure Draft Proposed Accounting Standards Update – Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements


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