AICPA Proposes Framework for Valuation of Financial Instruments

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The American Institute of CPAs (AICPA) is seeking comments on a new framework to help accounting and finance professionals value financial instruments, such as mortgage-backed securities, credit default swaps, complex bonds, and other derivatives.

According to the AICPA, financial instruments have often been difficult to value, which has the potential to adversely affect markets and the global economy. The proposed framework explains the level of documentation needed for CPAs and finance professionals to demonstrate the valuation performed.

The guidance in the framework relies on three major principles – independence, objectivity, and consistency – and will be the basis for a new credential, Certified in Valuation of Financial Instruments (CVFI), that will be introduced later this year.

An exposure draft detailing the new framework was issued on July 6. Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (CVFI) Credential guides professionals on explaining the characteristics of financial instruments and disclosing how these securities have been valued in a way that is understandable, consistent, and transparent, the AICPA states.

The framework sets parameters for documentation requirements, as well as definitions of terms that may be unique to the framework. It also includes a list of accounting, audit, and valuation standards, and references to technical literature that apply to the guidance.

“Financial instruments have become increasingly complex and determining their value has been a challenge that has adversely affected the market in the past,” Jeannette Koger, CPA, CGMA, vice president of advisory services and credentialing for the AICPA, said in a prepared statement.

The framework responds to marketplace needs by creating a “standardized and replicable process for financial professionals who perform valuations on financial instruments,” she added.

“This framework will ensure that professionals working with financial instruments perform their engagements with independence, objectivity, and consistency,” Koger said.

A second part of the exposure draft, Application of the Disclosure Framework for the Valuation of Financial Instruments, explains how CPAs and finance professionals can apply the framework for areas of valuations that often are misapplied or inadequately supported or documented.

It also describes the most common components in which the valuation professional provides a conclusion of value and addresses matters when more consistency is needed in applying the approaches and methodology. In addition, the guidance provides support in applying professional judgment, as well as in documenting inputs and results.

The AICPA notes that the Application of the Disclosure Framework for the Valuation of Financial Instruments will continue to evolve to cover a broader range of topics and practice trends.

Comments on the exposure draft are due by Sept. 26 and should be addressed to Jeff Rockwell High.

About Terry Sheridan

Terry Sheridan

Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.

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