Capital Markets

FASB Proposes Changes in Measuring Fair Value

Valuation techniques should include input from active markets, in which quoted prices are ``readily and regularly available.''
Stephen TaubJune 25, 2004

The Financial Accounting Standards Board (FASB) has proposed rules for measuring fair value that would change its current guidance and expand disclosure requirements.

FASB’s exposure draft, “Fair Value Measurements,” aims to set up a framework for measuring fair value that would apply broadly to financial and non-financial assets and liabilities. The guidance would boost “the consistency, comparability, and reliability” available in its current measurements, the accounting standards-setting group contends.

The new rules would go into effect for fiscal years beginning after June 15, 2005. The comment period for the new rules will be open through September 7. To gather added input, the board plans to hold a public roundtable meeting September 21.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The proposed rules define fair value as “the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, unrelated willing parties.” The goal of measuring fair value “is to estimate the price of an asset or liability in the absence of an actual exchange transaction for that asset or liability,” the board noted.

The valuation techniques used to gauge fair value should “emphasize market inputs, including those derived from active markets,” FASB said. The board defined “active markets” as “those in which quoted prices are readily and regularly available.”

The proposed framework would expand current disclosures governing the use of fair value to measure assets and liabilities, FASB added. The new disclosures would focus on the methods used for the measurements. The new disclosure rules would apply whether the assets and liabilities are measured at fair value in all periods, such as the measurements involved in trading securities, or in only some periods, such the measurements involving impaired assets.

The board’s collaborator for the project, FASB member Leslie Seidman said he thought the proposed rules would “clarify the approach that should be used in estimating fair value. The proposed disclosures should help investors evaluate the extent of fair value being used presently in the financial statements and the effect on earnings.”

The board noted that it consulted with valuation experts and other interested parties before drawing up the new rules. “An important aspect of this project is to provide guidance for measuring fair value that can be generally understood and consistently applied by preparers, auditors, and valuation professionals,” said Linda McDonald, FASB project manager.