Fair-Value Holiday: Restrictions Apply

FASB hands companies a year extension on fair value, but it only applies to a limited group of non-financial assets and liabilities. Plus, FAS 157 ...
Sarah Johnson and Marie LeoneNovember 15, 2007

With a Friday deadline looming, companies received a one-year deferral on booking non-recurring, non-financial assets and liabilities at fair value. On Wednesday, the Financial Accounting Standards Board confirmed an earlier decision to reject a blanket deferral of its fair value rule, FAS 157, but agreed that companies could wait a year before recording some non-financial assets and liabilities at market value.

That means that companies with fiscal years beginning after November 15, 2007, are required to record at fair value assets and liabilites that are relatively easy to mark-to-market, if those items are already being carried at fair value. Those recurring, finanical items include derivatives, loan-servicing assets and liabilities, and some loans and debt linked to business combinations. However, companies will receive a year hiatus on recording the fair value of such items as non-financial assets and liabilities related to goodwill, business combinations, and discontinued operations, as well as some non-financial intangible assets. Again, the rule only applies to non-financial assets that are already being recorded at fair value.

An exposure draft on the partial deferral will be released for public comment “in the near future,” said FASB.

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FAS 157 provides a framework for making value estimates based on market value rather than historical cost. That change has caused a stir among financial statement preparers who must grapple with marking-to-market assets and liabilities that are thinly traded or not traded at all. Indeed, FAS 157 creates a mind-shift on the part of companies because it emphasizes the market participant’s view rather than a company’s own prospective plans for a certain asset. That means companies will have to apply the new fair value standard to an acquired asset even if they have no desire to ever sell it or do anything with it.

At the board meeting, FASB members also favored the idea of issuing principles, rather than rules, to guide preparers through fair-value exercises. The principles would likely include several examples of valuation approaches that take into consideration the hierarchy system embedded in the accounting rule.

The hierarchical slots range from the so-called Level 1 category, which are openly traded assets with an observable fair value, to Level 3 assets, which are valued by using unobservable estimates based on the value the company believes a hypothetical third party would place on those items. Level 2 assets are valued using the mark-to-model methodology, which uses observable inputs rather than quotable prices to estimate fair value.

“There is no way to hardwire [FAS 157 guidance],” asserted FASB member Leslie Seidman at the meeting, who said that fair value estimates should be considered from the perspective of the reporting entity, and therefore will likely be different for each company. “I’m afraid that if we write a lot of ‘shoulds’ it will give us a cookbook approach, but if we leave the hierarchy in place, people will consider the rule principles.”

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