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FASB OKs Valuation Shift

By Allison Bell

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The Financial Accounting Standards Board has issued three final staff positions on the recommended procedures for valuing securities.

FASB, Norwalk, Conn., has approved FASB Staff Position Financial Accounting Standard 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, along with an interim disclosures FSP and an FSP on other-than-temporary impairments.

FSP FAS 157-4 “reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive,” FASB Chairman Robert Herz says in a statement.

Advocates of the changes say current implementation of FASB securities valuation rules, which require some holders of some securities to “mark the securities market,” forces financial services companies to use the latest market price as the price of a security even when the market is not functioning properly.

Critics have argued that FASB rules already have given financial services companies some leeway in securities valuations, and that advocates of efforts to change valuation rules want to give companies the ability to “mark to myth.”

FASB Chairman Robert Herz notes that FASB has received more than 600 written comment letters about the FSPs.

“Our careful consideration of the input resulted in some changes in the final documents from the guidance first proposed, Herz says. “The changes include a number of new disclosures relating to the determinations of fair value and to estimated credit losses and credit exposures. Virtually all of the investors providing input expressed the need for greater transparency by banks. Taken together, these three new documents require significantly expanded and enhanced disclosures.”

The FSPs are effective for interim and annual periods ending after June 15, but entities may adopt the FSPs early for the interim and annual periods ending after March 15.

FASB also is working with the International Accounting Standards Board, London, on a project that could lead to broader changes in financial instrument accounting standards, FASB says.

The text of FSP FAS 157-4 is available here.