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FASB Updates Fair Value Measurement Guidance

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The Financial Accounting Standards Board (FASB) has issued the final version of a document that could affect how insurers report on the performance of their investment portfolios.

FASB, Norwalk, Conn., worked on its fair value measurement project – an update of Topic 820 in the FASB Accounting Standards Codification — along with the International Accounting Standards Board (IASB), London.

FASB manages the U.S. Generally Accepted Accounting Standards (GAAP) accounting standards system.

IASB, which manages accounting standards outside the United States, has published a comparable batch of fair value guidance – International Financial Reporting Standard (IFRS) 13 Fair EarthValue Measurement.

The Topic 820 update and the IFRS 13 guidance should harmonize the U.S. GAAP rules and the IASB rules, FASB and IASB officials say.

“The harmonisation of fair value measurement and disclosure requirements internationally also forms an important element of the boards’ response to the global financial crisis,” FASB and IASB officials say.

Debate about the use of fair value accounting methods became heated in late 2008 and in 2009, after the credit market freeze paralyzed the markets for some types of financial instruments.

FASB and IASB have been working on the fair value project for about 5 years.

Some accounting purists argued that banks, insurance companies and other companies should use the true market values when reporting on their asset and liabilities, even if that would mean setting the values at zero; others argued that a pure fair value approach would force companies to report unrealistically low values as a result of temporary problems in the financial markets. In some cases, the critics said, reporting low asset values caused by short-term market problems could lead to long-term damage to a company’s operations.

U.S. insurance groups such as the American Council of Life Insurers (ACLI), Washington, and the Group of North American Insurance Enterprises (GNAIE), New York, told FASB and IASB during the public comment period for the Topic 820 update draft that they were worried about the cost and complexity of implementing some proposed provisions, such as a requirement for formal measurement uncertainty analysis.


The revised version of Topic 820 defines “fair value” as being a “market-based measurement of a value.”

“For some assets and liabilities, observable market transactions or market information might be available,” FASB says. “For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same–to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between
market participants at the measurement date under current market conditions (that is, an … exit price … at the measurement date from the perspective of a market participant that holds the asset or owes the liability).”

In one section on uncertainty, FASB says it might be necessary to include a risk adjustment when there is

significant measurement uncertainty.

Significant measurement uncertainty could arise “when there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities,” FASB says.

In a section on “basis for conclusions,” FASB talks about the measurement uncertainty analysis controversy.

An IASB draft and a FASB proposal would have required companies to help financial statement users understand the uncertainty in value measurements by providing a range of fair values, or exit prices, that could reasonably have been reported in the circumstances.

Financial statement users said they liked they proposal, but most commenters were preparers of financial statements.

Statement preparers said the requirement would not provide useful information and would be costly and difficult to implement. They suggested that FASB and IASB replace the range-of-values requirement with a requirement that companies provide a qualitative assessment of fair value measurement subjectivity.

The final version of the Topic 820 update will, in some cases, require companies to provide narrative descriptions, by class or asset of liability, of the sensitivity of recurring fair value measurements to “unobservable inputs” if a change in the inputs could lead to a significant change in the fair value measurements.

“The boards expect that the narrative description will focus on the unobservable inputs for which quantitative information is disclosed because those are the unobservable inputs that the entity has determined are most significant to the fair value measurement,” officials say. “They will continue to assess whether a quantitative measurement uncertainty analysis disclosure would be practical after issuing the amendments in this update, with the aim of reaching a conclusion about whether to require such a disclosure at a later date.”

At press time, insurance groups were still reviewing the 331-page collection of Topic 820 update documents and were not immediately available to comment on it.

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