A FASB news release said the effort includes two prongs, including:
- application guidance – will address determining when a market for an asset or a liability is active or inactive; determining when a transaction is distressed; and applying fair value to interests in alternative investments, such as hedge funds and private equity funds.
- improving disclosures about fair value measurements – will consider requiring additional disclosures on such matters as sensitivities of measurements to key inputs and transfers of items between the fair value measurement levels.
The FASB said the projects were initiated based on recommendations contained in the Securities and Exchange Commission’s (SEC) recent study on mark-to-market accounting, and from recommendations made by an internal Valuation Resource Group.
“The SEC expressed continued support of fair value accounting in its study, but recommended consideration of potential improvements in the guidance surrounding the application of fair value principles,” said Chairman Robert H. Herz, in the news release. “We agree with the SEC and with our Valuation Resource Group that more application guidance to determine fair values is needed in current market conditions. Additionally, investors have asked for more information and disclosure about fair value estimates. Therefore, the FASB is immediately embarking on projects that directly address areas that constituents have told us are challenging in the current environment, and which will improve disclosures in financial reports.”
According to the announcement, the FASB anticipates completing projects on application guidance by the end of the second quarter of 2009, and the project on improving disclosures in time for year-end financial reporting.
The SEC report is available at http://www.sec.gov/news/studies/2008/marktomarket123008.pdf .
More information from the FASB about the fair value issue is available here .
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