FASB Proposes a Return to Reality
Tom Armistead submits:
Under much political pressure, the Financial Accounting Standards Board ((FASB)) has issued proposed guidance to the infamous FAS 157, on mark to market accounting. Here is a link to the handout (.pdf) they considered and approved. The guidance will be open for comment until 4/1, after which it is expected to become effective prospectively from 3/15/09. The required fix is there, as follows:
12. If the reporting entity does not have evidence that both of these factors are present for a given quoted price (including because there is insufficient information on which to base a conclusion), then the reporting entity shall consider the quoted price to be associated with a distressed transaction and shall use a valuation technique other than one that uses the quoted price without significant adjustment (that is, a significant adjustment is required, resulting in a Level 3 measurement). For example, the reporting entity could use an income approach (that is, a present value technique) to estimate fair value. However, the fair value resulting from the present value technique shall not be derived solely from inputs based on the quoted price associated with a distressed transaction. The inputs should be reflective of an orderly (that is, not distressed or forced) transaction between market participants at the measurement date. An orderly transaction would reflect all risks inherent in the asset, including a reasonable profit margin for bearing uncertainty that would be considered by market participants (that is, willing buyers and willing sellers) in pricing the asset in a non-distressed transaction.
