Ask FERF about ...... fair value.

• Author: Sinnett, William M.
• Position: Resources

The year 2006 may go down in history as "The Year of Fair Value." During calendar year 2006, the Financial Accounting Standards Board (FASB) issued three Statements of Financial Accounting Standards (FAS 155, 156 and 157) and one Proposed Statement (The Fair Value Option) that relate to fair value. These documents are available for download on the FASB Web site, www.fasb.org.

With great foresight, FEI President Colleen Cunningham included "Fair Value Measurement" in her "Top 10 Financial Reporting Challenges of 2006" (see Financial Executive, January/February 2006) and includes it again this year in her "2007 Top 10 Financial Reporting Challenges" (see Financial Reporting column on page 14).

What follows is some brief detail on each of the statements and the proposal.

FAS 155, Accounting for Certain Hybrid Financial Instruments

Issued in February 2006, FAS 155 amends FAS 133, Accounting for Derivative Instruments and Hedging Activities and FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation.

FAS 156, Accounting for Servicing of Financial Assets

Issued in March 2006, FAS 156 amends FAS 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. FAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.

FAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. It then permits the entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:

* Amortization method -- Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss, and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.

* Fair value measurement method -- Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.

FAS 157, Fair Value Measurements

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