Fair value:fair value SEC, FASB issue clarification; more to come.

• Author: Orenstein, Edith
• Position: Financial reporting - Financial Accounting Standards Board - Securities and Exchange Commission

One of the hotly contested topics in discussing the current market turmoil has been whether fair value or "mark-to-market" accounting--particularly as set forth in FASB Statement No. 157, Fair Value Measurements, contributed to downwardly spiraling valuations and the resultant tightening of credit.

Although the both the Financial Accounting Standards Board and the International Accounting Standards Board have had working groups developing guidance on fair value in inactive markets calls for further guidance were stepped up in the fall. Groups including the American Bankers Association and Financial Services Roundtable asked the U.S. Securities and Exchange Commission to step in and issue further guidance.

On Sept. 30, the eve of passage of the Emergency Economic Stabilization Act of 2008 (EESA), SEC and FASB issued a joint clarification on measuring fair value in inactive markets. The guidance can be found on the SEC Web site under "Press Releases." Written in question and-answer format, the guidance addresses the following questions:

1) Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?

2) How should the use of "market" quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?

3) Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?

4) Can transactions in an inactive market affect fair value measurements?

5) What factors should be considered in determining whether an investment is other-than-temporarily impaired?

SEC 'Dear CFO' Letters Recommend Disclosures

The SEC-FASB Sept. 30 joint clarification on fair value reiterated the need for clear and transparent disclosures and refer- enced letters issued by the SEC Division of Corporation Finance to a large numbers of issuers in March and September--referred to informally by the SEC and others as its "Dear CFO letters."

The guidance noted the letters "provide[s] real-time guidance for issuers to consider in enhancing the transparency of fair value measurements to investors."

The...