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The FASB issued Final Staff Position, which clarifies the guidance for applying fair value accounting to financial instruments that are no longer trading in an open market.
Background
The FASB Staff Position No. FAS 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements. Statement 157 establishes a single definition of fair value and a framework for measuring fair value in GAAP that result in increased consistency and comparability in fair value measurements. Statement 157 also expands disclosures about fair value measurements, thereby improving the quality of information provided to users of financial statements. Statement 157 does not require any new fair value measurements.
However, certain constituents expressed concerns that Statement 157 does not provide sufficient guidance on how to determine the fair value of financial assets when the market for that asset is not active. Application issues include:
a. How the reporting entity’s own assumptions (that is, expected cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair value when relevant observable inputs do not exist
b. How available observable inputs in a market that is not active should be considered when measuring fair value
c. How the use of market quotes (for example, broker quotes or pricing services for the same or similar financial assets) should be considered when assessing the relevance of observable and unobservable inputs available to measure fair value.
The Office of the Chief Accountant of the SEC and the FASB staff jointly issued a press release on
FASB staff position