FASB, IASB Agree on Work Plan on Rules For Converged Fair Value Measurement

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By Steve Burkholder

NORWALK, Conn.—An agreement by the Financial Accounting Standards Board and its international counterpart on a work plan aimed at aligning rules on fair value measurements means that the existing U.S. main principles on the topic are “in play,” one FASB member said Dec. 16.

However, the deliberations by FASB and the International Accounting Standards Board are aimed at yielding only “tweaks” of those key rules (Accounting Standards Codification 820; formerly FAS 157), a senior staff accountant with the U.S. panel suggested at a meeting of the boards in London.

“What's not on the table is getting rid of exit price” and the notion of a transfer of a liability, said Russell Golden, FASB's technical director. Some constituents of IASB have suggested that an approach that also factors in entry price, or replacement cost, also could be an appropriate way to define fair value.

Golden offered his comments after the two boards tentatively agreed on the details of a coordinated project plan on fair value measurements. FASB and IASB expect that effort would yield final, converged rules on how to gauge fair values in the fourth quarter of 2010.

In May, IASB issued a draft standard that the boards say is largely consistent with FASB's prescriptions for how to carry out fair value measurements.
The discussions at the boards' monthly joint meeting Dec. 16 focused on which issues within the topic would be considered jointly or which would be weighed separately by each board.

Lawrence Smith, a member of the U.S. board, initiated an exchange of comments among Golden, FASB Chairman Robert Herz, and himself when he said that with the tentative acceptance of the coordinated work plan, “We just agreed we're deliberating on a significant number of issues.” Smith suggested that would lead an observer to conclude that “157 is in play.”

“It is,” Golden said.

“Aspects of it are,” Herz added, referring to Statement 157, Fair Value Measurements, which has been effective in the United States since November 2007. The FASB chairman went on to suggest that if decisions are made to change the current U.S. statements of generally accepted accounting principles on fair value measures, “we'd have to re-expose,” or float those changes for public comment.

FAS 157 and its benchmark notion of fair value being based on a marketplace participant's view became controversial last year. As the global financial meltdown unfolded, bankers said they found it difficult to assign fair values to the troubled financial assets that were central to the crisis.

Bankers also questioned existing guidance on write-downs of financial assets and when to record impairments of those assets. Critical comments from banks and their trade groups, together with strong suggestions for FASB action coming from banking allies in the House of Representatives, led the U.S. board to issue controversial guidance in April (5 APPR 349, 4/17/09).

Defining Fair Value.

In a pending proposal on fair value measurements—proffered, as what became FAS 157 was framed, to remedy inconsistencies in the how-to guidance—IASB has defined fair value identically to the term in U.S. GAAP: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

At the boards' joint meeting Dec. 16, Smith suggested that, for FASB, the issue of the effective date for planned revisions to fair value measurements rules and how to switch to altered GAAP would be at play in a busy schedule for rulemaking on the project slated for next year.

In addition, the boards would seek to avoid the situation in which one panel “leapfrogs” over another in the joint effort aiming at converged accounting principles, Golden said. With such leapfrogging, one board makes a decision ahead of the other, causing the other board to seek to keep up and also keep aligned on the same substantive issue.

Among the issues on fair value measurements to be deliberated jointly in coming months are fair values in markets that are no longer active, assessments of a market participant view, blockage factors, day one gains and losses, “highest and best use,” and reference market.

Items to Be Considered Separately.

FASB and IASB endorsed a staff recommendation to have each board separately consider questions on the effective date of planned measurement rules and transition provisions. “Both boards need to determine which is the most appropriate” specification on effective date and transition “for their respective jurisdiction,” according to a staff-written background paper.

The two boards also plan to conduct separate deliberations on issues relating to the scope of fair value measurements rules. Currently, FASB's ASC 820 excludes from its scope share-based payments; leasing arrangements; measures that are based on, or otherwise use, “vendor-specific evidence of fair value”; and inventory pricing.

For its part, IASB has proposed that its planned standard on fair value measurement would exclude financial liabilities marked by a demand feature, according to the staff background paper. “It also proposes replacing the term ‘fair value’ in the measurement share-based payment transactions and reacquired rights in a business combination,” the boards' staff accountants wrote.

Herz suggested that FASB and IASB would be seeing staff accountants working on the fair value measurements project every month going forward, until the end of the standard-setting effort.

At an Oct. 28 meeting in Norwalk, the two panels agreed that their goal is to ensure that the term fair value has the same meaning in U.S. GAAP and international financial reporting standards, or IFRS, according to a project update at FASB's website (5 APPR 971, 10/30/09).

In addition, the boards agreed to try to make their respective fair value measurement requirements “the same other than minor necessary differences in wording or style,” staff accountants wrote in the update.

In separate but related action, FASB's plans to issue fresh accounting guidance to improve footnote reporting on the fair values of assets and liabilities and clarify disclosure requirements are expected to be finalized later this month, a staff accountant at the U.S. board said Dec. 9.

A FASB-IASB background paper detailing the proposed plan for the fair value measurement project is available at http://www.iasb.org/NR/rdonlyres/1E29C8C6-7E7F-4735-B146-FBAEE8C45D1D/0/FVM1209b06obs.pdf .

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