SEC AND FASB STAFFS PROVIDE FAIR VALUATION FLEXIBILITY
The SEC and FASB staffs released fair value determination guidance that allows the calculation of fair value to include factors other than market prices and broker quotes. The guidance states that when an active market for a security does not exist, broker quotes are not necessarily determinative and a preparer can use future cash flows as a factor to determine fair value. The guidance also offered factors to determine whether an investment is “other-than-temporarily impaired,” allowing preparers to consider the length of time that market value has been less than cost, the conditions of the issuer, and the length of time necessary to allow a recovery in market value. The staffs stressed the importance of transparent disclosure with respect to fair value determinations.
OUR TAKE: This guidance is a significant departure from FAS 157’s strict Level 1, 2, and 3 regime. Rather than requiring reliance simply on the price that can be obtained in the market as evidenced by broker quotes, the guidance allows preparers to use the Level 3 methodology of using “unobservable inputs” (i.e. multiple subjective factors) to determine valuation. However, if a preparer goes this route, full disclosure is required.