The FASB issued an exposure draft regarding a broad range of proposed amendments to Topic 820 on June 29, 2010, with a comment period extending through September 7, 2010. The exposure draft is part of the ongoing convergence project and is intended to more closely align fair value measurements under U.S. GAAP and IFRS. For the sake of our busy friends and colleagues who may not have reviewed the exposure draft yet, we offer a quick overview of some of the more significant proposed changes.

  1. The title of Topic 820 will be shortened to Fair Value Measurements. This change does not signal a de-emphasis on disclosure (the exposure draft expands required disclosures) but rather seems to be consistent with the view that measurement and disclosure are inextricably intertwined.
  2. The concept of “highest and best use” is restricted to non-financial assets only. The concept of highest and best use is rooted in the appraisal of real assets that have alternative uses. As financial assets and liabilities rarely have multiple uses, application of the highest and best use concept to such instruments was vexing (and, in practice, often ignored). Nonetheless, to the extent the fair value of a financial asset or liability has been measured with reference to the highest and best use provisions of Topic 820, the proposed changes would require a new valuation rationale.
  3. The “in use” and “in-exchange” premises are removed. All references to “in-use” and “in-exchange” values have been purged from Topic 820 on the grounds that the terms were needlessly confusing. The offending terms have been replaced with language clarifying whether the subject asset would be used in combination with other assets and liabilities or on a standalone basis.
  4. The appropriate use of valuation discounts and premiums is confirmed. The proposed changes continue the existing prohibition on the application of blockage discounts in Level 1 measurements, likening the blockage discount to a transaction cost that accompanies sale of the asset, but not an attribute of the asset itself. However, other valuation discounts and premiums – such as control premiums and minority interest discounts – receive the approval of the FASB for application under appropriate circumstances.
  5. The disclosure requirements for Level 3 fair value measurements are expanded. The proposed changes include addition of “measurement uncertainty analysis” to aid financial statement users in assessing the effect of alternative assumptions regarding unobservable inputs on the fair value measurement. The disclosures would also include assessment, on a qualitative basis, of correlation between various unobservable inputs. The FASB cautions that the purpose of the analysis is not to contemplate remote scenarios or describe the expected change in a fair value measurement due to future economic changes. The exposure draft provides a disclosure example, but provides no guidance regarding the range of assumptions to be disclosed. Despite assurances from the FASB that these disclosures are not meant to provide financial statement users with information for second guessing fair value measurements, some reporting entities are likely to chafe against this proposed change.

The pace of change at the FASB and IASB shows no signs of slackening. At Mercer Capital, we continue to monitor these developments so we can help make fair value measurement as painless as possible for our clients and their auditors. Our financial statement reporting professionals are always eager to discuss your fair value reporting issues in confidence. Give us a call today.

Reprinted from Mercer Capital’s Financial Reporting Valuation Flash, originally published August 30, 2010.

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