The Financial Reporting Blog

Fair value measurements have been a hot topic for many years due to the judgmental nature of the estimation process. Despite ongoing improvement efforts by standards setters, regulators, and valuation specialists, deficiency findings in audits continue to proliferate. In March 2015, a survey conducted by the International Forum of Independent Audit Regulators (IFIAR) found that nearly half of global audits contained a deficiency. Of those deficiencies, 20% centered on fair value measurements.

Although successful bank acquisitions largely hinge on deal execution and realizing expense synergies, properly assessing and pricing credit represents a primary deal risk. Additionally, the acquirer’s pro forma capital ratios are always important, but even more so in a heightened bank regulatory environment and merger approval process. Against this backdrop, merger-related accounting issues for bank acquirers have become increasingly important in recent years and the most significant fair value mark typically relates to the determination of the fair value of the loan portfolio. Fair value is guided by ASC 820 and defines value as the price received/paid by market participants in orderly transactions. It is a process that involves a number of assumptions about market conditions, loan portfolio segment cash flows inclusive of assumptions related to expected credit losses, appropriate discount rates, and the like. To properly evaluate a target’s loan portfolio, the portfolio should be evaluated on its own merits, but markets do provide perspective on where the cycle is and how this compares to historical levels.