A New Approach to Fair Value: Welcome to FAS 157
The rules of fair value are changing. With its September 15, 2006 issuance of Statement of Financial Accounting No. 157, "Fair Value Measurements," the Financial Accounting Standards Board (FASB) has redefined fair value, established a framework for measuring fair value, and expanded disclosure requirements regarding fair value measurement. While FAS 157 does not require any new fair value measurements, the Statement applies to other accounting standards that require or permit fair value measurement.
Fair Value Redefined
FAS 157 puts forth greater emphasis on fair value as a market-based measurement as opposed to an entity-specific measurement. According to the new standard, fair value is "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." In other words, fair value is an exit price rather than an entry price. FAS 157 provides a concrete definition for fair value as it is to be employed by the various other accounting standards.
Fair Value Measurement
With respect to the measurement of fair value, the Standard reaffirms that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability that are independent, knowledgeable, and both willing and able to transact for the subject asset or liability.