The Financial Accounting Standards Board has just proposed amendments to SFAS 157 regarding the fair value measurement of liabilities. “Statement 157 defines the fair value of a liability as the price that would be paid to transfer the liability in an orderly transaction between market participants at the measurement date,” the new Staff Position No. FAS 157-c explains. However:
Some entities are concerned that there may be a lack of observable markets or observable inputs for the transfer of a liability. This is especially true where that liability would continue to exist and where the original obligor is completely relieved of any obligations to the counterparty.
Due to this and additional factors, numerous entities suggested that a liability’s fair value include a “hypothetical measurement attribute” to account for any transfer basis that would not occur in the marketplace. The FASB Staff began considering these comments in November 2007, and has now responded with FAS 157-c, which would amend the paragraphs of SFAS 157 as follows:
15A. A quoted price for the identical liability (unadjusted) in an active market (Level 1 input) shall be used to measure the fair value of the reporting entity’s liability when available.
15B. In the absence of a quoted price for the identical liability in an active market, the reporting entity may measure the fair value of its liability at the amount that it would receive as proceeds if it were to issue that liability at the measurement date. A reporting entity shall evaluate fair value inputs and prioritize observable inputs over unobservable inputs in determining whether it should use the amount that it would receive as proceeds if it were to issue that liability at the measurement date.
A footnote explains that “liability” includes a debt instrument or other form of obligation. To review the complete FAS 157-c, click here. Note: Comments are due February 18, 2008.
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