In their meeting last Wednesday (Mar. 24), the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced it will consider a requirement to provide sensitivity analysis about Level 3 fair value measurements at a future meeting. The IASB outlines their current position on sensitivity analyses here.
As Josh Cashman (Intrinsic Valuation) wrote in the BVUpdate™ (Jan 2010), valuation reviewers can use sensitivity analysis as they attempt to establish the materiality of fair value issues in financial reporting.
Here are two examples illustrating the use of a sensitivity analysis from Josh:
- Valuation reviewers asked Intrinsic to create a traditional data table in their Step 1 goodwill impairment analysis using a discounted cash flow approach. Intrinsic identified widely disparate values based on slight adjustments to discount rates. Ultimately, they found the impact of minor adjustments resulted in far-reaching outcomes, such as impairment or no impairment.
- A Monte Carlo analysis was performed to highlight the relative impact of assumptions about contingent liabilities associated with anti-dilution provisions attached to series preferred shares under EITF 07-5.
The IASB assumes that a sensitivity analysis disclosure, at least for financial instruments, will be proposed. What the boards must decide is whether the disclosure requirement will be converged with the fair value measurement standard or in a different standard.
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