Last Friday the SEC’s Division of Corporation Finance posted its Sample Letter to public company CFOs on applying SFAS 157 to the Management Discussion and Analysis (MD&A) portions of their quarterly Form 10Q filings.  In particular, current market conditions may require valuation models that rely on “significant” use of Level 3 measurements (unobservable inputs) for some assets and liabilities, the Letter says:

Given the judgment you must apply in using unobservable inputs to determine the fair value of your assets and liabilities, your use of them can have a material effect on your results of operations, liquidity, and capital resources, where for example, the fair value you determined falls within a broad range.  If you conclude that your use of unobservable inputs is material, please disclose in your MD&A…how you determined them and how the resulting fair value of your assets and liabilities and possible changes to those values, impacted or could impact your results of operations, liquidity, and capital resources.

“In general, CFOs are going to be under intense pressure to divulge anything that might impact the company's measure of fair value,” comments Neil Beaton (Grant Thornton).  He believes this latest action from the SEC (combined with regulatory oversight from all sources) will expose companies to increasing shareholder liability, just as in the days of insider trading.  “CFOs are more likely to take a hard line and write down much more than they have in the past or that might be warranted by the situation,” Beaton adds.  And they might be calling more frequently on independent appraisers, he says, creating yet another version of the “full employment act” for valuation specialists.