News

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FASB proposes fair value guidance in inactive markets

03 Oct 2008

The US Financial Accounting Standards Board has invited comment on a proposed FASB Staff Position (FSP) that addresses concerns regarding the determination of fair value in markets that are not active.

The objective of the guidance in proposed FSP FAS 157-d is to clarify how SFAS 157 applies to determining the fair value of assets and liabilities in inactive markets and to provide an example that illustrates several key principles, including the following:

FAS 157 principles that will be illustrated in the guidance:

  • In some cases an entity might determine that observable inputs to a market approach valuation technique require significant adjustment and thus are ultimately considered unobservable or Level 3 inputs. The entity might then conclude that an income approach valuation technique that uses management's internal assumptions about market participants' expectations of cash flows is equally or more representative of fair value. However, regardless of the valuation technique used, entities must include appropriate adjustments that market participants would make for risks, such as nonperformance and liquidity.
  • A fair value measurement represents the price at which a transaction would occur between market participants at the measurement date. As discussed in paragraph 30 of Statement 157, in situations in which there is little, if any, market activity for an asset or liability at the measurement date, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant.
  • Broker quotes or pricing services may be a relevant input when measuring fair value, but not necessarily determinative if an active market does not exist for the security. In weighing a broker quote as an input to fair value, an entity should place less reliance on quotes that do not reflect the result of market transactions.
There is more information in the Handout for Observers at the FASB Meeting (PDF 46k) beginning on page 7. The proposed FSP is now posted on FASB's Website. The planned one-week comment period will end on 9 October 2008, and the FASB expects to meet on 10 October 2008 to discuss comments received and vote on final guidance. The guidance would be effective on issuance. Any resulting changes in fair value measurements would be reflected in current profit or loss rather than by restating prior period financial statements.
European Union (old) Image

EC President Barroso comments on global financial crisis

03 Oct 2008

At a press conference in Brussels on 1 October 2008, European Commission President Jose Manuel Barroso commented on the global financial crisis, including accounting implications: "We must refine the rules on the evaluation of complex assets.

"We must refine the rules on the evaluation of complex assets. This includes adapting our accounting rules to a new situation. In particular if other markets also apply changes, we don't want EU banks in a situation of disadvantage as compared to banks for other markets." He also seemed to support a proposal that has been sent to the European Commission by French President Nicolas Sarkozy to modify or suspend the mark-to-market accounting requirements for some financial assets of banks. Click to:
FASB (old) Image

US FAF express concern about legislating accounting standards

03 Oct 2008

Robert E Denham, chairman of the Financial Accounting Foundation (FAF) under which the FASB operates, has written to the leadership of both houses of the US Congress and to other key US government officials expressing grave concerns about the possibility of legislation that would overturn FASB Statement 157 Fair Value Measurements.

The FAF urges Congress to reject proposals that would threaten the independent accounting standard setting process. Click to Download Mr Denham's Letter (PDF 43k). Here is an excerpt:

We are very concerned about the current efforts of some to legislate the suspension of one of the FASB's standards, Statement 157 on fair value measurements. We believe that any legislative effort to overturn a FASB standard will greatly undermine investor confidence. We believe that once Congress starts setting accounting standards through its political process, the integrity of US accounting standard setting and the credibility of US financial reporting will be greatly compromised.

If Congress sends the message that special interests, through legislation, are able to overturn expert accounting judgement arrived at through an open and thorough due process, necessary and timely improvements in financial reporting will likely become impossible and the best interests of participants in the capital markets will not be served.
EFRAG (European Financial Reporting Advisory Group) (dk green) Image

EFRAG report – 14 IASB pronouncements await EU endorsement

02 Oct 2008

The European Financial Reporting Advisory Group (EFRAG) has updated its report showing the status of endorsement, under the EU Accounting Regulation, of each IFRS, including standards, interpretations, and amendments.

Click to download the Endorsement Status Report as of 1 October 2008 (PDF 88k). Currently, there are 14 IASB pronouncements that have not yet been endorsed for use in Europe, as follows:
  • IFRS 1 and IAS 27 Cost of an Investment in a Subsidiary, Jointly-Controlled Entity, or Associate
  • IFRS 2 Share-based Payment: Vesting Conditions and Cancellations
  • IFRS 3 Business Combinations (2008)
  • IAS 1 Presentation of Financial Statements (revised September 2007)
  • IAS 23 Borrowing Costs (revised March 2007)
  • IAS 27 Consolidated and Separate Financial Statements (2008)
  • IAS 32 and IAS 1 Amendments for Puttable Instruments and Obligations Arising on Liquidation
  • IAS 39 Amendments for Eligible Hedged Items
  • IFRIC 12 Service Concession Arrangements
  • IFRIC 13 Customer Loyalty Programmes
  • IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements, and their Interaction
  • IFRIC 15 Agreements for the Construction of Real Estate
  • IFRIC 16 Hedges of a Net Investment in a Foreign Operation
  • Improvements to IFRSs – 2007 (affects various standards)

 

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Deloitte Alert on proposed FASB FSP on FV measurement

02 Oct 2008

Deloitte (United States) has published an Alert on a proposed FASB Staff Position (FSP) that would amend FASB Statement 157 Fair Value Measurements to provide guidance on measuring fair values (FV) in illiquid markets.

Deloitte Financial Reporting Alert 08-12 (PDF 34k) points out that the FSP will not change the measurement principles in FAS 157 but will provide guidance for applying those principles in inactive markets by elaborating on the guidance that the SEC and FASB Issued Jointly on 30 September 2008 (see our Earlier News Story). Examples will be added to FAS 157 on:
  • How entities' internal (entity-specific) assumptions should be considered in the measurement of FV for a financial asset when relevant market data does not exist.
  • How observable market information in an inactive market affects FV measurements.
  • How entities should consider the use of broker quotes or pricing services when assessing the relevance of inputs available to measure FV.
FASB will expose the proposed FSP for comment by the end of this week, with comments due by 9 October 2008. FASB plans to finalise the FSP on 10 October 2008, with an immediate effective date (including for financial statements for periods ending 30 September 2008 that have not yet been issued). Regarding transition, any changes in fair value would be included in an entity's financial results; retrospective application of the guidance to prior periods would be prohibited.

 

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AICPA CAQ has concerns about accounting sections of 'bailout bill'

02 Oct 2008

The United States Senate has passed (vote 74 to 25) a version of the so-called 'Financial Institutions Bailout Bill'.

The House of Representatives (which previously rejected a version of the bill) will consider a similar bill tomorrow. In our News Story of 29 September 2008, we identified two sections of the House's draft bill that relate to fair value measurement issues:
  • Sec. 132. Authority to suspend mark-to-market accounting
  • Sec. 133. Study on mark-to-market accounting
Those two sections remain in the version of the bill that the Senate voted on yesterday. On 30 September 2008, the Center for Audit Quality (CAQ) of the American Institute of CPAs (AICPA) sent a Letter to All Members of Congress (PDF 61k) stating that 'proposals advocating suspension of mark-to-market (or fair value) accounting are not in the best interest of investors or the capital markets and should be rejected'. The letter states:

The principles of mark-to-market accounting are rooted in the fundamental virtue of transparency and are central to informed market decisions and efficient allocation of capital. In our view, investor confidence would be undermined by efforts designed to mask the actual value of financial assets at a given point in time.

It is important to underscore that mark-to-market accounting has contributed positively to revelations about the severity of the economic crisis facing our country's credit markets and certain institutions, but it did not create the economic crisis.

Recently, some have suggested that the Securities and Exchange Commission or the Financial Accounting Standards Board should suspend the application of mark-to-market or fair value accounting or somehow impose a moratorium on mark-to-market requirements for certain financial institutions when preparing financial statements to be used by investors.

Although determining fair values for financial instruments in an illiquid market can be challenging, the best estimate of the prices that would be received for such instruments in orderly transactions occurring at the measurement date remains the most relevant information for investors and policymakers. To lessen the uncertainties about the value of these securities, it is critical that investors continue to have the insight provided by the application of mark-to-market accounting principles.
Views similar to the CAQ's were expressed publicly by the CFA Institute and the Council of Institutional Investors.
Click to view the 'Financial Institutions Bailout Bill' (PDF 596k).

 

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Webcast will address tax implications of IFRSs

01 Oct 2008

Deloitte (Asia-Pacific) will present a webcast on Tax Accounting: The Past, the Present and the Future from 12:00 noon to 13:00 Hong Kong time (GMT +8) on 11 December 2008. The webcast will focus on three topics:

  • Lessons learned during the year since FIN 48 was implemented.
  • Other tax accounting updates, including how FIN 48 will impact non-public companies.
  • Issues companies should consider as more countries adopt International Financial Reporting Standards.

 

SEC (US Securities and Exchange Commission) (dark gray) Image
FASB (old) Image

Joint SEC-FASB guidance on fair value measurements

01 Oct 2008

The US SEC's Office of the Chief Accountant and the FASB staff have jointly issued a press release containing questions and answers aimed at clarifying fair value measurement practices in the current environment.

They issued this guidance pending the completion by FASB of additional interpretative guidance about the requirements of FASB Statement No. 157 Fair Value Measurements in illiquid markets.

The joint press release contains answers to the following questions:

  • Can management's internal assumptions (eg, expected cash flows) be used to measure fair value when relevant market evidence does not exist?
  • How should the use of 'market' quotes (eg, broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?
  • Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?
  • Can transactions in an inactive market affect fair value measurements?
  • What factors should be considered in determining whether an investment is other-than-temporarily impaired?
Click for the Joint Press Release (PDF 25k). FASB has announced a change to the Agenda of its 1 October 2008 Meeting to consider a draft FASB Staff Position that would provide additional measurement guidance on FAS 157.
Deloitte Comment Letter Image

We comment on Conceptual Framework proposals

30 Sep 2008

Deloitte has submitted to the IASB a Comment Letter on the IASB's Conceptual Framework Exposure Draft – An Improved Conceptual Framework for Financial Reporting:

  • Chapter 1 The Objective of Financial Reporting
  • Chapter 2 Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information
In our letter we express strong support for the Conceptual Framework project and for the proposals in this exposure draft.
An excerpt is below. Our past comment letters to the IASB/IASC are Here.

We wish to acknowledge that in our opinion, the proposed Framework as expressed in the ED has been significantly improved from the Discussion Paper phase of this project. We find the proposed Framework is now well organised and we generally agree with the notions expressed therein. More specifically, we agree with the dual focus of the expressed objective of financial reporting on both cash flow generation and management stewardship and also agree that decision useful information has several qualitative characteristics of which relevance and faithful representation are the most fundamental. However, we think that comparability, verifiability, timeliness and understandability are supporting components (not 'enhancing characteristics') that need to be present to render financial information relevant and representationally faithful. In addition, there are certain aspects of the proposed Framework which we continue to believe may be enhanced. We have included our comments on these aspects in the Appendix to this letter....

We believe that the individual chapters of the conceptual framework should not be finalised (or at least not made effective) until all of the chapters are finalised to ensure that the overall Framework forms a cohesive set of principles.

Click to view Comment Letter on the IASB's Conceptual Framework Exposure Draft – An Improved Conceptual Framework for Financial Reporting (PDF 152k)

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We comment on the Reporting Entity discussion paper

30 Sep 2008

Deloitte has submitted to the IASB a Comment Letter on the IASB's Discussion Paper on the Reporting Entity: Preliminary Views on an Improved Conceptual Framework for Financial Reporting – The Reporting Entity. We agree with, and support, the majority of the proposals made by the Board in this DP.

Below is an excerpt from our letter. Our past comment letters to the IASB/IASC are Here.

We conceptually agree with the proposed definition for a reporting entity and support the proposal to keep the definition broad. However, we believe that the broadness of the definition should be supplemented by more discussion on why it is important to define the concept of what constitutes a reporting entity. Similarly, while we concur that control should be defined at the conceptual level and that the controlling model should be used to define entities to be included within consolidated financial statements, we suggest that the Board expands its discussion on the matter and clarifies certain aspects. One of the key aspects of the controlling model that needs to be clarified at the conceptual level is whether consolidation is appropriate when an entity (the investor) controls at the present time another entity (the investee) or whether it is appropriate when the investor has the ability to obtain control, at present, over the investee. The ambiguity is evidenced by the fact that, on the one hand, the DP defines control has 'having the ability to determine...' while on the other hand it indicates in paragraph 154 that 'the ability to take control' does not translate in having control at the present time.

Finally, we agree that there is a need to allow the preparation of general purpose 'group' financial statements in certain circumstances not captured by the controlling entity model. However, we believe that the common control model fails to capture all of these circumstances and we find that the restriction on the preparation of combined financial statements contradictory to the principle of allowing for a broad definition of a reporting entity.

Click to view Comment Letter on the IASB's Discussion Paper on the Reporting Entity (PDF 196k).

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