When observable market data can’t be had, companies can make their own calls about the fair value of a transaction based on how they think market participants would price the liability. Nevertheless, the standard says, “the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that … owes the liability.”
A company may be severely restricted from transferring a liability, however. Often, for instance, when a company borrows money, it can’t transfer its obligation to another party without an agreement from the bank. Or a market may not exist for transferring such liabilities.
In such cases, on what basis can the issuer estimate the fair value of the liability? “I would have thought settlement value would be exit value,” Herz said at the meeting. “It’s the best measure of exit value in those circumstances.”
That line of thinking, however, seemed to exasperate Seidman, who thought Herz was suggesting a complete “overhaul” of 157 by changing the basic definition of fair value to include the concept of settlement. “If you say we should never have required fair value accounting,” she said to Herz at one point, “that water is under the bridge.”
For his part, the chairman suggested that he was only trying to make things easier for preparers and users. Referring to a shortcut permitted under 157 for Level 3 estimates, Herz sought a way out of the impasse. In using the shortcut, a corporation estimates what it would accept as payment for assuming its own liability.
But using such an estimate might violate the statement under 157 that fair value is “not the price that would be paid to … assume the liability.” That would be using an “entry price” rather than the “exit price.”
For that reason, Herz proposed labeling the shortcut as a “practical expedient” because it really doesn’t conform with the fair-value standard. “While it would help people get to a transfer notion, I don’t think it’s hypothetically correct,” he said.
By the end of the meeting, with the “practical expedient” language still on the table, the board seemed to be closer to an accord on the staff’s proposed guidance. CFOs trying to figure out what fair value to attribute to loans or derivative obligations that have no markets will be watching closely.