In level 3, which often applies to asset valuations in illiquid markets or in “distressed” sales (sometimes called “fire sales”), fair value can be determined only through “unobservable inputs” and prices that could be based on internal models or estimates.
Some critics of last month’s proposed guidance on how to apply 157 and a companion proposal on other than temporary impairments (OTTI) said that the measures represent a capitulation to bankers’ demands for weaker standards-and some even saw them as a symptom of the weakening of FASB itself.
In a press conference following the meeting, a reporter asked FASB chairman Robert Herz to react to charges by the CFA Institute that the two staff positions indicated a lack of independence on the part of the board. He also asked Herz to answer the institute’s charge that the speed with which FASB came up with the proposals suggests that it was bowing to “special interests” (in this case, presumably, the banks).
The FASB chairman replied that the board had “reached out to 40 major investors in financial institutions” in addition to the CFA for input on the proposed staff positions. Unlike the institute, most of the investors, while calling for additional disclosures of fair-value measurement methods, approved of the direction in which FASB was headed, he contended, noting that that was especially true of the OTTI proposal.
Acknowledging that the two-week comment period was “accelerated and expedited,” Herz went on to say that the board engaged in “full due process” and that FASB probably got more input than it gets on proposals with three-month comment periods.
To accusations of a lack of independence by the board, Herz said, “What I don’t like really is that when you don’t agree with our end outcome you impugn our motives. That’s not fair-or appropriate.”
In letters to the board, some respondents voiced worries that the proposal on inactive markets and distressed transactions “would result in a relaxation of fair value requirements and reduce consistency and comparability in financial statements,” according to a board meeting handout.
In its proposed guidance, FASB’s staff asserted that the original objective of fair-value measurement hadn’t changed, adding that determining fair value in an inactive market “may require the use of significant judgment.”
Nevertheless, some respondents thought the board had switched gears from its requirement under 157 and was now asking for something more precise and less judgment-based. They began questioning whether the goal of fair-value measurement in an inactive market should be gauging fair value in a currently inactive market; determining what the hypothetical fair value would be in an active market; or figuring out the midpoint between the former two calculations.
Board members, asserting that they didn’t mean that reporting entities should rigidly calculate a midpoint, said that they should use a variety of inputs—but mostly their own judgments. In the guidance approved by the board at its meeting today, FASB stated that even when there’s been a significant decrease in market activity for an asset, “the fair-value objective remains the same. Fair value is the price that would be received to sell the asset in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date in the current inactive market.”