In an action that may be more significant for its uniformity than for what it does, the Financial Accounting Standards Board and the International Accounting Standards Board today issued fair-value measurement and disclosure requirements that are almost entirely the same.
Indeed, the largest differences may lie in the differences between British and American English. “The converged standard demonstrates that FASB and IASB can come together on a measure that is almost word-for-word identical,” says David Larsen, a Duff & Phelps managing director and a longstanding adviser to FASB’s valuation resource group. “It’s a big positive [for the argument] that convergence can be done.”
At the same time, the converged standard, issued by FASB as an update to Topic 820, doesn’t represent much of a change from the controversial Statement of Financial Accounting Standards No. 157, which drew fierce opposition from banks in the wake of the financial crisis. “The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within [international financial-reporting standards] or U.S. [generally accepted accounting standards],” the two boards said in a joint news release.
Largely of concern to financial-services organizations, the measure does add some disclosure requirements not contained in SFAS 157. For CFOs of nonfinancial companies, the biggest change may be the new requirement that companies must now disclose how they measure the value of their assets when it’s either hard or impossible to sell them in active markets.
Unchanged in the new standard is a bedrock tenet of SFAS 157: the “fair value hierarchy” for measuring assets and liabilities. The hierarchy consists of three levels, each requiring different disclosures of a company’s measurement process. Level 1 assets and liabilities must be valued without any adjustments to the quoted prices in the active markets in which they trade. Level 2 valuation is based on “observable market data” other than a quoted market price. Level 3, the most controversial stratum, consists of assets and liabilities valued by means of “unobservable inputs.” Such inputs can include the entity’s own data, which is adjusted if necessary to reflect market participants’ assumptions.
The new standard adds the requirement that companies must provide quantitative details of how they measure their Level 3 assets. For example, the general metric a company uses for certain assets it holds — such as an average weighted cost of capital — must now be disclosed. CFOs at many different kinds of companies will likely have to add new disclosures as a result.