New guidance to help with fair value accounting

Oct. 3, 2008 – New guidance on fair-value accounting says that credit unions and other institutions may use management’s internal assumptions in measuring fair value, a tool that is intended to help institutions deal with the inertia of current markets.

The Financial Accounting Standards Board, responding to pressure from lawmakers, the Securities and Exchange Commission and others, published clarifications and guidance on FASB Statement 157, Fair Value Measurement. Credit unions are required to follow generally accepted accounting principles and should consult this material, said NAFCU Associate Director of Regulatory Affairs Tessema Tefferi.

The guidance was published jointly by FASB and the SEC’s chief accountant as a set of five questions and answers to clarify aspects of fair value measurement. In these, FASB stated that management’s internal assumptions, such as expected cash flows from an asset, can be used to measure fair value.

The Q&A also addresses the use of market quotes (they may be instructive, if not determinative, in an inactive market); the fact that distressed sales do not necessarily indicate fair value; the impact on fair value of transactions in an inactive market; and factors to consider in determining whether an investment is other-than-temporarily impaired.

Those factors in evaluating other-than-temporarily impaired status include:

• the length of time and extent to which the market value ahs been less than cost;
  
  
• the financial condition and near-term prospects of the issuer that may influence issuer operations; and
  
  
• the intent and ability of the holder to retain the investment in the issuer long enough to allow for any anticipated recovery in market value.

FASB was also preparing to publish a proposed staff position providing added guidance Thursday. That guidance was to take effect immediately.