FAS 157-f

On May 1, 2009 the FASB released proposed FSP 157-f, Measuring Liabilities under FASB Statement No. 157 (“FSP 157-f”). FSP 157-f gives proposed guidance on the fair value measurement of liabilities and applies to liabilities within the scope of FAS 157. The proposed guidance would be effective in the first period after issuance of the final guidance, with earlier application permitted. Comment letters are due June 1, 2009. BACKGROUND FSP 157-f was driven by a perceived lack of observable market information related to the valuation of liabilities subject to FAS 157. The measurement of liabilities is challenging due to the following conditions:

1. For debt with transfer restrictions, there is no observable data to determine the impact of such restrictions on the fair value of the debt.
2. Most of the time, companies settle their obligations directly with the counterparty, not by paying a third party to assume the debt. When debt is transferred, there maybe differences in nonperformance risk between the transfer or and the transferee¹.

Many debt instruments are traded as investments that represent assets to the investor, but trading prices may not represent fair value of that instrument for the borrower. MEASUREMENT When quoted prices in active markets for identical liabilities are not available, companies should use the following valuation inputs in order of most preferred to least preferred:

1. Quoted prices for identical liabilities traded in an active market.
2. Quoted prices for identical liabilities traded in an inactive market.
3. Quoted prices for similar liabilities traded in an active market.
4. Another technique, such as the income approach or the market approach.

Notice that these four approaches exclude consideration of quoted prices for similar assets in markets that are not active. In our view, this should have been included between approaches 3 and 4. ADJUSTMENTS The common theme underlying the first three of these measurement approaches is that prices of liabilities that are traded as assets are used in measuring fair value. When using one of these three approaches, the following circumstances must be considered to determine whether price needs to be adjusted to get to fair value:

1. Quoted price is for a similar liability traded as an asset, but not an identical one.
2. Quoted price does not reflect fair value because of a significant decrease in trading volume and activity level (see our Accounting Alert on FSP 157-4).
3. Quoted price includes the effect of a transfer restriction.
4. Unit of account for the asset is different from that of the liability (for example, the quoted price for the asset includes the effect of a credit enhancement).

Companies should not include a separate adjustment (or valuation input) for transfer restrictions. This applies both at inception and in subsequent measurements. When using the fourth measurement approach, companies need to make sure that the technique used reflects the assumptions of market participants and complies with the principal market and unit-of-account rules in FAS 157. DISCLOSURES There are no new disclosure requirements. ¹While IFRS uses a settlement concept in the valuation of certain liabilities, US GAAP generally presumes that liabilities continue and are not settled.