FASB on April 9, laid to rest atleast a controversial subject on marking assets in distressed economic conditions.
The FASB via FSP157-4 issued its position on defining illiquid markets for assets and giving a leeway that the management can rely on their internal valuation models instead of using the external factors.
The rule revision applies to all assets and liabilities within the scope of accounting pronouncements that either require or permit fair value measurements.
The FSP provides that a reporting entity should evaluate a battery of factors to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with "normal market activity" for the asset or liability. These factors include, but are not limited to, the following:
- There are few recent transactions;
- Price quotations are not based on current information;
- Price quotations vary substantially either over time or among market makers;
- Indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability;
- There is a significant increase in implied liquidity risk premiums, yields, or performance indicators for observed transactions or quoted prices when compared with the reporting entity's estimate of expected cash flows for the asset or liability;
- There is a wide bid/ask spread;
- There is a significant decline or absence of a market for new issuances for the asset or liability; and
- Little information is released publicly.
This move is a welcome step and will definetly aid a lot of banks in shoring up their balance sheets. No wonder, that post April 9, most of the markets are on a bull run and have started factoring this change in the swing in the balance sheets of various financial institutions.
The FASB must also be appreciated for relenting under pressure to delineate mark-market to accounting forever and has come out with the correct decision considering the economic scenario.
Will wait and wonder what will be FASB's position in a reverse scenario, when markets are in prime bull position and prices are overvalued, will they come out with a new FSP to FAS 157....????
