Monday, June 22, 2009

Flaws in FASB’s Proposed Fair Value Proposal

The Association of Financial Professionals (AFP) Government Investor Relations Task Force has sent a comment letter to the FASB on the proposed FASB Staff Position titled “Measuring Liabilities under FASB Statement No. 157” (FSP FAS 157-f).

While AFP supports the FASB in its efforts to issue timely guidance on fair value measurement, AFP’s view is that the FASB’s model for measuring liabilities in this FSP is significantly flawed because:

  1. The inability to actually realize the fair value at the reporting date should be considered;
  2. The fair value calculation of a liability should not exceed the contractual value of the debt a company actually owes;
  3. Gains arising from a company’s own credit impairments should not be allowed; and
  4. Any restrictions on a debt should be taken into consideration in subsequent measurement.

AFP says that the FSP assumes that the company has the ability to take advantage of market pricing (e.g., as a result of changes in interest rates) and repurchase its own debt in the open market, which in most cases it does not. The market performance of a company’s debt trading as an asset is not directly correlated to the economic value of the liability associated with its issued debt. A company is only liable for the stated value of the debt upon maturity or early retirement – nothing more or less. Thus, why would a company hypothetically report a fair value measurement above or below the face amount of the debt if the company does not have the ability to actually realize that pricing at the reporting date?

Read the full comment letter here.

No comments: