The Financial Accounting Standards Board has proposed revised guidance on
valuing financial assets with an inactive market. Proposed FASB Staff Position
FAS 157-e (Mar. 17, 2009). The proposed guidance would apply to entities, such
as investment companies, that report their financial assets at fair value. The
proposal comes only a few months after FASB addressed the same issue in FASB
Staff Position FAS 157-3 (Oct. 10, 2008).

Under controlling FASB guidance (Statement of Financial Accounting Standards
157), "fair value" is the price that would be received to sell an asset in an
orderly transaction between market participants at the measurement date, and a
forced liquidation or distress sale is not an "orderly transaction." FSP FAS
157-3 gave guidance on the weight to give to transactions in inactive markets,
but it explicitly assumed that the observable transactions considered in
determining fair value were not forced liquidations or distressed transactions.
Proposed FSP FAS 157-e would drop this dubious assumption in favor of a two-step
process for determining whether transactions are orderly.

Step 1 would require the entity to determine whether the market is inactive.
The proposed FSP provides a partial list of factors that indicate that a market
is not active:
a. Few recent transactions (based on volume and level of activity in the
market). Thus, there is not sufficient frequency and volume to provide pricing
information on an ongoing basis.
b. Price quotations are not based on current information.
c. Price quotations vary substantially either over time or among market makers
(for example, some brokered markets).
d. Indexes that previously were highly correlated with the fair values of the
asset are demonstrably uncorrelated with recent fair values.
e. Abnormal (or significant increases in) liquidity risk premiums or implied
yields for quoted prices when compared with reasonable estimates (using
realistic assumptions) of credit and other nonperformance risk for the asset
class.
f. Abnormally wide bid-ask spread or significant increases in the bid-ask
spread.
g. Little information is released publicly (for example, a
principal-to-principal market).

If the entity concluded that the market is not active, then Step 2 would
require it to presume that a quoted price is associated with a distressed
transaction unless the reporting entity has evidence that (a) there was
sufficient time before the measurement date to allow for usual and customary
marketing activities for the asset and (b) there were multiple bidders for the
asset. If the transaction price is a distressed price, then the entity must use
a valuation technique other than one that uses that quoted price without
significant adjustment. If the transaction is not distressed, then the quoted
price may be a relevant observable input that should be considered in estimating
fair value. However, the entity still should consider whether any other factors
or conditions warrant making an adjustment to the quoted price.

Comments are due by April 1, 2009, and FASB is likely to act on the proposal
shortly thereafter. It is proposed to be effective for interim and annual
periods ending after March 15, 2009, and to be applied prospectively. Proposed
FSP 157-e is available online at

http://www.fasb.org/fasb_staff_positions/prop_fsp_fas157-e.pdf

FASB is also proposing guidance on other-than-temporary impairments to the
value of assets that are not fair valued. Proposed FASB Staff Position FAS
115-a, FAS 124-a, and EITF 99-20-b (Mar. 17, 2009). The same comment deadline
and effectiveness would apply. This proposed FSP is available online at

http://www.fasb.org/fasb_staff_positions/prop_fsp_fas115-a_fas124-a_and_eitf99-2\
0-b.pdf

For my post on the adoption of FSP FAS 157-3, see

http://groups.yahoo.com/group/FundLaw/message/1199


John M. Baker <JMB@...>
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
202.419.8413
202.822.0140 fax
FundLaw Listowner http://groups.yahoo.com/group/fundlaw