1. Fair Value Measurement (SFAS 157)
Kaipo Doorley
Amper Politziner and Mattia

2. Agenda – Topics Covered
Fair Value Issues
Fair Value Framework
Fair Value Disclosure Requirements
Alternative Investments
Audit Considerations
Recent Standard Setting Activity
SEC Update

3. FV Issues - The Fair Value “Movement”
Moving toward everything eventually being “initially” measured at fair value
Less and less use of cost-based measures for financial instruments
SFAS 115, 133, 155, 156, 159
Held to maturity debt securities and APB 18 are exceptions
Nonfinancial instruments generally still use historic cost with impairment testing

4. FV Issues – Problem and Possible Solution
The Problem – Reliability of measures
Different parties could get inconsistent measures
Possible for management to influence measures
The (Partial) Solution – SFAS 157
Detailed definition of “fair value” for use in accounting
Does not expand use of fair value
Provides guidance to make fair value measures more consistent and understandable to investors
Requires disclosures to help users understand reliability of inputs
Financial statement users still prefer fair value while management and auditors do not believe the “market” is always the most accurate reflection of a transaction/account

5. FV Issues – The Good News
For most securities, decrease in value are being reported as they occur
Impairment of other assets are being recognized
Despite difficulty, companies/auditors have been able to come up with values
FV disclosures are helpful to users (Level 3 assets, etc.)
Fair Value has been around for a very long time and now there is one definition of fair value
Valuation specialists and certain industries have dealt with fair value for years and have expertise and insight

6. FV Issues – The Bad News Impairment models are inconsistent
Some tests are impossible (other-than temporary)
Standard-setters being pressured to back off
Many implementation issues/question on 157
FASB’s VRG and staff working
Some FSPs raise more questions than answers
Tendency to apply “rules” instead of principles
Looking to transactions that aren’t representative
Supporting pricing service estimates
Hard to convince auditors that losses are temporary
The timing of SFAS 157 and the economic crisis

7. Fair Value Framework - Definition
Definition of Fair Value – Exit Price not Entry Price
What could you sell for in an orderly transaction
Assume exit in principal or most advantages market
Marketplace participant assumptions, not entity specific
Looking to the market should reduce management bias and promote consistency (in concept)
“Marketplace participants” are knowledgeable, independent parties willing and able to transact
Transaction costs are not part of fair value
Always include credit risk if inherent in asset/liability

8. Fair Value Framework - Measurement
Step 1: Determine the unit of account (based on accounting/reporting rule driving measurement)
Stand alone asset/liability or group of assets
For example is the unit of account a “reporting unit” being tested for goodwill or a single equity security recorded as available for sale

9. Fair Value Framework - Measurement
Step 2: Highest and best use (market participant view)
In-use (used with a group of assets/liabilities to maximize value)
In-exchange (stand alone basis)
For example a market participant is a real estate developer and purchases a construction company for:
In-use: Integrate the company’s PP&E
In-exchange: Operate the company as a stand alone entity
Must be physically possible, legally permissible and financially feasible to the market participant
The reporting entity’s current or intended use of the asset/liability does not matter

10. Fair Value Framework - Measurement
Step 3: Determine principal or most advantageous (based on highest and best use)
Principal market has the greatest volume and activity
In the absence of a principal market, the most advantageous market in which the “reporting entity” would sell the asset/transfer the liability with the price that maximizes amounts received and minimizes amounts paid
Based on market principal/most advantageous market the reporting entity identifies (not specifically) market participants
The market and market participants should be evaluated at recognition and re-evaluated at each measurement date
Inactive market and disorderly transactions discussed later

11. Fair Value Framework - Measurement
Fair value hierarchy
Prioritizes inputs to the valuation technique used to measure fair value
Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2 – inputs and other quoted prices included in Level 1 that are observable either directly or indirectly
Level 3 – unobservable inputs reflecting the reporting entity’s own assumptions about market participant assumptions

12. Fair Value Frame Work - Measurement
Characteristics of Level 1 Inputs
Transactions occur with sufficient frequency and
volume to provide pricing information on an ongoing
basis.
Reporting entity has ability to access
Alternative pricing methods (e.g. matrix pricing) may be used as a practical expedient
Alternative pricing method results in a lower level measurement
After-hours trading or news events
Not required, but should be considered

13. Fair Value Frame Work - Measurement
Characteristics of Level 2 Inputs
Quoted prices for similar assets or liabilities in active markets
Quoted prices for identical or similar assets or liabilities in markets that are not active
Inputs other than quoted prices that are observable (e.g. yield curves)
Market-corroborated inputs: Derived principally from or corroborated by observable market data by correlation or other means
Adjustments necessary to corroborate inputs may result in Level 3 measurement

14. Fair Value Frame Work - Measurement
Characteristics of Level 3 Inputs
Unobservable inputs used to the extent that observable inputs are not available
Includes assumptions about risk, developed based on best information available without undue cost and
effort
Data used to develop the inputs should be adjusted if there are contrary data indicating market participants would use different assumptions
FV may be determined based on the best available information in the circumstances

15. Fair Value Framework - Measurement
Valuation techniques consistent with market, income and/or cost approaches shall be used to measure FV
Market Approach – Uses observable prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
Income Approach – Converts cash flow or earnings to a single present amount (discounted) . Value indicated by current market expectation about future amounts
Cost Approach – Amount that would currently be required to replace the service capacity of an asset (current replacement cost)
Use valuation techniques that are appropriate in the circumstances and for which sufficient data are available
Single or multiple techniques may be appropriate depending on the circumstances.

16. Fair Value Disclosure Requirements
Assets and liabilities measured at FV on a recurring basis
Disclose the level of inputs used (tabular format)
Level 3 inputs rolled forward
Valuation techniques – annually (see FSP updates)
Assets and liabilities measured at FV on a nonrecurring basis
Same as above AND
The reasons for the measurement
Note FASB fair value disclosure project discussed later

17. Alternative Investments
What is an alternative investment?
AICPA Practice Aid
AICPA Draft Issue Paper
Specific Issues for Alternative Investments
FASB FSP 157-g Estimating the Fair Value of Investments in Investment Companies That Have Calculated Net Asset Value per Share in Accordance with the AICPA Audit and Accounting Guide, Investment Companies – Issued Monday June 8,2009 and comment period ends July 8, 2009
Will be effectiv3e immediately upon release

18. Alternative Investments – Specific Issues
Defining markets/market participants
Factors in deciding whether a market is active
Evaluating transactions
Transparency
Relevance
Distressed
Determining fair value of interest in alternative investments
Unique Elements of Private Equity
Consideration of use of NAV as a practical expedient
FASB issues FSP FAS 157-g

19. Audit Considerations Auditing standards
If market assumptions not available, an entity may use own assumptions as long as no contrary data that market participants would consider
Auditor must understand the entity’s process for determining fair value and relevant controls to develop an audit approach
Use of specialists
Auditor must find the assumptions reasonable and the valuation methods appropriate and properly applied
Consideration of variances from period to period

20. Audit Considerations (cont’d)
Non-Authoritative Guidance
AICPA Toolkit for Auditing Fair Value Measurements and Disclosures
Auditor must understand the entity’s process for determining fair value and relevant controls to develop an audit approach
Use of specialists
Auditor must find the assumptions reasonable and the valuation methods appropriate and properly applied
Consideration of variances from period to period
Practice Issues for Non-Issuers

21. Recent Standard Setting Activity
FSP FAS (fair value measurement)
FSP FAS 157-f (fair value of liabilities)
FSP FAS and APB 28-1 (fair value disclosures)
FSP FAS and FAS (OTTI of debt securities)
Ongoing FASB Projects
Fair Value Disclosure Project
Financial Instruments Project
Recoveries of Other-Than-Temporary Impairment (Reversal) Project

22. Recent Standard Setting Activity – FSP 157-4
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
Superseded FSP FAS 157-3
No longer just relates to financial assets
Despite a significant decrease in market activity for an asset, the objective of fair value measurement remain
Provides factors to consider for significant decrease in volume and level of activity
When market activity significantly declines, further and more robust analysis required

23. Recent Standard Setting Activity – FSP 157-4
FSP FAS (cont’d)
Requires additional disclosures of fair value measurements
For interim and annual periods the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period
Major security types shall be based on the nature and risks of the security. Disaggregation of financial instruments are much greater and a listing is included in the FSP
Effective for periods ending after 6/15/09

24. Recent Standard Setting Activity – FSP 157-4
FSP FAS (cont’d)
Provides circumstances that may indicate a transaction is “NOT” orderly
If not orderly, place little if any weight
If orderly, consider transaction price and weight depends on facts and circumstances
If not sufficient information available to determine whether orderly or not, the transaction price may not be determinative of fair value
Use of broker quotes and pricing services not precluded, but a reporting entity must evaluate the quote

25. Recent Standard Setting Activity – FSP 157-f
FSP FAS 157-f, Measuring Liabilities Under SFAS 157
FASB is redeliberating a proposed FSP to provide additional guidance on determining the fair value of liabilities
A proposed FSP was issued in May for comment
Generally estimate fair value of liabilities as you would estimate fair value of an asset
However, should not make any adjustments due to restrictions on the transfer of a liability

26. Recent Standard Setting Activity – FSP 157-f
FSP FAS 157-f, Measuring Liabilities Under SFAS 157
FASB is redeliberating a proposed FSP to provide additional guidance on determining the fair value of liabilities
A proposed FSP was issued in May for comment
Generally estimate fair value of liabilities as you would estimate fair value of an asset
However, should not make any adjustments due to restrictions on the transfer of a liability

27. Recent Standard Setting Activity – FSP 107-1
FSP FAS and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
Applies to all public companies
Applies to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value
Requires disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for financial instruments not measured on the balance sheet at fair value
Effective for periods ending after 6/15/09

28. Recent Standard Setting Activity (cont’d)
FSP FAS and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments
Applies debt securities scope in to SFAS 115
If FV < CV (amortized cost), instrument is impaired
If an entity intends to sell or more likely than not will be required to sell before recovery, all OTTI recognized through earnings
If entity does not intend to sell and it is not more likely than not, OTTI is separated into (a) credit loss and (b) amounts related to other factors
Credit loss through earnings and the rest through OCI
Note covered in greater detail

29. Recent Standard Setting Activity (cont’d)
Fair Value Disclosure Project
FASB recently added a project to its agenda to improve disclosures of fair value measurements
Project will consider additional disclosures, such as:
Sensitivities of measurement to key inputs
Transfers of items between the fair value hierarchy levels
Levels of aggregation
Expected timing for this project is year end 2009

30. Recent Standard Setting Activity (cont’d)
Financial Instruments Project
Financial Instruments: Improvements to Recognition and Measurement – Joint project of the IASB and FASB
Project objectives:
Simplify reporting to improve decision usefulness and understandability
Determine which financial instruments should be recognized at fair value and which financial instruments would be recognized at a different measurement attribute
Address impairment, hedging, fair value option, and financial statement presentation issues
Expected timing for this project is by year end 2009

31. Recent Standard Setting Activity (cont’d)
Recoveries of Other-Than-Temporary Impairment (Reversal) Project
Objective of this project is to consider allowing an entity to recover, through earnings, a previously recognized OTTI loss when evidence exists that an impairment loss has reversed
Another objective of this project is to converge with IFRS with regard to the accounting for recoveries of OTTI
Expected timing for this project is by year end 2009

32. SEC Update SEC Staff Views of Fair Value Measurements
SEC Staff Letters – Financial Asset Impairments
Hot Topics Related to Fair Value Measurements
Control premiums
Discount rates/WACC
Valuation of restricted stock
Use of valuation Specialists
Limited scope engagements

33. Questions?
“The material contained in this presentation is for general information and should not be acted upon without prior professional consultation.”