Notes on the new fair value accounting rules

Last week the U.S. and international accounting standards boards (FASB and IASB, respectively) agreed on a common standard for fair value measurement and disclosure. These, of course, will affect U.S. actuaries in how they will value liabilities when we begin to discount loss reserves, something that seems increasingly likely.

The agreement is outlined, vaguely, in this press release. I got further information from this IFRS podcast:

  • The key changes/clarifications are:
    • Fair value is the exit price – the price the asset or liability would command if sold today in the market. (The alternative would have been the entry price – but sometimes that doesn’t exist, like a bloc of assets purchased as part of a company.)
    • The standard is explicit in which market the item should be valued in – it should be in the principle market, and that market should be identified. (If there is no principal market, it should be valued in the most advantageous market for the item.)
  • There are also disclosure requirements:
    • The company must provide data on significant inputs in the valuation.
    • Sensitivity and validation analysis are required.
  • Even so, there are some differences between the FASB and IASB. These differences are driven by different approaches in other accounting standards. But the accounting wonks expect to close those gaps over time.
  • IFRS considers this more of a cleanup measure, as their guidance previously was vague or inconsistent.

The standard will be effective Jan. 1, 2013, but early adoption is OK. As far as I can tell, there’s no need for an ‘as if’ restatement for comparative purposes. More at this pdf.

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