Project Update

FAS 157—Measurement of Liabilities

Last Updated: September 28, 2009 (Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
*Due Process Documents
Decisions Reached at the Last Meeting
Summary of Decisions Reached to Date
*Next Steps
Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective

The objective of this project is to provide guidance on the measurement of liabilities in accordance with FASB Statement No. 157, Fair Value Measurements.

*Due Process Documents

In August 2009, the Board completed this project with the issuance of Accounting Standards Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value.

Update No. 2009-05 

Comment Letter Summary

Decisions Reached at the Last Meeting (July 8, 2009)

The Board discussed the feedback received on proposed FSP FAS 157-f, Measuring Liabilities under FASB Statement No. 157. (See the meeting handout for the comment letter analysis.) The Board made the following decisions:

  1. The Board decided to clarify that at initial recognition of the liability at fair value, the reporting entity should not adjust the price of the liability when traded as an asset for circumstances in which the asset includes a restriction preventing its transfer.


  2. The Board decided to clarify that after initial recognition of the liability at fair value, changes in fair value of an asset due to changes in a restriction preventing the transfer of the asset should be considered when measuring the fair value of the liability.


  3. The Board affirmed its decisions about liability restrictions, changes in the liability restrictions, principal market, and bid/ask spread.


  4. The Board decided to clarify the need to consider the principles of FASB Statement No. 157, Fair Value Measurements, when using an entry price technique.


  5. The Board decided that guidance on determining an appropriate market risk premium for an asset retirement obligation under FASB Statement No.143, Accounting for Asset Retirement Obligations, is outside the scope of the final Accounting Standards Update.

The Board directed the staff to proceed to a draft of an Accounting Standards Update for vote by written ballot.

*Summary of Decisions Reached to Date

See Update No. 2009-05.

*Next Steps

None.

Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

July 8, 2009 Board Meeting 
February 25, 2009 Board Meeting
April 9, 2008 Board Meeting
November 14, 2007 Board Meeting

Background Information

Paragraph 15 of Statement 157 provides the following guidance for estimating fair value of a liability:

A fair value measurement assumes that the liability is transferred to a market participant at the measurement date (the liability to the counterparty continues; it is not settled) and that the nonperformance risk relating to that liability is the same before and after its transfer. Nonperformance risk refers to the risk that the obligation will not be fulfilled and affects the value at which the liability is transferred. Therefore, the fair value of the liability shall reflect the nonperformance risk relating to that liability. Nonperformance risk includes but may not be limited to the reporting entity's own credit risk. The reporting entity shall consider the effect of its credit risk (credit standing) on the fair value of the liability in all periods in which the liability is measured at fair value. That effect may differ depending on the liability, for example, whether the liability is an obligation to deliver cash (a financial liability) or an obligation to deliver goods or services (a nonfinancial liability), and the terms of credit enhancements related to the liability, if any.

Constituents have indicated to the staff that there is significant diversity in interpretation of the above language. For example, some constituents have suggested that the quoted market price of a publicly traded debt instrument does not represent the fair value of the issuer’s liability. Those constituents observe that the quoted market price of a publicly traded debt instrument represents the price at which an investor could sell the instrument to another investor, so it may constitute a Level 1 fair value measurement for the asset from an investor’s perspective. However, those constituents suggest that such an amount might not represent the amount that the issuer would be required to pay a transferee to assume the debt obligation in a hypothetical exit transaction.

Contact Information

Ronald Maples
Practice Fellow
rwmaples@fasb.org

Kristofer Anderson
Valuation Fellow
keanderson@fasb.org