Project Update

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 Measurement.

Due Process Documents

Proposed FSP FAS 157-c, Measuring Liabilities under FASB Statement No. 157, was issued on January 18, 2008. The comment period ended February 18, 2008.

Decisions Reached at the Last Meeting

See minutes below.

*Summary of Decisions Reached to Date

1. During rediliberations of the proposed FSP the Board directed the staff to make the following changes to the proposed FSP and its related amendments:
   1. Modify paragraph 6 of the proposed FSP to clarify that the exceptions to the use of Level 1 inputs in paragraphs 25 and 26 of FASB Statement No. 157, Fair Value Measurements, continue to be available under the guidance in the proposed FSP

   2. Clarify that when using a quoted price in an active market, an entity should ensure that the item for which the quote pertains is identical to the unit of account for the liability being measured

   3. Modify paragraph 6 of the proposed FSP to clarify that the best measurement of fair value for an entity’s liability is the price at which that liability is traded as an asset

   4. Maintain paragraph 7 of the proposed FSP as written in the exposure draft without including the staff’s revisions related to using entities assumptions about market participant assumptions.

   5. Clarify that the effect of initially applying the guidance in the proposed FSP should be included as a change in fair value in the period of adoption

   6. Specify that the final FSP will be effective at the later of (a) the beginning of the first reporting period ending after the issuance date of the FSP or (b) the beginning of the period in which an entity initially applies Statement 157.

Next Steps

At the April 9, 2008 meeting the Board directed the staff to present a memorandum to the Board to ensure that the staff has captured the Board’s views on the FSP. The Board may decide to readdress issues related to this FSP at a future meeting.

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 Statement, Interpretation, FSP, or Statement 133 Implementation Issue.

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.

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