FA FASB SB St State tement No. o. 157 57 – Fair ir Value lue Me Measurement surements John R. Null July 16, 2009
Objec bjectiv tives • Overview of fair value • Valuation techniques and guidance • Specific application to non-profits • Disclosure requirements and examples • Planning and other considerations 2
Overview iew of of SF SFAS AS 15 157 • Effective for fiscal years beginning after November15, 2007 • Applies to financial and nonfinancial assets and liabilities measured at fair value 3
Overview iew of of SF SFAS AS 15 157 (cont. t.) •The goal of SFAS 157 is to improve financial reporting by: – Providing a common definition of fair value Almost 70 FASB pronouncements that require or allow fair value measurement – Establish a framework for measuring fair value – Expand disclosures on use of fair value measurements – Create principles-based standard •Increase transparency 4
Eff ffectiv tive Date te • Financial assets/liabilities and nonfinancial assets/liabilities recognized or disclosed at fair value on a recurring basis - effective for periods beginning after November 15, 2007. • Other nonfinancial assets/liabilities - effective for periods beginning after November 15, 2008. • Primarily applied prospectively as of the beginning of the fiscal year in which the statement is initially applied. 5
Defi De finition nition of of Fair ir Valu lue • “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” • Fair value is an exi xit price. Previously, fair value generally thought to be an entry price - what a company would pay to acquire an asset 6
Keys to to Fair ir Value lue Me Measurement surement • Measurement assumes an orderly transaction in the principal or most advantageous market – Market with the greatest volume or level of activity in which an entity could sell an asset or transfer a liability • Fair value should reflect the highest and best use from a market participant perspective, regardless of management’s intended use 7
Valu luation tion Te Techn hnique iques un unde der FA FAS 15 157 • Market Approach – uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities • Income Approach – uses valuation techniques to convert future amounts to a single present amount – Discounted cash flows – Swaps • Cost Approach- based on the amount that currently would be required to replace the service capacity of the asset 8
Fair ir Value lue Hi Hiera rarch rchy Fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs. – Level 1 - Observable inputs that reflect quoted market prices for identical assets or liabilities in active markets • Example – Stock Prices 9
Fair ir Value lue Hi Hiera rarch rchy (co cont. t.) – Level 2 – Inputs that are directly or indirectly observable in the marketplace • Examples - matrix pricing, yield curves – Level 3 – Unobservable information • Examples – Company’s internal information, investment manager information for private placement, private equity or hedge funds 10
Goo Good or Bad? d? There is no formula for calculating fair value. Judgment plays a role in the fair value measurement and level determination. 11
Appli Applicabili bility to to Non- on-Prof rofits its • Certain statements that are specific to Non- Profits: – Statement 116 (Contributions) – Statement 124 (Marketable Securities) – Statement 136 (Beneficial Interests) – Statement 159 (Contributions Receivable, Split- Interest Obligations, etc.) – Statement 164 (NFP mergers and acquisitions) • In addition to the many other general GAAP standards that apply to Non-Profits – Asset impairments, derivatives, pension assets, etc. 12
In Investm stment nt Co Considera iderations ions • Determination Level Reports can be provided from custodians/investment advisors to assist in determining the levels. • Custodians should also provide a client communication package detailing the valuation process utilized regarding their methodology on the level determination. • Are there any restrictions? If so, consider Level 3 inputs. 13
Al Alte terna rnati tive In Investm stment nt Co Consi nside derations tions • Primary issue: Does the Net Asset Value (NAV) constitute fair value presentation? – Presently, it is common for investors to estimate the fair value of investments using the net asset value per share without additional adjustment – Hedge funds, private equity funds, venture capital funds • Proposed guidance FSP FAS 157-g – Final comments due July 8, 2009 – When issued will be effective immediately 14
Co Cont ntri ribut utions ions Re Receiv ivable ble • If expected to be collected in less than one year, may be measured at net realizable value as this is a reasonable estimate of fair value • If expected to be collected greater than one year, income approach is appropriate – Present Value Techniques 15
Split Split –Int nterest rest Agree reement nts Generally: – Assets are typically cash or marketable investments and are fairly straightforward to determine measurement – Liabilities – income approach used 16
Di Disclos sclosure ure Re Requiremen quirements ts • Fair value measurement on the reporting date • Level within fair value hierarchy each measurement falls • A description of the valuation techniques used to measure fair value • Discussion of any changes in fair value measurement which occurred throughout the period 17
Di Disclos sclosure ure Re Requiremen quirements ts (co cont. t.) Level 3 disclosures have expanded requirements: – Reconciliation of the beginning and ending balances for fair value measurements including the following: • Realized and Unrealized Gains and Losses • Changes in Unrealized Gains and Losses • Purchases, Sales, Issuances and Net Settlements • Fair Value items that transfer in or out of Level 3 classification 18
Di Disclos sclosure ure Example ple Effective the beginning of 2008, the Company implemented FAS 157, which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurement. The adoption of FAS 157 did not have an impact on the measurement on the Company’s financial assets and liabilities, but did result in additional disclosure. FAS 157 defines fair value as the price that would be received to sell an asset or liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. FAS 157 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The FAS 157 fair value hierarchy is defined as follows: Level 1 - Valuations are based on unadjusted quoted prices in an active market for identical assets or liabilities. Level 2 - Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly. Level 3 - Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date. 19
Di Disclos sclosure ure Example ple (co cont. t.) The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, contributions receivable, investments, accounts payable and long-term borrowings. The carrying amount of cash and cash equivalents, accounts receivable, contributions receivable and accounts payable approximate their fair value due to the short-term nature of such instruments. The fair value of assets and liabilities at December 31, 2008 is as follows: Level 1 Level 2 Level 3 Total Assets: Investments $ 10,000,000 $ - $ 2,000,000 $ 12,000,000 ` Total assets at fair value $ 10,000,000 $ - $ 2,000,000 $ 12,000,000 Liabilities: Long-term borrowings $ 2,000,000 $ 11,000,000 $ - $ 13,000,000 Total liabilities $ 2,000,000 $ 11,000,000 $ - $ 13,000,000 The fair value of investments categorized as Level 1 are based on quoted market prices for identical securities traded in active markets that are readily and regularly available to the Company. 20
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