Much Ado About Nothing: The FASB Amends Topic 820 (FAS 157)

Nothing is ever as easy as it seems.  When the FASB issued FAS 157 (now Topic 820) in September 2006, their goal seemed pretty straightforward.  The objective was to define fair value, establish a framework for measuring fair value and improve the disclosures regarding fair value measurement.  They believed that credit was the missing component to the equation and set about making changes to the time honored practice of valuing financial instruments.

Several iterations and years later, the FASB continues to tinker with the standard.  On January 21, 2010 the FASB issued ASU 2010-06-1 which amended Topic 820.  The update mandates three new disclosure requirements revolving around the calculation and categorization of fair values.

The first requirement mandates that companies provide the same level of detailed disclosures for Level 1 and 2 fair values as are already required for Level 3 fair values and to implement a consistent policy for recognizing the timing of a change in an instrument’s fair value hierarchy level.

The second requirement asks for a greater level of granularity when grouping fair value measurements.  While the FASB allows companies to use their judgment when determining how to categorize the data, suggested groupings include hedge type, asset class, instrument type, entity, valuation technique and inputs.

The final requirement requests that companies describe their current method for valuing items, the inputs that are used in the calculations and any changes from how this was done in prior periods.

While these new disclosures are changes from the status quo, none should require significant additional effort or should cause too many sleepless nights.   If only the same could be said about the roadmap for adopting IFRS.