Fair value assessments

Fair value is being used more and more in financial reporting.  Its use ranges from measuring most financial instruments at fair value, to calculating impairments, and the recording of assets acquired and liabilities assumed in a business combination.  Accounting standard setters continue to turn to fair value as a relevant measure of assets and liabilities for financial reporting purposes.

Both the FASB and the IASB have issued guidance In order to provide consistency related to fair value measurements. Overall, that guidance provides a framework for measuring assets and liabilities at fair value as well as requiring robust disclosures around the judgments and inputs behind the measurements.  Application of the guidance can be complex and require significant judgment.

Fair value in financial reporting is likely here to stay. The use of fair value measurements increases the use of judgment around financial accounting. In many circumstances, determining “fair value” requires the use of complex modeling techniques and valuation experts.

Chad Kokenge, Partner

Impacts to companies:

  • The increased use of fair value requires companies to refresh measurement policies and procedures. 
  • Companies should analyze how fair value is determined when no active market exists, and establish procedures to develop the appropriate disclosures. Valuation professionals may need to be involved early in the process.
  • Appropriate and robust disclosures in the financial statements are necessary to inform investors about measurement methods and uncertainty.
  • The increasing needs for disclosures may require the establishment new processes and databases to record and report the information.

What companies should do:

  • Develop a refined focus on fair value measurements.
  • Retain valuation and accounting specialists as needed.
  • Analyze systems and processes in order to get the right information for disclosures.