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‘Fair Value’ Accounting Guidelines Tweaked


Accounting rule makers tweaked their guidelines for valuing assets based on market prices, a move that will bring U.S. and international accounting rules closer together and will require companies to disclose more about how they value their most exotic assets.

The changes adopted by the Financial Accounting Standards Board and the International Accounting Standards Board will provide a more consistent definition of “fair value,” which is the market value or the closest approximation of it. Though most of the specific changes are relatively minor and won’t affect the core aspects of how companies calculate fair value, the move better aligns U.S. and global accounting rules on asset valuation.

Perhaps the most significant changes affect companies’ disclosures about their “Level 3” assets, which are the risky, illiquid securities valued using a company’s own estimates and models rather than market prices. Companies will have to disclose more about the processes and assumptions they use in their Level 3 valuations. They will also have to discuss what might happen to the company’s valuations if the factors they are using were to change.

Companies will have to disclose any movements of securities between the other two classes of fair-value assets: Level 1, those valued strictly using market prices, and Level 2, those for which a blend of market prices and a company’s own models are used.

The fair-value changes are part of the rule makers’ “convergence” project, their attempt to bring U.S. and international rules closer together in an effort to standardize the accounting rules used world-wide. The Securities and Exchange Commission is expected to vote later this year on whether U.S. companies should switch to using international rules altogether.

Most companies will adopt the fair-value measurement changes in early 2012.

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