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Fair Value Measurement

Fair Value Measurement. Ben Couch, Valuation Practice Fellow, FASB. Agenda. Fair value hierarchy Level 1 Level 2 Level 3 Example. Fair value hierarchy. Is there a quoted price for an identical asset or liability? (Level 1 input). Yes. No.

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Fair Value Measurement

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  1. Fair Value Measurement Ben Couch, Valuation Practice Fellow, FASB

  2. Agenda • Fair value hierarchy • Level 1 • Level 2 • Level 3 • Example

  3. Fair value hierarchy Is there a quoted price for an identical asset or liability? (Level 1 input) Yes No Are there any observable inputs other than quoted prices for an identical asset or liability? Use the Level 1 input = Level 1 measurement Must use without adjustment Yes No Use of Level 2 inputs with no significant unobservable inputs = Level 2 measurement Significant use of unobservable inputs = Level 3 measurement

  4. Level 1 Measurements • Observable prices in active markets for identical asset or liability • Must be used when available • Fair value of a liability that uses observed price for the identical, corresponding asset is Level 1 • Adjustments can be made, but rarely, and results in lower level measurement

  5. Level 2 Measurements • Typically derived from observable data using extrapolation, correlation or regression analysis • Matrix pricing a common technique • Measures of fit and predictability are useful in supporting Level 2 classification • Major challenge is similarity of comparable assets and liquidity/market activity

  6. Level 3 Measurements • Significant use of unobservable inputs, but exit price objective remains the same • Entities’ own data may be used, but market participant data cannot be ignored • Significantly more disclosures about Level 3 measurements • Roll-forward • Quantitative information about inputs • Valuation process • Narrative sensitivity

  7. Level 3 Measurements continued • New disclosure example

  8. Example • Valuing a junior AAA-rated tranche of RMBS as of 3/31/09 that were purchased on 1/1/2008 • Third most senior of seven tranches • Collateral is nonguaranteed, nonconforming residential mortgages loans, H2Y06 vintage • At 3/31/09, tranche now A-rated • Thinly traded in brokered market from 1/1/08 to 6/30/08, but no trades in prior nine months

  9. Q&A Expressions of individual views by members of the FASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the FASB on accounting matters are determined only after extensive due process and deliberation.

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