On October 10, the Financial Accounting Standards Board (FASB) finalized its new FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3). This new FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Some of the key principles illustrated include:

• determining fair value in a dislocated market depends on facts and circumstances, and may require the use of significant judgment about whether individual market transactions are forced liquidations or distressed sales and therefore poor indicators of fair value;
• when relevant observable market data is not available, the use of assumptions about future cash flows and discount rates may be appropriate in determining fair value; and
• the value of broker quotes in determining fair value depends on facts and circumstances, particularly when an active market does not exist.

FSP 157-3 is effective immediately, including with respect to prior periods for which financial statements have not been issued.

FSP 157-3 comes on the heels of the joint guidance regarding Statement 157 that was issued by the SEC and FASB on September 30. The joint guidance was apparently intended to give companies more flexibility in valuing financial assets in inactive markets. While FSP 157-3 purports to be "consistent with and amplif[y]" that guidance, some observers believe that it does not go far enough in permitting illiquid assets to be valued by means other than the "mark-to-market" principles embodied by Statement 157.

For this reason, on October 13, the American Bankers Association sent a letter to the Securities and Exchange Commission requesting that the SEC override FSP 157-3 and "address in a more meaningful way the problems of using fair value in dysfunctional markets." This is an extraordinary request, and it seems unlikely that the SEC will take any such action in the very short term. However, the SEC has begun its study of the impact of fair value accounting standards, which is required by the Emergency Economic Stabilization Act of 2008 to be completed by January 2, 2009. As part of that study, the SEC will consider both the advisability of modifications to fair value accounting standards, and possible alternative accounting standards to those provided in Statement 157.

If you have any questions or would like more information, please contact one of the following Faegre & Benson ERS Task Force lawyers:

Financial Institution Regulation	Michael P. Carlson	612-766-7779	MCarlson@faegre.com
Capital Markets and Investments	David B. Miller   Erik J. Romslo	612-766-7327   612-766-7079	DMiller@faegre.com   ERomslo@faegre.com
Real Estate	John R. Wheaton   Jeffrey S. Thiede   Lica Tomizuka   Angela M. Wolfe	612-766-7761   612-766-8773   612-766-7092   612-766-7853	JWheaton@faegre.com   JThiede@faegre.com   LTomizuka@faegre.com   AWolfe@faegre.com
Bankruptcy and Restructuring	Stephen M. Mertz	612-766-7223	SMertz@faegre.com
Securities and Financial   Markets Litigation	Robert L. Schnell   Aaron D. Van Oort   Nathaniel J. Zylstra   Leif T. Simonson	612-766-7225   612-766-8138   612-766-8168   612-766-8177	RSchnell@faegre.com   AVanOort@faegre.com   NZylstra@faegre.com   LSimonson@faegre.com
Securities Enforcement	Wendy J. Wildung   Terri L. Combs   Martin S. Chester	612-766-7759   515-248-9005   612-766-7232	WWildung@faegre.com   TCombs@faegre.com   MChester@faegre.com
Executive Compensation	Randy L. Gegelman   Kathlyn E. Noecker   Barbara-Ann Gustaferro	612-766-8066   612-766-8604   612-766-8593	RGegelman@faegre.com   KNoecker@faegre.com   BGustaferro@faegre.com
Tax	Lisa R. Pugh	612-766-7825	LPugh@faegre.com