Changes in FAS 157 and 115 on Structured Finance

Changes in FAS 157 and 115 on Structured Finance

Introduction

Under FAS 157 and 115, the fair value of the asset or liability is equal to the exit price, not necessarily the value on the mark to market statement from the financial institution providing the statement. DerivActiv adjusts periodic mark to market values to incorporate non-performance risk as required under FAS 157. Our team will analyze the underlying instrument and determine the methodology to be used to adjust the market value for non-performance risk. We will work closely with your auditing firm to verify that the asset or liability is classified correctly (Ohlson, 2005 687) and to confirm that the methodology is consistent with the current practice for similar entities.

FAS 157 and 115 are the Financial Accounting Standards Statement No. 157, Fair Value Measurement; an accounting disclosure and valuation requirement implemented in 2008 by the Financial Accounting Standards Board (FASB). At its heart, FAS 157 redefines the “fair value” accounting of financial instruments as, “. . . the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (Schuetze, 2003 70).”

While the Statement is complex, the intention is to increase consistency and comparability among fair value estimates used in financial reporting.

There are many points and details to the 85-page FAS 157 accounting standard. To help you better understand FAS 157, we have produced an audio podcast episode in which Johan Rosenberg, the CEO of DerivActiv, interviews Brett Schwantes, a Certified Public Accountant with Wipfli, on the subject (FASB, 2007 44). Listen to understand which entities are subject to the new standards and when; the “unintended consequences” of the new standard with respect to FAS 133; and how FAS157 may increase volatility in financial statements.

This Statement addresses the accounting and reporting for certain investments in debt securities and equity securities. It expands the use of fair value accounting for those securities but retains the use of the amortized cost method for investments in debt securities that the reporting enterprise has the positive intent and ability to hold to maturity. This Statement was undertaken mainly in response to concerns expressed by regulators and others about the recognition and measurement of investments in debt securities, particularly those held by financial institutions. They questioned the appropriateness of using the amortized cost method for certain investments in debt securities in light of certain trading and sales practices. Their concerns also were prompted by the existence of inconsistent guidance on the reporting of debt securities held as assets in various AICPA Audit and Accounting Guides (Richard, 2005 825). The AICPA's Accounting Standards Executive Committee (AcSEC) and the major CPA firms, among others, urged the Board to re-examine the accounting for certain investments in securities. 

For individual securities classified as either available-for-sale or held-to-maturity, an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than temporary. For example, if it is probable that the investor will be unable to collect all amounts due according ...