U.S. accounting board eyes more disclosure on illiquid assets

August 31, 2009

Financial Accounting Standards Board Chairman Robert Herz makes remarks at the Reuters Regulation Summit, in Washington, February 7, 2008.     REUTERS/Mike Theiler (UNITED STATES) WASHINGTON, Aug. 31 (Reuters) – U.S. accounting rulemakers have proposed requiring new disclosures on how companies value illiquid assets, a move designed to make it easier for investors to assess businesses’ financial health.

The rules proposed by the Financial Accounting Standards Board would require a company to provide alternative means to calculate how much its hardest-to-value assets are worth, using “reasonably possible” scenarios.

Robert Herz, FASB’s chairman, in a statement said the proposed disclosures would result in “increased transparency” for investors.

U.S. rules for fair value accounting divide assets into three categories: Level 1, Level 2 and Level 3.

The value of a Level 1 asset can typically be determined from market prices. A Level 2 asset is often valued based on prices for similar assets, sometimes known as “mark-to-model.” A Level 3 asset is considered illiquid, and often valued based on complex mathematical models.

FASB’s proposal would require a company to show how its valuation of a Level 3 asset would increase or decrease in the event of a “reasonably possible” market scenario.
It would also require a company to disclosure the amounts of major transfers of assets in or out of Level 1 and Level 2, and the reasons for those transfers.
FASB said the deadline for comments on its proposed update is Oct. 12.

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