Yesterday, the US Financial Accounting Standards Board approved three FASB Staff Positions (FSPs) to clarify fair value accounting for financial instruments, particularly in distressed markets. The Board had received 600 comment letters on three proposed FSPs. The letters presented mixed messages from investors, individuals, preparers, regulatory bodies, business associations, and auditors regarding the proposed FSPs. An extensive discussion took place before consensuses were reached by FASB to draft and issue final standards:

• FSP FAS 157-e Determining Whether a Market Is Not Active and a Transaction Is Not Distressed. In discussing this proposal, the FASB indicated that proposed FSP FAS 157-e was not intended to change the objective of a fair value measurement even when there has been a significant decrease in market activity for the asset being measured. The objective is to determine fair value (an 'exit price') in the current inactive market and not the value in a hypothetical active market or a midpoint between the two. A significant change from the proposed FSP FAS 157-e relates to the removal of the presumption that all transactions in an inactive market are distressed unless proven otherwise.
• FSP FAS 115-a, FAS 124-a, and EITF 99-20-b Recognition and Presentation of Other-Than-Temporary Impairments (OTTI). FASB agreed that the scope of the new OTTI model should be limited to debt securities. The existing OTTI models for equity securities would continue. The new OTTI model for debt securities would shift the focus from an entity's intent to hold until recovery to its intent to sell.
  
  • An entity would write underwater debt securities that it currently intends to sell down to fair value through earnings.
  • For those not intended for sale (available-for-sale or held-to-maturity), if it is probable that the entity will not collect all amounts contractually due, the entity will bifurcate the OTTI. The impairment due to credit, measured as the difference between amortized cost and the present value of expected cash flows discounted at the security's effective rate, would be recognised in earnings. The remaining amount of the impairment (noncredit portion) would be recognized in other comprehensive income.
• FSP FAS 107-b and APB 28-a Interim Disclosures about Fair Value of Financial Instruments. Public entities must disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in inteirm and annual financial statements and explain any changes.