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Measuring Fair Value: New Accounting Rule to Affect Unusual Investments and More

Expect to have your hands full this year as you apply a new accounting standard to financial assets and liabilities that require fair value accounting. Also plan to be particularly busy if your not-for-profit has alternative investments such as hedge funds, private equity holdings or limited partnerships.

Big effect on some investments

Financial statements for fiscal years beginning after Nov. 15, 2007, must comply with Statement of Financial Accounting Standards (FAS) No. 157, "Fair Value Measurements." If you haven't started familiarizing yourself with the new rule, now is the time to do so.

FAS 157 defines fair value, sets a framework for measuring fair value in accordance with accounting practices generally accepted in the United States of America (GAAP), and expands disclosures of fair value measurements.

Not-for-profits are likely to see the greatest impact of FAS 157 on investments for which valuations aren't readily available. Applying the standard to publicly traded stock, on the other hand, should be relatively simple. For example, if someone donated 100 shares of AT&T stock to your organization, you could find out its fair value today with a quick Internet search.

However, if someone donates shares in a family business—let's say a bookstore—its value couldn't be ascertained in just a few minutes. Rather, under FAS 157, you'd have to follow a series of procedures based on benchmarks and other forms of measurement.

Three types of measurements

Under FAS 157, there's a three-level hierarchy for inputs used in determining fair value measurements:

Level 1. Quoted prices in active markets for identical assets or liabilities

Level 2. Quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, or other observable input

Level 3. Unobservable input using the reporting entity's own assumptions about what market participants would use in pricing the asset or liability

New disclosure requirements

Under FAS 157, new disclosures are necessary for any assets or liabilities that should be measured at fair value. Disclosure consists of the following:

• The fair value as of the reporting date
• Which of the levels was used for determining the fair value
• For Level 3 values, a reconciliation of the beginning and ending balances including purchases, sales and gains and losses and
• The amount of the gains and losses included in earnings from changes in unrealized gains or losses for assets or liabilities still held at the reporting date.

Finally, the disclosure must include the valuation techniques used, with an explanation of changes in techniques, if any.

Outside expertise

Because these disclosures are likely to affect your financial statements, it would be prudent to consult with your accounting professional now to avoid any surprises at year-end.

Questions on FAS 157?
Contact Toni Diprizio at tdiprizio@BlackmanKallick.com or call 312-980-3227.

FAS 157 Impacts Other Rules

Here is a partial listing of other not-for-profit-oriented accounting standards influenced by FAS 157:

• FAS 116, "Accounting for Contributions Received and Contributions Made"
• FAS 117, "Financial Statements of Not-for-Profit Organizations"
• FAS 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations"
• FAS 133, Implementation Issue No. B35, "Embedded Derivatives: Application of Statement 133 to a Not-for-Profit Organization’s Obligation Arising from an Irrevocable Split-Interest Agreement"
• FAS 136, "Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others"
• Certain directives in the AICPA Audit and Accounting Guide: Not-for-Profit Organizations

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.