CUNA Regulatory Comment Call

March 19, 2009

Proposed FSP FAS 157-e: Determining Whether a Market Is Not Active and a Transaction is Not Distressed


Please feel free to e-mail your responses to Senior Vice President and Deputy General Counsel Mary Dunn at and to Regulatory Research Counsel Luke Martone at You may also contact us at 800-356-9655, ext. 6743, if you have questions. Click here to access the proposed FSP.


FAS 157, issued in 2006, establishes a single definition and framework for measuring fair value in U.S. generally accepted accounting principles (GAAP) in order to increase consistency and comparability. FAS 157 states that a fair value measurement assumes that the asset or liability is exchanged in an orderly transaction. An orderly transaction is not a forced transaction, such as a forced liquidation or distress sale-which are not representative of fair value.

Many constituents believe that the guidance presented in FAS 157 and FAS 157-3 is insufficient on determining whether a market for a particular asset is not active and whether a transaction is considered distressed. Additionally, many believe that the fair value hierarchy within FAS 157 may be interpreted to emphasize the use of an observable market transaction even if distressed or the market is not active; thus resulting in misapplication of FAS 157.

The Emergency Economic Stabilization Act of 2008 tasked the Securities and Exchange Commission (SEC) with conducting a study on mark-to-market accounting standards. Upon completion, the SEC recommended FASB make several changes to improve the accounting standard, one of which is addressed in this FSP.


The proposed FSP would employ a two-step process to determine whether a market is not active and whether a transaction is not considered distressed.

Step 1:

Step 1 includes a non-exhaustive list of factors that indicate that a market is not active, including:

Once the reporting entity has evaluated all factors and considered their significance and relevance, the entity would then use its judgment in determining whether the market is active. If determined that the market is not active, the entity would proceed to step 2.

Step 2:

In step 2, the reporting entity would presume that a quoted price is associated with a distressed transaction unless there is evidence that:

a. There was sufficient time before the measurement date to allow for usual and customary marketing activities for the asset; and

b. There were multiple bidders for the asset.

If there is evidence of both factors (a. and b.) for a given quoted price, then that price is presumed not to be associated with a distressed transaction and may be a relevant observable input to consider in estimating fair value. However, even it is determined that the price is not associated with a distressed transaction the reporting entity should consider whether any other factors or conditions warrant making adjustments to the quoted price (see FAS 157 paragraph 29).

If the reporting entity does not have evidence of both factors (a. and b.) for a given quoted price, the entity would consider that quoted price to be associated with a distressed transaction. The entity would then need to use a valuation technique other than one that uses that quoted price without significant adjustment. For example, the entity could use an income approach, such as a present value technique to estimate fair value. "The inputs to the present value technique should reflect an orderly transaction between market participants at the measurement date. An orderly transaction would reflect all risks inherent in the asset, including a reasonable risk premium for bearing uncertainty that would be considered by willing buyers and willing sellers in pricing the asset in a non-distressed transaction at the measurement date."


  1. Is the proposed effective date of interim and annual periods ending after March 15, 2009, operational?

  2. Will this proposed FSP meet its objective to improve financial reporting by addressing fair value measurement application issues related to determining whether a market is not active and a transaction is not distressed?

  3. Do you believe the amendments to FAS 157 in this proposed FSP are necessary, or do you believe the current requirements in FAS 157 should be retained?

  4. Do you believe the proposed two-step model is understandable and operational? If not, what alternative methods could be used to determine an inactive market?

  5. Are the factors listed in Step 1 that indicate that a market is not active appropriate? What other factors might be indicative?

  6. What costs do you expect to incur if the Board adopts this proposed FSP? How could the costs of applying the requirements be reduced without reducing the benefits?

  7. Any other questions or comments?

Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 •