Nonprofits looking for fair value measurements when it comes to assets and liabilities should become familiar with Statement of Financial Accounting Standards (SFAS) 157.
Issued in September 2006, SFAS 157 applies broadly to financial and non-financial assets and liabilities measured at fair value. It was designed to improve financial reporting by providing a common definition of fair value; establishing a framework for measuring faire value; expanding disclosures on use of fair value measurements, and creating a principles-based standard.
Kristofer Anderson, valuation fellow with the Financial Accounting Standards Board in Norwalk, Conn., and Nancy Shelmon, senior partner in not-for-profit and higher education services group at PriceWaterhouseCoopers, presented a primer on SFAS 157 during a session at the recent American Institute of Certified Public Accountants (AICPA) annual conference in Washington, D.C.
Anderson and Shelom offered six key concepts of SFAS 157:
- Orderly transaction: Hypothetical transaction at measurement date; not a forced sale.
- Market participants: Buyer or sellers in principal (or most advantageous) market for an asset or liability.
- Principal/most advantageous market: Market with greatest volume/level of activity in which an entity could sell asset/transfer liability.
- Highest and best use: Fair value should reflect highest and best use from a market participant perspective, regardless of management’s intended use.
- Fair value hierarchy: Fair value hierarchy prioritizes inputs used in valuation techniques. Techniques should maximize use of observable inputs/minimize use of unobservable inputs.
- Valuation techniques: Consistent with market approach, income approach or cost approach is required to be used.