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Increased MD&A Disclosures in Light of Recent Fair Value Accounting Guidance

posted by Akin Gump

What follows is from Akin Gump’s corporate practice. For more information, please contact—

Certain public companies may need to enhance their upcoming quarterly management’s discussion and analysis (MD&A) disclosure in light of recent Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) guidance regarding fair value accounting.

In March 2008, the SEC’s Division of Corporation Finance sent letters to certain public companies, in which it highlighted certain disclosure issues relating to fair value measurements.  In September 2008, the division sent a supplemental letter, reiterating the points set forth in the March letter and providing additional suggested disclosure items.  The letters generally invite public companies to evaluate whether or not they could provide, in their MD&A, clearer and more transparent disclosure relating to their fair value measurements. The March letters provide insight into the level of detail the SEC expects from companies that may be required to apply management judgments in using unobservable inputs to determine the fair value of assets and liabilities.  The September letters supplement the March letters and further invite public companies to disclose, among other things, the way in which credit risk is incorporated into the valuation of assets or liabilities; the impact of the lack of market liquidity on fair value determination of financial instruments; and the extent to which brokers or pricing services were used to assist in fair value determination.

  • The March letter is available here.
  • The September letter is available here.

The letters were sent to public companies that reported a significant amount of asset-backed securities, loans carried at fair value or the lower of cost or market and derivative assets and liabilities in their most recent 10-Ks, but they may be relevant to a broader range of public companies.

The letters should be read in connection with the following guidance-

  • On September 30, 2008, the SEC and FASB issued a joint press release on fair value accounting under SFAS 157. We summarized the interpretive guidance here.
  • On October 10, 2008, FASB issued FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FAS 157-3 clarifies the application of fair value measurements in a market that is not active, amplifies the guidance contained in the joint press release and provides a new illustration to aid practitioners. The new illustration contemplates a company’s reclassification of a financial asset from Level 2 to Level 3 within the fair value hierarchy, due to the company’s determination that significant adjustments using unobservable inputs reflecting management assumptions are required to determine the fair value of the asset.