Finding Value In Your Fair Value Disclosures
In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. As outlined in ASC 820 commonly referred to as “Exit Price”, total fair value adjustments consider credit, interest rate, and liquidity factors. This can be done through explicit inputs or implicitly through an assumed rate of return.
For SEC Filers, this function must be completed and disclosed quarterly. For all PBE (Non-SEC Filers), this must be reported annually.
A simple analogy to explain Fair Value Valuation (FVV) is how you value your home vs. how others may value it. For example, you’ve owned your home for many years and have updated, improved, and cared for it; you know this home inside and out. As such, you have an idea as to what you believe the value of the house is, all things considered. However, when the appraisal is completed, the number you had in mind is often different (e.g., lower) than what you expected. In theory, this is because the appraiser is providing an objective price based on fair value, that is what others would consider an accurate estimate for your home.
While this is a requirement as per accounting guidance, there are a host of inherent benefits gained when outsourcing to a subject matter expert. An independent Fair Value Valuation...
- Offers a sneak peek to what the CECL allowance may look like.
- Offers a reasonable estimate as to what an exit pricing-based valuation will conclude.
- Helps to support Mergers & Acquisitions on the sell and buy side of the transaction.
- Will frequently corroborate with interest rate risk and ALM trends.
- Will show the fair value of the portfolio and where additional risk may be present.
- Will present what loans would trade at in an open market.
- Will ensure proper calculation and disclosure reporting.
- Will serve investors to ascertain what expected losses on a book of loans may be.
Does your financial institution need added support? Let Valuant serve as an extension to your team to help with your Fair Value Valuation. Contact email@example.com today.