© Grant Thornton LLP. All rights reserved. FASB Statement 157: Fair Value Issues Impacting Financial Services Webcast Wednesday, February 27 th, 2008 The session begins at 12:30 pm EST To receive 1 hour of CPE, you must individually participate by: Remaining logged in for the entire session Responding to all polling questions For technical support, please contact LearnLive at: Phone –

2 © Grant Thornton Welcome… Mark Scoles Financial Institutions Accounting Principles Partner Matt Luttinger Financial Services Assurance Partner

3 © Grant Thornton Recent developments regarding fair value measurements Identify some of the issues clients will face implementing FASB Statement 157 Provide industry expertise to your clients on issues relevant to their business Objectives Brief Overview of FASB Statement 157 Common FASB Statement 157 Questions Agenda By the end of this session …

4 © Grant Thornton Overview of key concepts Exit price vs. entry price Orderly transaction assumes pre-measurement date exposure to market Market participants vs. "willing parties" Emphasizes market-based measurement, not an entity specific measurement Price in principal (or most advantageous) market from seller's perspective

5 © Grant Thornton Group check 1 Is application of FAS 157 at the implementation date primarily prospective or retrospective (adjust beginning retained earnings)? Prospective Retrospective

6 © Grant Thornton Debrief Is application of FASB Statement 157 at the implementation date primarily prospective or retrospective (adjust beginning retained earnings)? Prospective, except for very limited financial instruments such as those traded in an active market where an entity applied a block discount

7 © Grant Thornton Recent developments regarding fair value measurements Identify some of the issues clients will face implementing FASB Statement 157 Provide industry expertise to your clients on issues relevant to their business Objectives Brief Overview of FASB Statement 157 Common FASB Statement 157 Questions Agenda By the end of this session …

8 © Grant Thornton Common questions Where do you start? Q

9 © Grant Thornton Common questions Where do you start? Identify assets and liabilities measured at fair value Identify assets and liabilities disclosed at fair value Determine principal (or most advantageous) market Prioritize use of market based inputs Determine hierarchy of inputs Classify within the hierarchy Q A

10 © Grant Thornton Group check 2 In valuing securities does FASB Statement 157 require use of the bid price or the ask price by retail customers? Bid price Ask price

11 © Grant Thornton Debrief In valuing securities does FASB Statement 157 require use of the bid price or the ask price by retail customers? Bid price

12 © Grant Thornton Common questions If a third party pricing service provides classification within the hierarchy what needs to be done? Q

13 © Grant Thornton Common questions If a third party pricing service provides classification within the hierarchy what needs to be done? Client is responsible for disclosures in their financial statements Client needs to determine processes and controls of pricing service PCAOB Staff Audit Practice Alert 2 Q A

14 © Grant Thornton Group check 3 What is the primary purpose of the fair value hierarchy? To provide disclosures that indicate the reliability of fair value measurements To prioritize the use of observable inputs over unobservable inputs in fair value measurements

15 © Grant Thornton Debrief What is the primary purpose of the fair value hierarchy? To prioritize the use of observable inputs over unobservable inputs in fair value measurements Don't get caught up in thinking that the hierarchy only relates to disclosures

16 © Grant Thornton Common questions What investment securities would be Level 1? Q

17 © Grant Thornton Common questions What investment securities would be Level 1? Identical security traded on an active market –Exchange traded securities Stocks, bonds, futures or options traded on an exchange –Actively traded bonds Active market has sufficient frequency and volume of transactions to provide pricing Q A

18 © Grant Thornton Group check 4 If an entity owns a number of securities that are traded on an active market, but uses matrix pricing as a practical expedient in measuring fair value, what level would the securities be within the hierarchy? Level 1 Level 2

19 © Grant Thornton Debrief If an entity owns a number of securities that are traded on an active market, but uses matrix pricing as a practical expedient in measuring fair value, what level would the securities be within the hierarchy? Level 2

20 © Grant Thornton Common questions What are some examples of investment securities that would be Level 2? Q

21 © Grant Thornton Common questions What are some examples of investment securities that would be Level 2? Restricted stock of a public company Debt securities traded on an active market, but matrix pricing is used Debt securities traded on a market that is not active (few transactions and/or prices not current) Similar debt securities traded on a market that is not active Many derivatives – inputs would be Level 1 Q A

22 © Grant Thornton Common questions (cont) What are some examples of investment securities that would be Level 2? Restricted stock of a public company subject to Level 2 –Example: Common stock of a public company that is restricted under Rule 144 Restricted stock of a public company subject to Level 1 –Example: Common stock of a public company that is subject to an underwriter's lock-up agreement Q A

23 © Grant Thornton Common questions (cont) What are some examples of investment securities that would be Level 2? Similar investment securities are actively traded –Example: No active market for US Treasury security with 37 months to maturity, but active market for those with 36 and 39 months to maturity Similar investment securities are traded on a market that is not active –Subjective judgment as to similarity of security and level of activity of similar security could render Level 3 Q A

24 © Grant Thornton Common questions What are some examples of investment securities that would be Level 3? Q

25 © Grant Thornton Common questions What are some examples of investment securities that would be Level 3? Somewhat similar investment securities are traded on a market that is not active –Amount of adjustment because only somewhat similar would render Level 3 –Amount of adjustment because the market is inactive would render Level 3 No similar investment securities are traded Q A

26 © Grant Thornton Group check 5 In the absence of a quoted price of an entity’s own debt and quoted prices for similar debt, can the entity look to the amount they would require from a market participant in order to issue that liability at the measurement date? Yes No

27 © Grant Thornton Debrief In the absence of a quoted price of an entity’s own debt and quoted prices for similar debt, can the entity look to the amount they would require from a market participant in order to issue that liability at the measurement date? Yes

28 © Grant Thornton Common questions What about mortgage loans? Q

29 © Grant Thornton Common questions What about mortgage loans? Determine principal market to sell the loans Whole loan market or securitization market? Q A Q

30 © Grant Thornton Common questions What about mortgage loans? Determine principal market to sell the loans Whole loan market or securitization market? Whole loan market Adjust securitization market only if there is no whole loan market Q A Q A

31 © Grant Thornton Common questions What about an investment in a portfolio company? Q

32 © Grant Thornton Common questions What about an investment in a portfolio company? Determine principal market to sell the investment Consider whether a secondary market exists If no market is identified consider the inputs that a hypothetical market participant would use to price the investment –Market approach – multiple of earnings, EBITDA –Income approach – discounted cash flows, option- pricing model Q A

33 © Grant Thornton Common questions What about limited partner investments in funds? Q

34 © Grant Thornton Common questions What about limited partner investments in funds? Determine principal market to sell the investment Consider whether a secondary market exists If no market is identified consider the inputs that a hypothetical market participant would use to price the limited partner investment –Are restrictions an attribute of the security or the holder? –Consider transfer restrictions and redemption provisions Q A

35 © Grant Thornton Common questions What about a limited partner investment in a private equity fund? Q

36 © Grant Thornton Common questions What about a limited partner investment in a private equity fund? Is there a secondary market, even if not at all active? Information about transactions in a secondary market would be considered What can be said about transactions in secondary markets? –Are transaction prices at NAV, at a discount to NAV, or at a premium to NAV? –What factors about the limited partnership investment influence the amount of premium or discount from NAV? Q A

37 © Grant Thornton Common questions What about a limited partner investment in a hedge fund? Q

38 © Grant Thornton Common questions What about a limited partner investment in a hedge fund? Is there a secondary market, even if not at all active? –Information about transactions in a secondary market would be considered If no market is identified consider the inputs that a hypothetical market participant would use to price the limited partner investment –Are redemptions subject to a lock-up period? Is it an attribute of the security or the holder? –Are redemptions and subscriptions at NAV? How frequent? Q A

39 © Grant Thornton Group check 6 Does the fair value measurements of a liability reflect the reporting entity's own credit risk? Yes No

40 © Grant Thornton Debrief Does the fair value measurements of a liability reflect the reporting entity's own credit risk? Yes

41 © Grant Thornton Thank you for your participation! An archive of this session can be viewed via LearnLive An online survey will be ed to you soon A copy of these materials will be available on financialservices