Statement of Financial Accounting Standards No. 107 : Disclosures about Fair Value of Financial Instruments

Statement of
Financial Accounting
Standards No. 107

FAS107 Status Page
FAS107 Summary

Disclosures about Fair Value
of Financial Instruments



December 1991















Financial Accounting Standards Board
of the Financial Accounting Foundation

401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116

---

Copyright © 1991 by Financial Accounting Standards Board. All rights reserved. No
part of this publication may be reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the Financial Accounting Standards
Board.
Page 2

---

Statement of Financial Accounting Standards No. 107
Disclosures about Fair Value of Financial Instruments
December 1991
CONTENTS
Paragraph
Numbers
Introduction .................................................................................................................. 1–2
Standards of Financial Accounting and Reporting:
Definitions and Scope ............................................................................................ 3–9
Disclosures about Fair Value of Financial Instruments ..................................... 10–15
Effective Dates and Transition ........................................................................... 16–17
Appendix A: Examples of Procedures for Estimating Fair Value .......................... 18–29
Appendix B: Illustrations Applying the Disclosure Requirements
about Fair Value of Financial Instruments ............................................................. 30–33
Appendix C: Background Information and Basis for Conclusions ......................... 34–88
Page 3

---

FAS 107: Disclosures about Fair Value of Financial Instruments
FAS 107 Summary
This Statement extends existing fair value disclosure practices for some instruments by
requiring all entities to disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized in the statement of financial position, for which it is practicable to
estimate fair value. If estimating fair value is not practicable, this Statement requires disclosure
of descriptive information pertinent to estimating the value of a financial instrument.
Disclosures about fair value are not required for certain financial instruments listed in paragraph
8.
This Statement is effective for financial statements issued for fiscal years ending after
December 15, 1992, except for entities with less than $150 million in total assets in the current
statement of financial position. For those entities, the effective date is for fiscal years ending
after December 15, 1995.
INTRODUCTION
1. The FASB added a project on financial instruments and off-balance-sheet financing to its
agenda in May 1986. The project is expected to develop broad standards to aid in resolving
existing financial accounting and reporting issues and other issues likely to arise in the future
about various financial instruments and related transactions.
2. Because of the complexity of the issues about how financial instruments and transactions
should be recognized and measured, the Board decided that, initially, improved disclosure of
information about financial instruments is necessary. The first disclosure phase was completed
in March 1990 with the issuance of FASB Statement No. 105, Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk. The second phase, which resulted in this Statement, considers
disclosures about fair value of all financial instruments, both assets and liabilities recognized and
not recognized in the statement of financial position, except those listed in paragraph 8.
Copyright © 1991, Financial Accounting Standards Board Not for redistribution
Page 4

---

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING
Definitions and Scope
3. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or
a contract that both:
a. Imposes on one entity a contractual obligation 1 (1) to deliver cash or another financial
instrument 2 to a second entity or (2) to exchange other financial instruments on potentially
unfavorable terms with the second entity
b. Conveys to that second entity a contractual right 3 (1) to receive cash or another financial
instrument from the first entity or (2) to exchange other financial instruments on potentially
favorable terms with the first entity.
4. The definition in paragraph 3 is essentially the same as that in paragraph 6 of Statement
105, which is hereby amended to conform to this Statement. Appendix A of Statement 105
provides examples of instruments that are included in and excluded from the definition of a
financial instrument.
5. For purposes of this Statement, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing parties, other
than in a forced or liquidation sale. If a quoted market price is available for an instrument, the
fair value to be disclosed for that instrument is the product of the number of trading units of the
instrument times that market price.
6. Under the definition of fair value in paragraph 5, the quoted price for a single trading unit
in the most active market is the basis for determining market price and reporting fair value. This
is the case even if placing orders to sell all of an entity's holdings of an asset or to buy back all of
a liability might affect the price, or if a market's normal volume for one day might not be
sufficient to absorb the quantity held or owed by an entity.
7. This Statement requires disclosures about fair value for all financial instruments, whether
recognized or not recognized in the statement of financial position, except for those specifically
listed in paragraph 8. It applies to all entities. It does not change any requirements for
recognition, measurement, or classification of financial instruments in financial statements.
8. The disclosures about fair value prescribed in paragraphs 10-14 are not required for the
following:
Copyright © 1991, Financial Accounting Standards Board Not for redistribution
Page 5

---

a. Employers' and plans' obligations for pension benefits, other postretirement benefits
including health care and life insurance benefits, employee stock option and stock purchase
plans, and other forms of deferred compensation arrangements, as defined in FASB
Statements No. 35, Accounting and Reporting by Defined Benefit Pension Plans, No. 87,
Employers' Accounting for Pensions, No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, and No. 43, Accounting for Compensated Absences, and APB
Opinions No. 25, Accounting for Stock Issued to Employees, and No. 12, Omnibus
Opinion—1967
b. Substantively extinguished debt subject to the disclosure requirements of FASB Statement
No. 76, Extinguishment of Debt, and assets held in trust in connection with an in-substance
defeasance of that debt
c. Insurance contracts, other than financial guarantees and investment contracts, as discussed
in FASB Statements No. 60, Accounting and Reporting by Insurance Enterprises, and No.
97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments
d. Lease contracts as defined in FASB Statement No. 13, Accounting for Leases (a contingent
obligation arising out of a cancelled lease and a guarantee of a third-party lease obligation
are not lease contracts and are included in the scope of this Statement)
e. Warranty obligations and rights
f. Unconditional purchase obligations as defined in paragraph 6 of FASB Statement No. 47,
Disclosure of Long-Term Obligations
g. Investments accounted for under the equity method in accordance with the requirements of
APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock
h. Minority interests in consolidated subsidiaries
i. Equity investments in consolidated subsidiaries
j. Equity instruments issued by the entity and classified in stockholders' equity in the statement
of financial position.
9. Generally accepted accounting principles already require disclosure of or subsequent
measurement at fair value for many classes of financial instruments. Although the definitions or
the methods of estimation of fair value vary to some extent, and various terms such as market
value, current value, or mark-to-market are used, the amounts computed under those
requirements satisfy the requirements of this Statement and those requirements are not
superseded or modified by this Statement.
Disclosures about Fair Value of Financial Instruments
10. An entity shall disclose, either in the body of the financial statements or in the
accompanying notes, the fair value of financial instruments for which it is practicable to estimate
that value. An entity also shall disclose the method(s) and significant assumptions used to
estimate the fair value of financial instruments.
11. Quoted market prices, if available, are the best evidence of the fair value of financial
Copyright © 1991, Financial Accounting Standards Board Not for redistribution
Page 6

---

instruments. If quoted market prices are not available, management's best estimate of fair value
may be based on the quoted market price of a financial instrument with similar characteristics or
on valuation techniques (for example, the present value of estimated future cash flows using a
discount rate commensurate with the risks involved, option pricing models, or matrix pricing
models). Appendix A of this Statement contains examples of procedures for estimating fair
value.
12. In estimating the fair value of deposit liabilities, a financial entity shall not take into
account the value of its long-term relationships with depositors, commonly known as core
deposit intangibles, which are separate intangible assets, not financial instruments. For deposit
liabilities with no defined maturities, the fair value to be disclosed under this Statement is the
amount payable on demand at the reporting date. This Statement does not prohibit an entity
from disclosing separately the estimated fair value of any of its nonfinancial intangible and
tangible assets and nonfinancial liabilities.
13. For trade receivables and payables, no disclosure is required under this Statement when
the carrying amount approximates fair value.
14. If it is not practicable for an entity to estimate the fair value of a financial instrument or a
class of financial instruments, the following shall be disclosed:
a. Information pertinent to estimating the fair value of that financial instrument or class of
financial instruments, such as the carrying amount, effective interest rate, and maturity
b. The reasons why it is not practicable to estimate fair value.
15. In the context of this Statement, practicable means that an estimate of fair value can be
made without incurring excessive costs. It is a dynamic concept: what is practicable for one
entity might not be for another; what is not practicable in one year might be in another. For
example, it might not be practicable for an entity to estimate the fair value of a class of financial
instruments for which a quoted market price is not available because it has not yet obtained or
developed the valuation model necessary to make the estimate, and the cost of obtaining an
independent valuation appears excessive considering the materiality of the instruments to the
entity. Practicability, that is, cost considerations, also may affect the required precision of the
estimate; for example, while in many cases it might seem impracticable to estimate fair value on
an individual instrument basis, it may be practicable for a class of financial instruments in a
portfolio or on a portfolio basis. In those cases, the fair value of that class or of the portfolio
should be disclosed. Finally, it might be practicable for an entity to estimate the fair value only
of a subset of a class of financial instruments; the fair value of that subset should be disclosed.
Copyright © 1991, Financial Accounting Standards Board Not for redistribution
Page 7

---

Effective Dates and Transition
16. This Statement shall be effective for financial statements issued for fiscal years ending
after December 15, 1992, except for entities with less than $150 million in total assets in the
current statement of financial position. For those entities, the effective date shall be for financial
statements issued for fiscal years ending after December 15, 1995. Earlier application is
encouraged. In the initial year of application of this Statement, it need not be applied to
complete interim financial statements.
17. Disclosures required by paragraphs 10-14 that have not previously been reported need not
be included in financial statements that are being presented for comparative purposes for fiscal
years ending before the applicable effective date of this Statement for an entity. For all
subsequent fiscal years, the information required to be disclosed by this Statement shall be
included for each year for which a statement of financial position is presented for comparative
purposes.
The provisions of this Statement need
not be applied to immaterial items.
This Statement was adopted by the unanimous vote of the six members of the Financial
Accounting Standards Board:
Dennis R. Beresford, Chairman
Joseph V. Anania
Victor H. Brown
James J. Leisenring
A. Clarence Sampson
Robert J. Swieringa
Appendix A: EXAMPLES OF PROCEDURES FOR ESTIMATING FAIR
VALUE
18. This appendix provides examples of procedures for estimating the fair value of financial
instruments. The examples are illustrative and are not meant to portray all possible ways of
estimating the fair value of a financial instrument in order to comply with the provisions of this
Statement.
19. Fair value information is frequently based on information obtained from market sources.
In broad terms, there are four kinds of markets in which financial instruments can be bought,
Copyright © 1991, Financial Accounting Standards Board Not for redistribution
Page 8

---

sold, or originated; available information about prices differs by kind of market:
a. Exchange market. An exchange or "auction" market provides high visibility and order to
the trading of financial instruments. Typically, closing prices and volume levels are readily
available in an exchange market.
b. Dealer market. In a dealer market, dealers stand ready to trade—either buy or sell—for
their own account, thereby providing liquidity to the market. Typically, current bid and
asked prices are more readily available than information about closing prices and volume
levels. "Over-the-counter" markets are dealer markets.
c. Brokered market. In a brokered market, brokers attempt to match buyers with sellers but do
not stand ready to trade for their own account. The broker knows the prices bid and asked
by the respective parties, but each party is typically unaware of another party's price
requirements; prices of completed transactions are sometimes available.
d. Principal-to-principal market. Principal-to-principal transactions, both originations and
resales, are negotiated independently, with no intermediary, and little, if any, information is
typically released publicly.
Financial Instruments with Quoted Prices
20. As indicated in paragraph 11 of this Statement, quoted market prices, if available, are the
best evidence of fair value of financial instruments. Prices for financial instruments may be
quoted in several markets; generally, the price in the most active market will be the best
indicator of fair value.
21. In some cases, an entity's management may decide to provide further information about
the fair value of a financial instrument. For example, an entity may want to explain that although
the fair value of its long-term debt is less than the carrying amount, settlement at the reported fair
value may not be possible or may not be a prudent management decision for other reasons; or the
entity may want to state that potential taxes and other expenses that would be incurred in an
actual sale or settlement are not taken into consideration.
Financial Instruments with No Quoted Prices
22. For financial instruments that do not trade regularly, or that trade only in
principal-to-principal markets, an entity should provide its best estimate of fair value.
Judgments about the methods and assumptions to be used in various circumstances must be
made by those who prepare and attest to an entity's financial statements. The following
discussion provides some examples of how fair value might be estimated.
23. For some short-term financial instruments, the carrying amount in the financial statements
may approximate fair value because of the relatively short period of time between the origination
of the instruments and their expected realization. Likewise, for loans that reprice frequently at
market rates, the carrying amount may normally be close enough to fair value to satisfy these
Copyright © 1991, Financial Accounting Standards Board Not for redistribution
Page 9

---

disclosure requirements, provided there is no significant change in the credit risk of those loans.
24. Some financial instruments (for example, interest rate swaps and foreign currency
contracts) may be "custom-tailored" and, thus, may not have a quoted market price. In those
cases, an estimate of fair value might be based on the quoted market price of a similar financial
instrument, adjusted as appropriate for the effects of the tailoring. Alternatively, the estimate
might be based on the estimated current replacement cost of that instrument.
25. Other financial instruments that are commonly "custom-tailored" include various types of
options (for example, put and call options on stock, foreign currency, or interest rate contracts).
A variety of option pricing models that have been developed in recent years (such as the
Black-Scholes model and binomial models) are regularly used to value options. The use of those
pricing models to estimate fair value is appropriate under the requirements of this Statement.
26. For some predominantly financial entities, loans receivable may be the most significant
category of financial instruments. Market prices may be more readily available for some
categories of loans (such as residential mortgage loans) than for others. If no quoted market
price exists for a category of loans, an estimate of fair value may be based on (a) the market
prices of similar traded loans with similar credit ratings, interest rates, and maturity dates, (b)
current prices (interest rates) offered for similar loans in the entity's own lending activities, or (c)
valuations obtained from loan pricing services offered by various specialist firms or from other
sources.
27. An estimate of the fair value of a loan or group of loans may be based on the discounted
value of the future cash flows expected to be received from the loan or group of loans. The
selection of an appropriate current discount rate reflecting the relative risks involved requires
judgment, and several alternative rates and approaches are available to an entity. A single
discount rate could be used to estimate the fair value of a homogeneous category of loans; for
example, an entity might apply a single rate to each aggregated category of loans reported for
regulatory purposes. An entity could use a discount rate commensurate with the credit, interest
rate, and prepayment risks involved, which could be the rate at which the same loans would be
made under current conditions. An entity also could select a discount rate that reflects the
effects of interest rate changes and then make adjustments to reflect the effects of changes in
credit risk. Those adjustments could include (a) revising cash flow estimates for cash flows not
expected to be collected, (b) revising the discount rate to reflect any additional credit risk
associated with that group of loans, or some combination of (a) and (b).
28. A fair value for financial liabilities for which quoted market prices are not available can
generally be estimated using the same techniques used for estimating the value of financial
assets. For example, a loan payable to a bank could be valued at the discounted amount of future
cash flows using an entity's current incremental rate of borrowing for a similar liability;
alternatively, the discount rate could be the rate that an entity would have to pay to a
creditworthy third party to assume its obligation, with the creditor's legal consent (sometimes
Copyright © 1991, Financial Accounting Standards Board Not for redistribution
Page 10

---