Accounting for hard-to-value assets often involves assumptions about how a market would behave. But what if there were several reasonable assumptions to choose from, each leading to a different outcome?

Investors may soon find out. The Financial Accounting Standards Board has proposed a measure that would force companies to disclose a range of possible valuations for assets, depending on the assumptions used, in cases where an established, liquid market does not exist. In such situations, companies employ sophisticated models and management discretion to arrive at fair value.

In other words, the FASB wants companies to recognize that there is more than one way to skin a cat. But in that adage, the end result is always the same for the cat. In accounting, the outcome can change significantly depending on which methods are used to value an asset.

The FASB proposal would require companies to state whether using a different, but still reasonable assumption would significantly alter the fair-value measurement, and by how much, for a Level 3 asset. Level 3 assets are the ones that are most dependent on theoretical values, as opposed to the concrete transaction prices used to value Level 1 assets such as stocks, or the easily constructed models used to value Level 2 assets, such as certain types of derivatives.

"In a Level 3 world, you're talking about valuation inputs that are not observable in the general marketplace, and so providing some level of additional disclosure on how you came up with those arguably would help users of financial statements," said David Larsen, a managing director at Duff & Phelps, a financial advisory and investment banking firm that sometimes helps clients determine values for illiquid assets. "But it's kind of a theoretical exercise, and it's questionable how practical that is for use" by readers of financial statements.

The FASB is asking for feedback from financial statement preparers and users on the potential costs and benefits of the proposal, and the feasibility of applying it to financial statements starting in next year's first quarter. Public comments are due by Oct. 12.

Other key provisions in the FASB proposal would require more detailed information about sales, settlements and other factors that could affect valuation inputs, and additional disclosures when assets are transferred in or out of the Level 1 and Level 2 accounting categories.

But none of those measures are expected to be as controversial as the proposal on disclosing the effect of alternative Level 3 valuation inputs.

"It's hard enough for companies and their auditors to agree on a valuation approach," said Rick Martin, head of technical accounting at Pluris Valuation Advisors LLC, which uses proprietary methodology to help clients measure hard-to-value assets. Taking two different approaches, "you could get numbers that vary by 20% or 30%," he said.

Martin said his firm sometimes will provide clients with a range of potential values, if they want the flexibility for planning purposes. But usually Pluris arrives at a single number, based on specialized algorithms and the best judgment possible.

"It looks like this could change the face of our valuation reports so that we might give a range as well as a single number," Martin said. "This is going to increase everybody's workload."

And it also will most likely increase the tab for banks and other statement preparers that need their valuations determined or vetted by third parties. The FASB intends to spend the next several weeks weighing those costs against the benefits afforded to investors, who would get a fuller picture of the inputs used to generate valuations, and of the range of possible outcomes in a liquidation scenario.

"A number of constituents have recommended that the board improve disclosures about fair-value measurements," Robert Herz, the FASB chairman, said in a news release Monday announcing the issuance of the exposure draft. "The board believes that the increased transparency resulting from the proposed disclosures would benefit financial statement users."

For larger banks and financial services firms, the proposal is one more development to keep an eye on as the FASB tackles other, broader questions about fair value, such as whether — as has been discussed at board meetings about another possible proposal — it should be made the default accounting method for all kinds of financial assets.

"It just demonstrates that there continues to be nuances that will surface" as the topic of fair value gets addressed, Larsen said. "There are a lot of moving parts."

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