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FAS 157-4

FAS 157-4. As noted earlier in Chapter 1, some critics of SFAS No.157 maintained that it caused or exacerbated the 2007-8 market crisis by forcing a downward spiral of valuations based on distressed institutions.

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FAS 157-4

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  1. FAS 157-4 • As noted earlier in Chapter 1, some critics of SFAS No.157 maintained that it caused or exacerbated the 2007-8 market crisis by forcing a downward spiral of valuations based on distressed institutions. • They also raised concerns that as a result of SFAS No. 157 and SFAS No. 115 financial institutions were forced to book losses on securities that may have value after the credit market crisis has passed. • However, proponents of the standard maintained that suspending or revising SFAS No. 157 would be a disservice to investors who deserve to know the current value of a reporting entity’s assets and liabilities.

  2. FAS 157-4 • Subsequently, after some contentious hearings in Congress, where the FASB’s standard setting authority was threatened by some of its members, the FASB amended SFAS No. 157 by issuing FSP FAS 157-4 (See FASB ASC 820-10-65). • FSP FAS 157-4provided guidance on how to determine when the volume and level of activity for an asset or liability has significantly decreased and identified the circumstances in which a transaction is not orderly.

  3. FAS 157-4 • After considering the significance and relevance of the factors indicating a transaction is not orderly, judgment should be used to determine whether the market is active, and if a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. • There were differing opinions on the expected impact of FSP FAS 157-4. CNBC financial markets commentator Lawrence Kudlow suggested that it would result in banks’ reporting improved profitability and that their balance sheets would reveal much more capital than was previously reported under the provisions of SFAS No. 157. • On the other hand, opponents of the amendment such as hedge fund manager James Chanos argued that it “… allows banks to substitute their own wishful-thinking judgments of value for market prices

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