Press Room: Tax Release

August 04, 2017

AICPA Rolls Out New Standard for Valuing Financial Instruments

Reflecting an overall trend in the financial arena towards greater accuracy and transparency, the American Institute of CPAs (AICPA) has released a new proposed framework for the valuation of financial instruments and their underlying components. The AICPA’s draft Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (CVFI) Credential (AICPA Framework) is responsive to global accounting standards that require fair value measurement, and also to the increasing complexity in the terms, conditions and structure of financial instruments.

The draft AICPA Framework also sets the stage for a new Certified in Valuation of Financial Instruments (CVFI) specialty credential to be offered through AICPA later this year for CPAs and non-CPA professionals who meet AICPA’s National Accreditation Committee’s requirements. Another new specialty credential was also announced by AICPA this year related to the valuation of intangible assets. Both credentials are targeted at AICPA’s goals of providing greater accuracy, consistency and transparency with respect to items that are often difficult to value.

Setting the Standard for Financial Instrument Valuation

Financial instruments, particularly mortgage-backed securities and other derivatives, have traditionally been challenging to value. This difficulty has created adverse effects in the financial markets and global economy. The AICPA Framework aspires to create a more accurate and transparent method for determining the value of financial instruments and relies on principles of independence, objectivity and consistency in introducing the level of documentation required to support a valuation. AICPA established the framework after carefully considering the current regulatory environment, industry best practices, governance procedures and controls, appropriate expertise, and the level of support required for measurements and disclosures in valuation deliverables and workpapers.

Specifically, the AICPA Framework for the valuation of financial instruments explains the character of financial instruments and describes how these have been valued previously in a consistent and transparent fashion; defines terms unique to financial instrument valuation; establishes clear and consistent documentation requirements; and provides references to standards and technical guidance that apply to the AICPA Framework.

Refining the Level of Documentation

While the AICPA Framework makes improvements to the guidance valuation professionals currently use in valuing financial instruments, the complementary Application of Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (CVFI) Credential (Application Draft) addresses areas where valuation guidance has been lacking or misapplied. The Application Draft identifies the core components used by financial valuation professionals and offers guidance on support for situations where professional judgment is required. In short, the Application Draft establishes how much work, the level of attention to detail and the documentation required when valuing a financial instrument.

The Takeaway

While financial instruments have become more complex, fair value requirements set by organizations like Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have expanded their reach to include financial instruments, share-based compensation and portfolio investments. It is becoming increasingly important to meet these professional, technical and ethical standards when performing valuations for financial reporting and other purposes. Adhering to a set of guiding principles helps to define these standards, and to determine how much work is necessary to provide the supportable and auditable measurements that serve as the basis for management’s preparation of financial statements for financial reporting and other purposes. The new draft AICPA Framework and accompanying Application Draft set forth the tools valuation professionals need to address the complexity and meet these standards in financial instrument valuation.

Valuation is an essential component in the global financial system and valuations must meet the highest standards to support lending and business decisions and avoid issues with regulatory bodies. It is critical that valuation specialists—whether internal or independent third parties—are poised to address the new AICPA guidelines and certification requirements. The valuation professionals at Andersen Tax will continue to meet available credential requirements, whether related to the valuation of financial instruments and intangibles, or other assets.