8DECEMBER - FEBRUARYCFO TECH OUTLOOKIN MY OPINIONBy Michael McCoy, CFO, B. Riley SecuritiesIn 2006 the Financial Accounting Standards Board (FASB) established a framework for fair value measurements and disclosures, which is now known as Accounting Standards Codification Topic (ASC) 820. The framework outlined in ASC 820 applies whenever the phrase "fair value" is referenced in a codification topic. ASC 820 defines fair value as:"`the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date'.Prior to the FASB's pronouncement in 2006, assets and liabilities were reported at an entry price commonly referred to as its cost. Fair value reporting altered this concept by requiring the utilization of market-based measurements founded on the notion of an exit price. An exit price requirement in financial reporting gave rise to a hierarchy of inputs when determining the fair value of an asset or a liability:Level 1, Level 2, and Level 3. · Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date· Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly· Level 3- Unobservable inputs for the asset or liabilityThough not exhaustive, the following ASC topics contain some of the more common references to "fair value" within the FASB's codification, and as a result, the framework outlined in ASC 820 must be adhered to when addressing these topics:· ASC 718, Compensation ­ Stock Compensation· ASC 805, Business Combinations· ASC 852, Reorganizations· ASC 350, Intangibles ­ Goodwill and Other· ASC 470, Debt· ASC 815, Derivatives and Hedging· ASC 321, Investments ­ Equity Securities· ASC 946, Financial Services ­ Investment CompaniesValuing securities under ASC 820can be a time-consuming process when done internally, and may result in additional audit fees associated with the review and documentation of fair value conclusions to ensure internal bias is not dictating the outcome when valuation best practices are not followed. There are many third-party valuation firms with the requisite experience and expertise, including B. Riley Advisory Services, that can make the process of fair value measurement simple and efficient. If you choose to perform the fair value analysis internally, some unexpected challenges with level 1 and level 2 inputs can manifest. For instance, a security may be priced on an exchange, but it may be thinly traded such that the quotes you observe, are not representative of the price that you would receive if sold on the exchange. Owning five million shares of a security that trades two hundred shares a day on an exchange may not be able to be liquidated in a timely fashion at a price close to the current quote. In cases such as this, you may need to think about applying a liquidity discount or using another valuation method as if the security were a level 3 asset, rather than a level 1 or Level 2 asset.Level 3 assets and liabilities can present several challenges when determining their fair value given their unobservable WHAT TO CONSIDER WHEN DECIDING TO USE A THIRD-PARTY VALUATION FIRM?
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