January 16, 2012
Fair Valuation of Illiquid Assets
This article originally appeared in the Winter January 2012 Release of RiskJournal magazine.
Companies have traditionally reported their financial positions at historical costs; however, current business models and requirements for timely, current and relevant information have played significant roles in effecting changes in financial reporting. Unlike in the years past, corporations now report certain financial and non-financial assets and liabilities at fair market value. Fair value measurements are important components of risk management, economic capital calculations and provide key inputs needed by regulators to carry out their supervisory responsibilities. Fair valuation practices also have accounting implications and influence the business decisions of a wide range of stakeholders.
The recent financial crisis and the protracted recession that followed however, are sad reminders that downward swings in macro-economic variables can make hitherto liquid assets difficult to sell. Equally worrisome is the fact that market prices are hard to determine for illiquid and hard-to-value assets. In this paper, we introduce the concept of fair value accounting and briefly explain the accounting guidance on the topic. We then discuss some methodologies for fair valuing illiquid assets and their limitations. Finally, we discuss strategies that companies can use to enhance their fair valuation practices.
To read the full article, click HERE
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