Issues
What are the classifications within the Fair Value Hierarchy for each transaction?
Analysis
Instrument #1 – CDO: According to FFC, its significant indicators included estimated
credit spreads and risk premium, and the implied rate of return as of the last date of
activity. Inputs used to arrive at the 23 % discount rate include quoted prices for similar
assets in inactive markets, market-corroborated inputs (agency reports and information
pertinent to the underlying assets), and credit spreads (ASC 815-10-35-48), which would
make this a Level 2 classification.
Instrument #2 – MBS: Pursuant to ASC 820-10-35-36-C, the presence of a bid/ask spread
requires fair value to be measured using the spread as a parameter of the fair value,
regardless of the classification of the input in the hierarchy. The most appropriate
measurement within the spread should be used, however.
Instrument #3 – ARS: ASC 820-10-35-53 requires a Level 3 designation if inputs are
unobservable. This is based in part on the presence/lack of a market for the asset. 35-48
allows the use of quoted prices for similar or identical assets in markets that are not active.
However, FFC used estimates that are not market based, as required by 820-10-55-11. This
classification would be Level 3.
Instrument #4 – Equity investment in a nonpublic company: There is no market for the
shares and the two similar companies’ shares are thinly traded, though in an observable
market. This makes it unlikely that the valuation could result in either Level 1 or Level 2
