Fair Value Measurements and Active Markets At A Glance

On 2 April 2009, the Financial Accounting Standards Board (FASB) further clarified some issues related to FASB Statement No. 157, Fair Value Measurements. FASB Staff Position 157-4 ("FSP FAS 157-4"), Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, provides guidance on how to assess whether a market for a security is not active. In situations when the market is not active, the use of a valuation technique (e.g., present value of expected cash flows) to determine fair value is required. FSP FAS 157-4 provides a list of seven factors that "should not be considered all inclusive" for deciding whether a market is inactive. In this brief overview, we review these factors as well as others that have been used in a litigation setting to test market efficiency in ways that meet with court approval. Related cases cited include Cammer v. Bloom, In Re Polymedica Corp. Securities Litigation, and In Re Omnicom Securities Litigation.