The valuation of financial instruments, whether for financial reporting or other purposes, is frequently characterized by complexity: complex accounting and regulatory issues, compounded by complex valuation methods and models. This often results in uncertainty for the finance professionals involved in valuing, reporting on, and auditing these instruments, as well as inconsistency in the level of effort in, and documentation and results of, the measurement process.
To address these and other issues, the American Institute of CPAs (AICPA) recently issued two exposure drafts. (A&M professionals are heavily involved in the valuation of financial instruments, and have participated in the AICPA task force and contributed to the creation of these documents.)
The first is entitled “Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (“CVFI”) Credential” (the Framework). As its title suggests, this document has two broad purposes:
· To provide guidance to finance professionals, with the intent to reduce uncertainties and inconsistencies in the valuation process;
· To establish a framework for a new credential for valuation professionals, the CVFI.
The second, closely related document, “Application of the Disclosure Framework for the Valuation of Financial Instruments and the Certified in Valuation of Financial Instruments (“CVFI”) Credential,” focuses on more specific issues, such as the use of broker quotes and pricing services as well as the valuation of specific types of financial instruments, including:
· Debt and equity securities
· Hybrid securities (with embedded derivatives) and standalone derivatives
· Structured products/asset-backed securities
As the associated link discusses, the AICPA is seeking comments from CPAs and other finance professionals; the comment period ends September 27, 2017.
We at A&M also encourage all professionals who are involved in the valuation of financial instruments and the associated audit process to review and submit comments regarding these drafts.
New York (July 6, 2017) – The American Institute of CPAs is seeking comments on a new Framework to guide CPAs and financial professionals on the valuation of financial instruments and their underlying components. The Framework will bring clarity, consistency and transparency to the valuation of these instruments. Historically, financial instruments, such as mortgage-backed securities, credit default swaps, complex bonds and other derivatives, have been difficult to value, which has the potential to adversely impact markets and the global economy.