The Financial Accounting Standards Board’s Fair Value Mandate: Are Level 3 Assets and Liabilities Being Measured Accurately?

Robert J. Cochran


This study asks the following question with respect to level 3 fair value assets and liabilities: are level 3 fair value assets and liabilities being measured accurately?  An argument is made that since level 3 markets do not exist (as defined in ASC 820), it is not possible to determine a level 3 value.  Data is examined, both pre- and post- SFAS No. 157 with respect to a specific level 3 asset that can be found on the balance sheet of most publically traded financial institutions, mortgage loan servicing rights.  The data suggests that the FASB’s attempt to clarify fair value had no effect on the levels of capitalization of mortgage loan servicing rights.  An additional argument is made that the language in ASC 820 undermines the requirement that level 3 fair values reflect a “market” value rather than an “investment” value.

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