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FAS 157 Level 3 Asset Valuation - Consulting Services

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FAS157 Level 2 & 3 Asset Valuations

FAS 157 requires that assets and liabilities be valued at their fair values on the measurement date. The focus is on the determination of an exit price, i.e. the price at which an asset will be sold or a liability paid for to be transferred in an orderly transaction between market participants.

The standard defines a hierarchy under which all assets and liabilities are to be classified and based on which are to be valued either using the Market, Income or Cost approaches.

Level 1 assets and liabilities are those for which an active market is available and quoted prices are directly observable.

Level 2 assets and liabilities do not themselves have observable prices but are based on assets and liabilities for which such prices are directly (quoted prices) or indirectly (yields, etc) available.

Level 3 assets and liabilities have unobservable prices as they are very illiquid. Their fair value will usually be based on assumptions and management judgement.

Level 1 assets and liabilities are valued using the Market Approach which is based on market observable prices (marked to market).

Level 2 assets and liabilities are valued using either the Market Approach or the Income approach. The later approach may apply numerical methods to project future cash flows and then discount them using a derived interest rate term structure to determine a model price or use closed from pricing models (e.g. Black Scholes option pricing model), etc (mark to model).

Level 3 assets and liabilities are valued using either the Income approach or the Cost approach. The latter approach assesses the cost of acquiring a substitute instrument with the same utility.

Level 2 & 3 assets for which Income Approach is feasible may be valued using the Black Derman Toy (BDT) interest rate model to determine discounted cash flows.

Consulting services for valuation of Level 2 & Level 3 assets for FAS 157 assets include upto 20 hours of consulting support services that are generally utilized for quarter end valuation disclosures. We have been delivering timely quarterly FAS 157 disclosures for US and North American clients for the last 18 months.

Consulting services include valuation services for a given note on a given counterparty name as of one given valuation date.

For USD denominated Level 2& 3 assets and liabilities, such as a subordinated floating rate note for which there is no observable market but where future cash flows are indexed to the US Treasury yield curve or US LIBOR rate FAS 157 valuation services include:

  1. Bootstrapping the zero curve from US Treasury yield curve rates for each date in a given look back period
  2. Determining the zero yield curve and related annualized volatilities term structure for input into the BDT interest rate model
  3. Constructing the Black Derman Toy interest rate model and calibrating it to observable prices (i.e. yields) of Treasury notes and bonds
  4. Constructing the bond valuation model based on terms and conditions of the given Level 2/3 instruments using the output from the BDT model to determine future cash flow streams and discounted cash flows and prices.
  5. Submitting a FAS 157 valuation report presenting the results, assumptions and methodology.

To place an order for FAS 157 valuation services please drop us a note with the details of the asset in question to confirm availability and timelines before placing the order.

Depending on the nature of the asset in question, the scope of the assignment and our prior commitments the delivery for valuation services ranges between 2 - 4 weeks.

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