At long last, fair value under U.S. accounting rules means pretty much the same thing as it does under international accounting rules.

The Financial Accounting Standards Board and the International Accounting Standards Board have published their new standards for how companies would measure assets and liabilities at fair value when other accounting rule require them to do so. For U.S. GAAP, the new fair value measurement standard is contained in Accounting Standards Update No. 2011-04, amending the measurement and disclosure requirements found in Accounting Standards Codification Topic 820. For International Financial Reporting Standards, the new standard is known as IFRS 13, Fair Value Measurement.

FASB member Russ Golden said in a FASB podcast that the new standards represent a “significant step” toward converging U.S. GAAP and IFRS. “The primary objective was to align the definition of fair value, that is how to measure fair value, between U.S. GAAP and IFRS,” said Golden.

The new standards do not map out any new requirements under either accounting system for when a company would be required to follow fair value, FASB explains in a summary of the standard. Rather, they focus only on how fair value is measured and any disclosures companies would be required to make when measuring under fair value.

For U.S. GAAP, fair value measurement changed significantly when FASB issued Financial Accounting Statement No. 157: Fair Value Measurement in 2006. FASB's new ASU makes some incremental changes to fair value under GAAP, but IASB's new standard makes more substantial changes to fair value under IFRS. “For the first time, IFRS now has a common definition of fair value,” says David Larsen, managing director at financial advisory and investment banking firm Duff & Phelps. “The FASB's and IASB's definitions for fair value are identical.”

The adjustments to fair value under GAAP include some clarifications for how to measure fair value. For example, the concepts of “highest and best use” and “valuation premise” are applied only when measuring the fair value of nonfinancial assets, and instruments classified as equity must be measured from the perspective of a market participant. The new rules under GAAP also specify some disclosure requirements regarding unobservable inputs when measuring at “level 3” on the fair value hierarchy.

For public companies, the new guidance is effective for interim and annual periods beginning after Dec. 15, 2011, with early application prohibited.

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