MuniMarket Pulse Podcast Interviews Travis Quast of DerivActiv on Topic 820 and the New Definition of Fair Value

    MINNEAPOLIS, MN, April 08, 2010 /24-7PressRelease/ -- MuniMarket Pulse, has recently posted a podcast interview with Travis Quast, Vice President on "FASB Topic 820's Relevance for Entities that Use Derivatives." This podcast is an excellent primer for accounting, auditing and treasury officials on how to meet the revised Topic 820 (formerly FAS 157) requirements.

According to Quast, "Topic 820 sets a uniform definition of fair value and expands the disclosures about fair value measurements to be used in financial statements. It's relevant for entities that use derivatives since derivatives are required to be reported at fair value and it's also relevant for entities that issue debt and are required or choose to report that debt at fair value."

In December, 2009, the Financial Accounting Standards Board (FASB), changed the name of FAS 157 to Topic 820. The primary goal in developing the new Topic 820 codification is to simplify access to updates in one place. In addition, FASB wanted to make sure it included a research system that was up-to-date as these updates are released.

An area that is a challenge to determine fair value is derivatives. With the update to Topic 820, a three tier hierarchy of inputs is now used to determine the fair value of assets and liabilities for disclosure purposes. According to Quast, "Level One are inputs that are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The Level Two inputs are inputs other than quoted prices included within Level One that are observable where the asset or liability either directly or indirectly. And then finally Level Three inputs, Level Three inputs are unobservable inputs for the asset or liability."

For derivatives, it can be considered either an asset or a liability depending upon market conditions with non-performance risk affecting how it is to be valued. "At DerivActiv, non-performance risk applies to the party with the obligation or for derivatives who would have to pay to get out of the transaction. So in periods when the derivative is a liability, we assess the entities credit to determine an appropriate spread to add to the discount curve. In periods when the derivative is an asset, we look to the counterparty's credit," stated Quast.

As regulators and the Congress pushed for more transparency in reporting, companies like DerivActiv can provide the independent valuations that companies seek in determining fair value of more complex instruments like derivatives.

This GASB 53 valuation involves more than simple accounting. There are four methods that are used to do a GASB 53 valuation to determine if it is an effective hedge: consistent critical terms, synthetic instrument method, dollar offset, and regression analysis. According to Towne, "One nice feature of GASB is that for each calculation you're allowed to continue to run the tests until one of the tests passes. So for example, an entity can fail three of the four tests but as long as one of the tests is positive, or they pass, that derivative can be declared an effective hedge."

For more information about MuniMarket Pulse or its sister podcasts CapitalMarket Pulse and MMA MuniCast, please visit http://podcast.derivactiv.com/. A complete audio interview and transcript can also be found at: http://podcast.derivactiv.com/

About MuniMarket Pulse
Since its inception in 2008, MuniMarket Pulse has become the most popular municipal bond industry podcast. On a regular basis, it invites leading opinion leaders from the ranks of economists, investment bankers, issuers, bond lawyers, portfolio managers, rating agencies and academics to comment on what is happening in the municipal bond industry. These 12-18 minutes interviews are insightful and timely looks into what leaders in the industry are doing and seeing. Listeners can download a podcast here: http://podcast.derivactiv.com/

About DerivActiv, LLC
DerivActiv, LLC is the primary sponsor of MuniMarket Pulse and is a leading provider of web-based derivative valuation and other financial monitoring services, serving financial institutions, corporations, non-profits, and municipalities. DerivActiv provides daily valuations of financial products, including equity, currency and fixed income securities derivatives as well as a number of alternative investments. DerivActiv is used for FAS 133 and 161, Topic 820 (FAS 157) and GASB 53 compliance in financial statements, board and finance committee reports, and as an internal risk management tool. For more information call 1-866-200-9012, or visit the company's website at: www.DerivActiv.com.

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