Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations

APPENDIX L

Fair Value Measurement of Derivatives Contracts¹

IN SEPTEMBER 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, Fair Value Measurement, a sleepy title to an accounting standard that had (and still has) huge implications for companies with balance sheets largely composed of financial instruments.² According to this standard, if a company holds financial assets or liabilities that are not exchange traded, it would mark to market those instruments at the exit price—defined as, what would a willing buyer pay for this?

Before this standard, the fair value definition was determined between a willing buyer and a willing seller. In the derivatives world, the midpoint between the bid and ask spread would suffice, and it ...