Crane Data was asked recently how companies are treating money market mutual funds given the new FASB 157 "fair value" accounting standards. Both investors and accountants seem to agree that "Tier 2" is the appropriate categorization. We, however, wonder why money market mutual funds would not be Tier 1.
The Financial Accounting Standards Board's FAS 157 "defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements." The rule establishes a hierarchy, breaking measurements of fair value into "level 1, 2, or 3" inputs, depending upon how liquid prices and markets are.
Price Waterhouse Coopers' Tony Evangelista tells us, "[B]ecause they are at amortized cost and not quoted market the consensus is that these would be level 2". He recently presented at an "Issues in Securities Valuations" conference on "FASB 157 and Fair Value". One of the questions posed was, "Will money market fund financial statements now have to report their portfolio holdings at FAS 157 'fair value' rather than amortized cost?"
While we're no accountant, we would argue that money market funds daily publication of net asset values should quality under the "Level 1" requirement of "quoted prices for identical assets and liabilities in active markets". Most money market instruments are being classified as "Level 2" inputs too, though their short maturities, high quality, and other features may call for reconsideration as "Level 1". Look for more discussion on valuation issues in the May issue of our Money Fund Intelligence.
