• Added to Agenda at September 2005 Meeting
• Discussed at November 2005 IASB Meeting
• Discussed at December 2005 IASB Meeting
• Discussed at February 2006 IASB Meeting
• Discussed at May 2006 IASB Meeting
• Discussed at June 2006 IASB Meeting
• FASB issues SFAS 157 Fair Value Measurements on 15 September 2006
• Discussed at September 2006 IASB Meeting
• Discussion Paper issued 30 November 2006. Original comment deadline 2 April 2007. Extended to 4 May 2007.
  Click for More Information
• Discussed at January 2007 IASB Meeting
• Discussed at September 2007 IASB Meeting
• Discussed at October 2007 IASB Meeting
• Discussed at November 2007 IASB Meeting
• Discussed at December 2007 IASB Meeting
• Discussed at March 2008 IASB Meeting
• Discussed at April 2008 IASB Meeting
• Discussed at May 2008 IASB Meeting
• June 2008 IASB forms Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets
• Discussed at June 2008 IASB Meeting
• Discussed at July 2008 IASB Meeting
• Discussed at September 2008 IASB Meeting
• Discussed at Special October 2008 IASB Meeting
• Discussed at October 2008 IASB Meeting
• On 31 October 2008 the IASB published the Report of its Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets
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• Discussed at November 2008 IASB Meeting
• Discussed at December 2008 IASB Meeting
• Discussed at January 2009 IASB Meeting
• Discussed at February 2009 IASB Meeting
• Discussed at March 2009 IASB Meeting
• Discussed at March 2009 IASB-FASB Joint Meeting
• Discussed at April 2009 IASB Meeting
• 28 May 2009 IASB publishes Exposure Draft Fair Value Measurement
  Comment deadline 28 September 2009. Click for Details.
• Discussed at October 2009 IASB Meeting
• Discussed at October 2009 Joint IASB-FASB Meeting
• 16 December 2009 IASB requests examples and case studies from emerging and transition economies by 31 January 2010.
  Click for Details.
• Discussed at January 2010 Joint IASB-FASB Meeting
• Discussed at February 2010 Joint IASB-FASB Meeting
• Discussed at February 2010 IASB Meeting
• Discussed at Special 3 March 2010 Joint IASB-FASB Meeting
• Discussed at Special 3 March 2010 Joint IASB-FASB Meeting
• Discussed at March 2010 IASB Meeting
• Discussed at March 2010 Joint IASB-FASB Meeting
• 29 June 2010 IASB publishes an Exposure Draft Measurement Uncertainty Analysis Disclosure for Fair Value Measurements.
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• 28 July 2010 IASB publishes a questionnaire for financial statement users on its Exposure Draft Measurement Uncertainty Analysis Disclosure for Fair Value Measurements.
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• 19 August 2010 IASB releases a staff draft of a forthcoming IFRS on fair value measurement
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• Discussed at September 2010 IASB Meeting (jump to notes below)
• Discussed at October 2010 IASB Meeting (jump to notes below)
• Discussed at November 2010 IASB Meeting (jump to notes below)
• Discussed at December 2010 IASB Meeting (jump to notes below)
• Discussed at March 2011 IASB Meeting (jump to notes below)
• 12 May 2011 – Final Standard published
• Discussed at October 2011 IASB Meeting (jump to notes below)

Timetable

• Click for IASB Project Timetable

IASB Project Insights

• A quick overview of this project is available on our IASB Project Insights page

The objective of this project is to provide guidance to entities on how they should measure the fair value of assets and liabilities when required by other Standards. This project will not change when fair value measurement is required by IFRSs.

Discussion at the September 2005 IASB Meeting

At the September 2005 meeting, the IASB added the Fair Value Measurements topic to its agenda. The aim of the project is to provide guidance to entities on how they should measure the fair value of assets and liabilities when required by other Standards. This project will not change when fair value measurement is required by IFRSs.

Discussion at the November 2005 IASB Meeting

The staff conducted an education session on the FASB's working draft of a final Statement on Fair Value Measurements. In addition, the staff reviewed the scope of FASB's Fair Value Measurements project as it relates to IFRSs and the issues and questions to be addressed in preparing an IASB Exposure Draft and related Invitation to Comment.

No decisions were made.

At a previous meeting, the Board decided to issue the FASB's final Statement on Fair Value Measurements as an IASB Exposure Draft with an Invitation to Comment. The appendices in the FASB document dealing with consequential amendments and references to US GAAP pronouncements will be replaced with proposed consequential amendments and references to IFRSs. The Board further decided that there should be limited changes to the FASB's document. Instead, the Invitation to Comment should discuss any areas where the Board disagrees with the FASB's conclusions along with the basis for the disagreement. The staff expects these areas to be identified during Board deliberations during the December 2005 and January 2006 meetings whilst aiming toward issuance of the IASB Exposure Draft by April 2006.

Discussion at the December 2005 IASB Meeting

Definition of fair value

The staff presented a paper identifying and comparing the differences between the definitions of fair value in the FASB's draft Fair Value Measurements (FVM) standard to the definition in IFRS. This comparison was meant to assist the Board in concluding whether or not to replace the current IFRS definition of fair value with the FVM standard definition. The staff's overall recommendation was to replace the current IFRS definition of fair value with the definition of fair value in the FVM standard. However, the staff made it clear that it was not stating that this definition be applied to all instances where fair value is currently used in IFRS. This scoping issue is the subject for a separate discussion that would span several Board meetings.

The Board discussed in detail, the various components of the current and proposed definition of fair value in the context of the staff's analysis. Although the Board was in overall agreement to proceed with the proposed definition in the FVM standard, the following points were noted:

• Certain Board members wanted to see the various issues discussed pulled together and presented in some logical manner that would clarify how fair value is approached. As noted below, the Board was concerned that the proposed definition would cause confusion where this was not the intention.
• Some Board members were concerned about changing 'amount' to 'price' as this would change the meaning of fair value. This concern seemed to emanate around the treatment of transaction costs.
• The explicit discussion of 'exit values' in the draft guidance was seen by some as problematic. Illustrations were provided indicating that at the time of the transaction; the agreed price constitutes both an 'entry' and 'exit' value for that specific asset or liability. Others indicated that it was their belief that the current fair value definition already encompasses an exit value notion.
• Following on from this issue, the notion of 'marketplace participants' is believed by some Board members to be a less superior phrase to the widely accepted 'knowledgeable, willing parties' notion which is more readily understood to apply to a transaction between two parties without the necessity of the existence of a 'market'. The FASB's rationale for introducing the 'marketplace participants' notion as a means of excluding to the greatest extent possible, any entity specific factors when determining fair value, was noted.

The Board will be asked to debate the meaning of the 'reference market' notion at subsequent meetings.

Scope of the Fair Value Measurements Project

The Board considered a paper setting out on a Standard by Standard basis, which individual standards should be scoped in or out of this project. That paper was organised into three sections:

• Standards that require fair value measurement
• Standards that require fair value measurement by reference to another standard
• Standards that do not require fair value measurement

Within each of these sections, the staff made various proposals for the Board's consideration. Overall, the staff recommended not modifying as part of this project existing reliability clauses and practicability exceptions. The staff concluded that such modifications could result in significant changes to current practice and that any changes should be considered on a standard-by-standard basis separately from this project.

Standards that require fair value measurement

The following standards were noted as requiring assets or liabilities to be measured at fair value in certain circumstances:

• (a) IAS 11 - Construction Contracts
• (b) IAS 16 - Property, Plant and Equipment
• (c) IAS 17 - Leases
• (d) IAS 18 - Revenue
• (e) IAS 19 - Employee Benefits
• (f) IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance
• (g) IAS 26 - Accounting and Reporting by Retirement Benefit Plans
• (h) IAS 33 - Earnings per Share
• (i) IAS 36 - Impairment of Assets
• (j) IAS 38 - Intangible Assets
• (k) IAS 39 - Financial Instruments: Recognition and Measurement
• (l) IAS 40 - Investment Property
• (m) IAS 41 - Agriculture
• (n) IFRS 1 - First-time Adoption of International Financial Reporting Standards
• (o) IFRS 2 - Share-based Payment
• (p) IFRS 3 - Business Combinations and the June 2005 Exposure Draft
• (q) IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations

The Board agreed with the staff recommendations (as set out in the observer notes) for each standard except in the following instances:

• IAS 18 - the staff concluded that in the instances where an entity received services for dissimilar goods or services, the measurement objective is not consistent with the draft FVM standard and therefore IAS 18 should be excluded from the scope. The Board noted this issue but indicated a preference to include IAS 18 within the scope of the FVM Standard as this is a minor part of the fair value requirements in IAS 18. The confusion caused in the market if the Board were to exclude IAS 18 from the project would be undesirable.
• IFRS 2 - due to the grant date model, the Board noted the issue that may arise where an entity measures a share-based payment transaction by reference to the equity instruments granted, not the goods or services received. However, the Board decided to include IFRS 2 within the scope of the FVM Standard on the same basis as for IAS 18.

Standards that require fair value measurement by reference to another standard

• (a) IAS 2 - Inventory
• (b) IAS 21 - The Effects of Changes in Foreign Exchange Rates
• (c) IAS 27 - Consolidated and Separate Financial Statements
• (d) IAS 28 - Investment in Associates
• (e) IAS 31 - Interests in Joint Ventures
• (f) IAS 32 - Financial Instruments: Presentation and Disclosure
• (g) IFRS 4 - Insurance Contracts
• (h) IFRS 7 - Financial Instruments

The Board agreed with the staff recommendation that discussion of the above is not necessary as these standards do not contain any additional requirements to measure assets or liabilities at fair value.

Standards that do not require fair value measurement

• (a) IAS 1 - Presentation of Financial Statements
• (b) IAS 7 - Cash Flow Statements
• (c) IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors
• (d) IAS 10 - Events After the Balance Sheet Date
• (e) IAS 12 - Income Taxes
• (f) IAS 14 - Segment Reporting
• (g) IAS 23 - Borrowing Costs
• (h) IAS 24 - Related Party Disclosures
• (i) IAS 29 - Financial Reporting in Hyperinflationary Economies
• (j) IAS 30 - Disclosures in the Financial Statements of Banks and Similar Financial Institutions
• (k) IAS 34 - Interim Financial Reporting
• (l) IAS 37 - Provisions, Contingent Liabilities and Contingent Assets
• (m) IFRS 6 - Exploration for and Evaluations of Mineral Reserves

With regard to IAS 37, the Board concurred with the staff that the measurement principles therein are consistent with fair value principles in many respects and went further to state that when the amendments to IAS 37 are finalised, it would add explicit reference to fair value to clarify this issue.

Discussion at the February 2006 IASB Meeting

This was a brief session to inform the Board about recent tentative decisions of the FASB on its fair value measurement standard. No observer notes were provided for this session.

The FASB discussed the fair value hierarchy at its last meeting. FASB's exposure draft had proposed a five-level fair value hierarchy. The FASB has come to the conclusion that it is difficult to distinguish levels two to four in the hierarchy. They have therefore reduced the hierarchy to three levels. The FASB has not made other changes to its proposed fair value guidance.

The staff said that discussion will continue in March.

Discussion at the May 2006 IASB Meeting

Principles of the fair value measurement project

The following principles were put to the Board as those forming the foundation of the fair value measurement project:

• The objective of a fair value measurement is to determine the price that would be received for an asset or paid to transfer a liability in a transaction between market participants at the measurement date.
• The definition of fair value and its measurement objective should be consistent for all fair value measurements required by IFRS.
• A fair value measurement should reflect market views of the attributes of the asset or liability being measured and should not include views of the reporting entity that differ from market expectations.
• A fair value measurement should consider the utility of the asset or liability being measured. As such, the fair value measurement should consider the location and the condition of the asset or liability at its measurement date.

The Board concurred with the staff that the above principles form the foundation of the fair value measurement project.

Revised definition of fair value

In the staff's view, the FASB's revised definition of fair value is substantively similar to the one tentatively approved by the IASB in December 2005. Based on that, the IASB agreed that the revised definition is consistent with the measurement objective.

However, some Board members expressed concern about the change to a 'price' rather than 'amount'. In addition, the revised definition is based on an exit price notion that does not consider prices that exist other than the exit price. As a consequence, other Board members noted that the current definition will require measurement based on a hypothetical market that, for some types of assets and liabilities, cannot be calibrated with reality and in most cases will result in day 1 gains or losses, which constituents are uncomfortable with.

Revised fair value hierarchy

The draft fair value measurement statement indicates that valuation techniques used to measure fair value shall maximise the use of observable inputs and minimise the use of unobservable inputs. The hierarchy prioritises the inputs to valuation techniques used to measure fair value based on their observable or unobservable nature.

The revised three-level hierarchy is summarised as follows:

• Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets the reporting entity has the ability to access at the measurement date.
• Level 2 inputs are observable inputs other than quoted prices for identical assets or liabilities in active markets at the measurement date.
• Level 3 inputs are unobservable inputs, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable data. However, the fair value measurement objective remains the same. Therefore, unobservable inputs should be adjusted for entity information that is inconsistent with market expectations. Unobservable inputs should also consider the risk premium a market participant (buyer) would demand to assume the inherent uncertainty in the unobservable input.

IFRSs currently does not have a single hierarchy that applies to all fair value measures. Instead individual standards indicate preferences for certain inputs and measures of fair value over others, but this guidance is not consistent among all IFRSs.

The Board agreed with the staff's conclusion that the revised hierarchy in the draft fair value measurement statement is consistent with the principles discussed above and that the hierarchy in the draft fair value measurement statement represents an improvement over the disparate and inconsistent guidance currently in IFRSs.

Unit of account and fair value measurements

The Board agreed that it is not appropriate or practical to provide detailed guidance on the unit of account within the fair value measurement project. Determining the appropriate unit of account is a critical element of accounting and is not always consistent from one asset or liability to another or from one type of transaction to another.

Determination of which market

The Board agreed with the FASB's conclusion to adopt the 'principal market' view. While this will result in a change from the 'most advantageous' view currently in IFRS, the 'principal market' view more accurately reflects the fair value measurement objective and provides a more representative measure of fair value by giving preference to highly liquid markets over less liquid markets.

Transaction price presumption

At the December 2005 meeting, the IASB tentatively agreed the fair value measurement objective was an exit price. The December discussion highlighted the conceptual difference between transaction price (what an entity would pay to buy an asset or receive to assume a liability) and an exit price objective (what an entity would receive to sell an asset or pay to transfer a liability). The staff concluded that an entity cannot presume an entry price to be equal to an exit price without considering factors specific to the transaction and the asset or liability. As a consequence, the staff plans to bring a separate discussion of day 1 gains or losses to the Board at a future meeting.

The Board shared the concerns of the staff that if a transaction price were presumed to be fair value on initial measurement, entities might not sufficiently consider the differences between an entry transaction price and an exit fair value. As such, IFRSs should require an entity to consider factors specific to the transaction and the asset or liability in assessing if the transaction price represents fair value.

Fair value within the bid-ask spread

Entities often transact somewhere between the bid and ask pricing points, particularly if the entity is a market maker or an influential investor. However, application of the rule in IAS 39 results in consistency across entities without consideration of entity specific factors that may influence where within the bid-ask spread the entity is likely to transact. Further, the rule creates a bright-line in quoted markets, thus limiting the use of judgement and subjectivity in the fair value measurement.

The Board agreed to add a discussion to the invitation to comment that communicates agreement with the principle in the draft fair value measurement statement. The discussion would state that it is not appropriate to use a consistently applied pricing convention as a practical expedient to fair value. This recommendation would result in both a change to existing IFRSs as well as a departure from the FASB's draft fair value measurement statement.

Transaction and transportation costs in measuring fair value

The definitions of transaction type costs vary in IFRSs, though such costs are consistently excluded from fair value measurements. Currently, IFRSs are not clear (with the exception of IAS 41) whether transportation costs are an attribute of the asset or liability, and as such should be included in the fair value measurement.

The draft fair value measurement statement defines transaction costs as the incremental direct costs to transact in the principal or most advantageous market. Incremental direct costs are costs that result directly from, and are essential to, a transaction involving an asset (or liability). Incremental direct costs are costs that would not be incurred by the entity if the decision to sell or dispose of the asset (or transfer the liability) was not made.

In the draft fair value measurement statement, the FASB concluded the fair value measurement of the asset or liability shall include only those costs that are an attribute of the asset or liability. The FASB concluded transaction costs are an attribute of the transaction, not an attribute of the asset or liability. Therefore the fair value measurement of the asset or liability shall not include transaction costs.

The staff agreed with the conclusions in the draft FVM statement regarding transportation and transaction costs. However, the staff concluded that the discussion of what types of costs are attributes of the asset or liability could be more robust as it is difficult to decipher justification for different treatment of transaction costs and transportation costs in the current discussion in the draft FVM statement. As such, the staff recommended, and the Board agreed that the invitation to comment should include a question on the sufficiency of the discussion of costs that are attributes of an asset or liability, such as transportation costs.

Discussion at the June 2006 IASB Meeting

The Board continued its discussion of Fair Value Measurements (FVM), and reviewed the current project plan and due process steps. In addition, the Board had a preliminary discussion on accounting for 'day-one gains'.

Project Plan and Due Process

The Board was briefly updated on the developments from the last FASB meeting at which the Fair Value Measurements project was discussed.

The Fair Value Measurement project was added to the IASB's agenda in September 2005. At that time, the Board decided that they would expose the FASB's final FVM standard as an IASB exposure draft, not modifying it other than change US GAAP references to the appropriate IFRS references.

Since then, the staff has become aware of concerns raised by IASB constituents. These include:

• As the FVM project could change how fair value is measured, some think that proceeding directly to an IASB exposure draft based on the final FASB document could potentially short-cut the IASB's due process requirements.
• As the FASB document applies a different concept of fair value from that of older IFRSs, constituents have problems with the conceptual reasons for changing to an 'exit price objective' of fair value, particularly when an entity have no intention to sell an asset.
• As fair value is being increasingly used, fundamental questions regarding relevance and reliability need to be debated prior to completion of the project.

Due to these concerns, the staff presented the Board with two alternative solutions:

• The first alternative was a modified plan which still would include issuing the FASB document as an exposure draft, in addition to conducting field visits and round-table discussions to get input from constituents.
• The second alternative was to issue the FASB document as a discussion paper, deliberate this, and then issue an exposure draft. This would allow the Board more time and more flexibility to address the concerns raised by constituents and hopefully a better standard, even if this route will be a longer one.

The Board expressed sympathy for the concerns raised by the constituents, and the majority of Board members agreed that this would require a shift from the current project plan to alternative two which is to issue the FASB document as a discussion paper. However some Board members thought that the second alternative should be avoided as this would delay the issuing of a final standard too long. Alternative two will result in a final IFRS in late 2008 or early 2009.

Some Board members thought that it would be crucial to communicate with constituents that this move away from the current project plan and towards the discussion paper route would take more time, but that it would be done to ensure the interest of constituents.

The Board voted in favour of alternative two, resulting in a discussion paper being issued based on the FASB document. The Board noted that a final plan could not be put together before the final FASB document is issued. As long as the FASB have not issued their final document including, e.g. their application guidance, the IASB will not have a public document accessible for issuing as the IASB's discussion paper.

Day-one Gains and Losses

Fair value, as defined in the FASB's document is an exit price. As a result of the Board's tentative approval of the exit price definition of fair value, in circumstances where an asset or a liability is required to be measured at fair value on initial recognition, a day-one gain or loss may be recorded.

The staff believes the existing guidance in IAS 39 is inconsistent with the exit price notion as tentatively approved by the Board, and therefore needs amendment. The Board was asked whether they would consider:

• To make only consequential amendments to conform IAS 39 with the guidance in the Fair Value Measurement statement and to leave the current guidance on recognition of day-one gains and losses in IAS 39.
• Making consequential amendments and change the existing guidance in IAS 39.

September 2006: FASB issues fair value measurement standard

On 15 September 2006, the US Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements. FAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. It applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. FAS 157 does not expand the use of fair value in any new circumstances. Click for:

• FASB News Release (PDF 19k)
• Special issue of the Heads Up Newsletter Summarising FAS 157 (PDF 218k)

The IASB has on its agenda a project on fair value measurement. It is one of the convergence projects with the FASB. This means that the IASB and the FASB plan to have similar, if not identical, definitions and guidance relating to fair value measurements. The IASB plans to issue a discussion paper in the fourth quarter of 2006 that will:

• indicate the IASB's preliminary views on the provisions of FAS 157;
• identify differences between FAS 157 and fair value measurement guidance in existing IFRSs; and
• invite comments on the provisions of FAS 157 and on the IASB's preliminary views about those provisions.

Discussion at the September 2006 IASB Meeting

The staff noted that FAS 157 Fair Value Measurements was issued on 15 September 2006 (see IAS Plus News Story of 19 September 2006). The IASB staff can now complete the preparation of an IASB Discussion Paper on Fair Value Measurements, which will comprise:

• FAS 157;
• excerpts of existing FVM guidance in IFRSs; and
• an Invitation to Comment that expresses the Board's preliminary views and requests constituent input on certain matters

Non-performance risk

The Board noted that IFRSs currently do not discuss non-performance risk in relation to the fair value of liabilities. IAS 39 requires the fair value of a financial liability to reflect the credit quality of the instrument. Reflecting credit quality in the fair value measurement of a financial liability effectively causes the fair value measurement to reflect the risk that the obligation will not be fulfilled. FAS 157 extends this principle to the fair value measurement of both financial and non-financial liabilities.

It was noted that non-financial liabilities include both credit risk (which related to the financial component) and non-performance risk (which related to the activity). After some discussion, the Board agreed to include a preliminary view in the invitation to comment agreeing with the concept that the fair value of a liability should reflect the non-performance risk relating to that liability (in addition to credit risk).

Issues in the Invitation to Comment

Entry and exit prices

The Board agreed that the Invitation to Comment should discuss the concepts of entry and exit prices without stating a preliminary view. The Discussion Paper will address two views without stating a preference. The discussion note that the notion of a price established between 'a willing buyer and a willing seller' matters only when one is shifting markets. In many IASB standards, 'fair value' is used to mean an exit price; in a few (such as IFRS 3, IAS 39, and IAS 41), the phrase is used to mean an entry price. Board members found using the same phrase to communicate two different measurement objectives confusing. Board members noted that they might need to reassess the measurement objective in IFRS 3, IAS 39, and IAS 41 should they adopt the approach in FAS 157 paragraph 17(d), which allows the use of a price other than the transaction price to represent fair value if the transaction occurred in a market other than the principal or most advantageous market.

The staff proposed wording 'on the fly', which they will bring back to the Board.

Principal or most advantageous market

IAS 39 requires an entity to use the most advantageous active market in measuring the fair value of a financial asset or liability when multiple markets exist, whereas IAS 41 Agriculture requires an entity to use the most relevant market. By comparison, the FAS 157 requires an entity use the principal market for the asset or liability. In the absence of a principal market for the asset or liability, the entity uses the most advantageous market. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability. The most advantageous market is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximises the amount that would be received for the asset or minimises the amount that would be paid to transfer the liability, considering transaction costs in the respective market(s). In either case, the principal (or most advantageous) market (and thus, market participants) should be considered from the perspective of the reporting entity, thereby allowing for differences between and among entities with different activities.

The Board reconfirmed their view taken in May 2006, namely:

A question will be asked on this topic in the Invitation to Comment.

Calling 'level 3' measurements 'fair value'

The Board noted that FAS 157 establishes a three level hierarchy for categorising and prioritising inputs for fair value measurements. Level 3 of the hierarchy is 'unobservable inputs' for the asset or liability (that is, they are not observable in a market). Unobservable inputs are used to measure fair value only to the extent that observable inputs are not available. These inputs reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). When Level 3 measures are used, FAS 157 prescribes additional disclosures.

The Board agreed that the disclosure requirements in FAS 157 highlight sufficiently the nature of the fair value measurement so that users of financial statements can develop a view of the potential uncertainty of that measurement. Therefore, it would not be necessary to include in the Discussion Paper a discussion of whether measurements comprised of significant Level 3 inputs should be labelled something other than fair value.

Block premiums and discounts

The Board agreed to address the issue of whether block premiums and discounts should be discussed in the Discussion Paper. Such premiums or discounts may arise when a larger-than-normal quantity of an asset or liability is being sold in a market. Board members noted that the requirement to use the 'Price x Quantity' formula is limited to Level 1 measures, and that this opens the treatment of block purchases and sales to abuse, since it could be argued that these should be measured using Level 2 or 3 inputs.

Board members also agreed that there is a need to distinguish illiquidity caused by the size of the block from that caused by the thinness of the market.

The staff will draft a question on this issue for inclusion in the Invitation to Comment.

Day 1 gains and losses

The Board noted that an exit price measurement objective could have significant implications on certain fair value measurements in IFRSs, particularly in IAS 39 on initial recognition. They reasoned that it is important to highlight situations where the guidance in FAS 157 differs significantly from current IFRSs. Further, convergence on the day-one gain matter is a high-profile issue to many large financial institutions and is an area where the staff expects many comments. The Invitation to Comment will contain a discussion and question on the transaction price presumption.

US GAAP-specific material contained in FAS 157

The Board agreed that, in the interests of timely publication, they would not alter FAS 157 in any way for the purposes of the Discussion Paper and Invitation to Comment, and that it would therefore have US GAAP-specific material. The Invitation to Comment would note that any Exposure Draft would be IFRS-specific.

Next steps

On a poll, 12 Board members voted to issue the Invitation to Comment and Preliminary Views, and one Board member abstained, pending resolution of the discussion of entry and exit prices.

The Discussion Paper is scheduled for publication in late 2006.

November 2006: Discussion Paper Issued

On 30 November 2006, the IASB published for public comment a Discussion Paper on Fair Value Measurements. The Discussion Paper sets out the IASB's preliminary views on how to measure fair values when fair value measurement is already prescribed under existing IFRSs. It does not propose any extensions of the use of fair values. The DP is built around FASB's recently issued SFAS 157 Fair Value Measurements. SFAS 157 establishes a single definition of fair value together with a framework for measuring fair value for financial reports prepared in accordance with US GAAP. Click for IASB Press Release (PDF 53k). The Discussion Paper will be available without charge on the IASB's website starting 11 December 2006. Comment deadline is 2 April 2007 [extended to] 4 May 2007. The IASB plans to publish an Exposure Draft in 2008.

Discussion at the January 2007 IASB Meeting

Extension of the comment deadline on the Discussion Paper

The staff reported that several constituents had asked the Board to extend the deadline for comments on the Board's Discussion Paper Fair Value Measurements. The constituents highlighted that the comment period coincided with the financial reporting season for those with calendar year ends and asked for more time so that an important and complex document could receive the attention it deserved.

The Board agreed unanimously to extend the deadline for comments to Friday 4 May 2007.

Discussion at the September 2007 IASB Meeting

The staff informed the Board that the FASB had formed a Valuation Resource Group (VRG). The purpose of the VRG is to provide the FASB with input for clarifying the guidance related to the application of the principles in SFAS 157 Fair Value Measurement when fair value is required or permitted under US GAAP. The VRG is drawn from accounting firms, valuation advisers, preparers, users, regulators and standard setters. The first meeting of the VRG is planned for 1 October 2007. Issues raised at that meeting will be brought to the October FASB meeting.

The IASB staff noted that any decisions made by the FASB are likely to have implications for valuations performed under IFRSs because constituents may apply the US guidance in the absence of IFRS guidance. The staff will keep the Board informed of the project.

No decisions were made.

Discussion at the October 2007 IASB Meeting

The staff presented their analysis of comments received on the IASB's discussion paper on fair value measurement. The discussion paper was issued as a 'wrap around' of FASB Statement of Financial Accounting Standards No. 157. The complete analysis is available in the Observer Notes section on the IASB's website (Agenda Paper 2C).

The staff asked the Board to do the following:

• consider the main points raised in the comment letters (136 received);
• affirm the project objectives; and
• approve the staff's preliminary project plan.

The main points raised in the comment letter by constituents included (please refer to Agenda Paper 2C for a detailed analysis):

• General agreement to that the fair value measurement project is needed;
• Concerns about how to provide guidance on determining fair value when it is not clear in which circumstances;
• The interaction between the fair value measurement project and the conceptual framework project (in particular, phase C which covers measurement);
• The view that in many situations an entry price notion is superior to an exit price notion;
• Fair value is more akin to a heading for a 'family' of measurement bases and accordingly terms should be used which are more descriptive (that is, more clearly articulate what the Board's intended measurement basis in that situation is); and
• With regard to measuring liabilities at fair value, the respondents raised concerns about the application of a transfer notion instead of a settlement notion and asked for guidance as to the meaning of non-performance risk.

Regarding the interaction between this project and the Conceptual Framework project, some Board members noted that the outcome of this project is only one of a number of possible measurement bases that will be in the revised Framework. Consequently, the impact on the Framework project is only minor. The staff confirmed that it consults with staff of the Framework project on a regular basis.

Some Board members observed that the notion 'entry price' should be as well defined as 'exit price'. Staff noted that this is part of the proposed project plan.

No decisions were made.

The Board was also asked to agree on the following project objectives:

• Development of principles and measurement guidance for an exit price measurement basis; and
• Completion of a standard-by-standard review of fair value measurements permitted or required in IFRSs to asses whether each standard's measurement basis is an exit price. If the Board does not agree, will it agree to decide on a case-by-case basis whether or not to develop measurement guidance for those other measurement bases.

The Board agreed to both objectives. On the second bullet point, it was clarified that this analysis will not lead to the development of additional guidance for those measurement bases that will be identified as not fitting in the definition of fair value for the purpose of the fair value measurement project. However, the Board noted that a working definition for fair value must first be agreed on before the analysis can be done.

Additional Discussion at the October 2007 IASB Meeting

This was an education session and accordingly no decisions were made.

The session was led by representatives of the valuation profession to illustrate practical valuation concepts and issues (the complete presentation [Agenda Paper 11A] can be obtained from the Observer Notes section on the IASB Website). The focus was on the valuation methodologies used in the measurement of tangible and intangible non-financial assets.

The background of the session was the Discussion Paper on Fair Value Measurements that was issued by the IASB in November 2006.

The main topics of the presentation were:

• Value concepts in IFRSs
• The purchase price allocation process
• Overview of valuation methodologies (that is cost approach, market approach, income approach)

The presenters' main focus was the valuation requirements resulting from a business combination and what are the factors valuation professionals consider in such transactions.

Although this was an education session only the Board showed particular interest in certain topics of the presentation:

• If and how appraisers exclude entity-specific factors from their valuation models
• Customer-related intangible assets (separation and assumptions used in valuation)
• Consideration of tax in the valuation process
• Separation and valuation of contingent liabilities

On the last point, the representatives of the valuation profession admitted that they have difficulties identifying all contingent liabilities and how to value them based on a transfer notion (that is what would an entity have to pay to pass on the risk – in contrast to a settlement notion).

Discussion at the November 2007 IASB Meeting

The staff began the morning session by informing the Board about the latest developments in relation to the implementation of SFAS 157 Fair Value Measurements which is the basis for the Discussion Paper published by the IASB. The developments included the deferral of the effective date of SFAS 157 for non-recurring measurements (for example in business combinations). It was noted that these developments would have no impact on the IASB project on fair value measurements.

The staff presented its preliminary definitions of 'current exit price' and 'current entry price' for assets and liabilities that will be used in the standard-by-standard review. The Board and the staff reiterated that they do not want to change the measurement within the standards. The goal of the analysis carried out by the staff would be to find out which measurement attribute the Board and its predecessor (the IASC) had in mind when using the term 'fair value'.

The preliminary working definitions of the staff are as follows:

• Assets:
  • Current entry price: The price that would be paid to buy an asset in an orderly transaction between market participants at the measurement date.
  • Current exit price: The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
• Liabilities:
  • Current entry price: The price that would be received to incur a liability in an orderly transaction between market participants at the measurement date.
  • Current exit price I (transfer notion): The price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
  • Current exit price II (settlement notion): The price that would be paid to settle a liability in an orderly transaction at the measurement date.

The Board had a short discussion on certain aspects of fair value measurement and was informed by staff that some of the issues will be discussed at the December Board meeting.

The Board agreed on the preliminary definitions of current entry price and current exit price for assets and liabilities and that staff should not consider other measurement bases for the purpose of the standard-by-standard review.

Discussion at the December 2007 IASB Meeting

The purpose of this session was to continue the deliberations on the issues in the Fair Value Measurements Discussion Paper and to present an analysis of the 'market participants view' under SFAS 157 compared to the 'knowledgeable, willing parties in an arm's length transaction' in IFRSs.

After staff review of the two approaches, the Board was asked if it agrees with the staff analysis on the market participants view. Some Board members raised concerns about the possible differences of the notion 'market participants view' in comparison to a 'knowledgeable, willing party'. The staff noted that they see no differences in content. One Board member asked why a change in terminology would then be necessary as constituents are familiar with the notion of a 'knowledgeable, willing party'. Other Board members said that the document must make clear that the terms are interchangeable.

After this the Board discussed what a market is and whether, for certain transactions, one can assume a market exists if, for example, actually only two parties are acting. As no definition of 'market' was provided, the Board asked the staff to develop an analysis. As all further discussions depend on the outcome of that analysis the Board agreed to postpone discussion of the other items in the agenda paper to a later Board meeting. No further decisions were made.

Discussion at the March 2008 IASB Meeting

Whether the fair value measurement project should have a working group or other type of specialist advisory group

The Board has on its agenda a project on fair value measurement that aims to provide guidance on how to determine fair value if a standard requires or allows fair value measurement.

The staff informed the Board that it worked under the assumption that a working group would not be required as there is an overlap with existing working groups that could be involved as required. On further reflection, the staff has concluded that this approach does not work as it proved difficult to involve the other working groups without a clear mandate.

The staff also believes that it would not be necessary to set up a formal working group but instead to establish a 'technical advisory group' (TAG) that could work on a informal, as-needed basis. Information exchange could be done in person or via electronic communication. However, the IASB Due Process Handbook requires the Board's consent for not establishing a working group for a major project.

One Board member raised the question whether the Valuation Resource Group of the FASB could be involved. The staff answered that this group would interpret and implement SFAS 157, the US standard providing fair value measurement guidance. The Board agreed not to establish a working group, but to form a technical advisory group instead.

Discussion at the April 2008 IASB Meeting

Representatives of the International Valuation Standards Committee (IVSC) presented an education session to the Board on four valuation issues. No decisions were made at this education session.

The four issues presented by the IVSC delegation were:

• What is the difference between 'price' and 'value'?
• Is there a valuation difference between an entry and an exit price?
• Highest and best use
• What makes the market?

What is the difference between 'price' and 'value'?

The representatives made clear that in their view 'price' is the amount agreed on in a transaction while 'value' is the outcome of a valuation. In practice, most valuations assume a transaction but, depending on the purpose of the valuation exercise, a value could also be entity-specific. It was made clear that in many cases price and value would result in (nearly) the same number. It was also noted that the IVSC standards use three types of valuation with two of them taking a market view and one of them being an entity-specific approach – which could possibly result in different amounts for the same valuation object.

Some Board members were confused by the terminology used by the presenters and it was agreed that this could be the cause for much confusion within the constituency and that any communication by the Board must clearly articulate what they mean. One Board member noted that 'value' must always be accompanied by an adjective as people understand different things in different situations. Other Board members were confused about where the difference in amounts results from. The IVSC representatives explained that there are many reasons (for example, synergies).

Is there a valuation difference between an entry and an exit price?

The delegation moved then on to the second question. The representatives explained that the profession holds the view that for non-entity-specific values entry and exit price for the same market should be the same. Often a perceived difference results because entry price is determined on a different market than the exist price. The Board had a lengthy discussion on that issue with a view on the guidance in US GAAP.

Highest and best use

The highest and best use is terminology from the US GAAP standard SFAS 157 Fair Value Measurements that assumes an entity would also use its asset the best way it can. It was highlighted that the SFAS 157 definition is very similar to the IVSC one. It was noted that this is not a different type or basis of value and that it is inherent in any basis that requires the estimate of an open market transaction. Some Board members expressed their doubt that this always could be assumed for liabilities.

What makes the market?

The representatives explained that there is an opinion that fair values could only be made where active markets exist. They made it clear that in their view this is not the case. The valuation profession assumes as long as there is enough evidence to establish a valuation it is assumed that a market exist even if the degree of reliability is lower than that for a market with frequent transactions. They would not necessarily link value and liquidity. The Board showed interest in the valuation for some of the instruments where markets have contracted recently and had some debate on that point with the representatives.

The Chairman closed the session by asking the IVSC representatives if they have experts on valuing liabilities that could participate in the planned IASB technical experts group. The representatives confirmed that such experts would be available to participate in the group.

Discussion at the May 2008 IASB Meeting

Discussion of the Meeting of the IASB Expert Advisory Panel on Valuing Financial Instruments in Illiquid Markets

The issue was added to the agenda with short notice and no observer notes were available.

The staff informed the Board that the Financial Stability Forum has established an expert advisory panel to assist the IASB in enhancing its guidance on valuing financial instruments when markets are no longer active.

In addition the staff noted the following:

• The first meeting will take place on 13 June 2008.
• At the first meeting the panel will decide on the form of guidance issued, e.g. best practice guidance or input for amendment of standards.
• The duration of the panel is expected to be two or three months.

June 2008: IASB Forms an Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets

On 5 June 2008, the IASB formed an expert advisory panel on valuation of financial instruments in inactive markets, in response to Recommendations made by the Financial Stability Forum (FSF). The new panel will assist the IASB in:

• reviewing best practices in the area of valuation techniques, and
• formulating any necessary additional practice guidance on valuation methods for financial instruments and related disclosures when markets are no longer active.

Discussion at the June 2008 IASB Meeting

Fair Value Measurements – Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets: Meeting update

The staff presented a summary of the first meeting held on 13 June 2008 of the Expert Advisory Panel.

The staff noted that the purpose of that meeting was to identify the issues arising on valuing financial instruments when markets are no longer active and that possible solutions will be discussed at future meetings.

In addition the staff noted the following:

• No decision was made regarding the form of guidance the panel will provide, e.g. best practice guidance or input for amendment of standards.
• Subsets of the issues identified will be discussed by a subgroup of panel members at the next meetings in July (measurement issues) and August (disclosure issues). Meeting dates have not yet been confirmed. The meetings will be held in private sessions with public updates being provided at the July and September Board meetings.
• The last meeting is expected to be in September 2008.

Updates on the activities of the panel are also available on the IASB's website.

Discussion of the Fair Value Measurements Project

Following the joint IASB-FASB meeting in April 2008 the Board discussed the way forward in this project. At the joint meeting the IASB decided not to re-debate all aspects of the Fair Value Measurement discussion paper (the DP), i.e. not to fully re-debate FAS 157 Fair Value Measurements on which the DP is based. Instead the Board agreed to redeliberate certain areas of confusion or areas in which FAS 157 had proved difficult to apply.

The staff presented an analysis of issues raised in the DP and provided recommendations on whether a particular issue should be redeliberated or not. Technical aspects of fair value measurement were not discussed at this meeting. The Board agreed to discuss further the topics listed below. These topics will be redeliberated mainly because the Board did not express a preliminary view in the DP and/or comments received on the DP indicated a need for further discussion:

The exit price measurement objective

The Board agreed to consider both entry and exit notions of fair value measurement based on the standard-by-standard review currently performed by the staff.

The market participant view

In general the Board reaffirmed its preliminary view in the DP. However, the staff was asked to improve the wording in order to address concerns raised by constituents. In particular, it should be clarified how to apply the market participant view in cases where no market exists (for example, liabilities that cannot be transferred).

Transfer vs. settlement of a liability

The Board agreed to a staff analysis that this is an important cross-cutting issue for other Board projects, particularly, amendments to IAS 37.

Transaction price and fair value at initial: Day one gains and losses

This issue is considered to be interrelated with the entry vs. exit price issue.

The principal (or most advantageous) market

The Board reaffirmed the preliminary view in principal but noted that questions about the practical application needs to be resolved.

Valuation of liabilities: Non-performance risk

There seemed to be a broad consensus to reaffirm the preliminary view that non-performance risks needs to be considered when measuring the fair value. However, the majority of Board noted that this is an important cross-cutting and that there are unresolved issues with regard to presentation (of the counter-entry) and disaggregation.

Highest and best use

The staff intends to address comprehensively all issues relating to 'different markets'.

Bid-ask spreads: Applicability of mid-market pricing to all levels of the hierarchy?

The staff noted that the Board still needs to reach a preliminary and that the question of which transaction costs are to be included will be addressed in this context.

Issues not discussed

• Disclosures: Redeliberation in light of current market environment
• Application guidance: Redeliberation in light of current market environment

Topics not to be redeliberated

The Board decided not to redeliberate the following five topics:

1. Attributes (characteristics) specific to an asset or liability

2. Whether transaction costs are separate from fair value

The staff intends to discuss any outstanding issues in connection with bid-ask spreads. (this sentence relates to bullet 2)

3. Three-level fair value hierarchy

Accepted as described in the Discussion Paper without any further deliberations

4. The prohibition of blockage factor adjustments at all levels of the hierarchy

The Board had a thorough debate on this issue. One Board member emphasised that the majority of constituents disagreed with the preliminary view expressed in the DP. Finally, there seemed to be a consensus not to redeliberate the issue but to deal with the concerns in the feedback statement. The staff was asked to review the comments received to ensure that the Board 'has not missed anything' in reaching the preliminary view.

5. The unit of account for financial assets and liabilities

The staff noted that the topics not to be discussed by the Board are broadly consistent with the principles in IFRSs and that they can therefore be addressed in the exposure draft in a way that considers the concerns raised by constituents and is consistent with FAS 157.

Discussion at the July 2008 IASB Meeting – Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets: Meeting update

The project manager on the fair value measurement project gave an oral update on the activities of the expert advisory panel. The purpose of this panel is to assist the IASB in reviewing best practices in the area of valuation techniques as well as formulating any necessary additional guidance on valuation methods for financial instruments and related disclosures when markets are no longer active.

The panel or subgroup met three times. At the kick-off meeting the panel identified specific issues that panel members felt must be addressed (such as forced transactions, the use of pricing services, illiquid markets).

It was noted that there seemed to be consistency in applying the fair value measurement requirements in IAS 39 despite the use of different techniques.

The staff informed the Board that there will be a draft document to be discussed end of July on those issues, but that it is not clear yet who will publish it. The panel would then turn to appropriate disclosures with the aim to have an exposure draft published in Q4/08. It was noted that there would be ongoing communications with the consolidations project team.

Discussion at the July 2008 IASB Meeting

At this session the staff asked the Board to decide on a definition of 'fair value' – what is the measurement object for items with a measurement basis currently referred to as 'fair value'? The staff acknowledged that some aspects of fair value have not been discussed yet, but will be brought to the Board at future meetings (for example, principal market and day-one gains/losses). Staff's view, however, is that whether fair value means an entry or exit price can be decided separately.

The staff then turned to the standard-by-standard review as requested by the Board. This review had been requested to help the Board to decide whether:

• To retain the term 'fair value' and define it appropriately, or
• To replace the term 'fair value' with more specific terms more appropriate in the individual context.

It was noted that a consistent definition of fair value might lead to fewer instances where the Board would require or permit its use. It was also highlighted that a precise definition of fair value would help to ensure proper application where it is required or permitted.

The Board had a lengthy discussion about whether entry and exit price would be the equal for the same item on the same date in the same market. Also, the Board discussed which market an entity should refer to in measuring fair value and whether an exit price could include exit by consumption of assets. Board members expressed a range of views on these issues. No clear consensuses were reached.

Some Board members observed that if the Board cannot clearly define what fair value means, it would be even more difficult for constituents in applying IFRSs. Board members said that some of the issues that are to be brought back for discussion at future meetings must be resolved before the Board can agree on a definition of fair value.

The staff also asked the Board to consider whether to keep the term 'fair value' or abandon it. The Board seemed to be split on that issue.

The Board discussed whether, in measuring the exit-price fair value of an asset the entity is using, the measurement should take viewpoint of the entity or of an independent market participant. Board members' views varied, and no decision was reached.

The staff distributed a flow chart which was not part of the observer notes that was intended to facilitate the discussion.

The Board decided that, once fair value is precisely defined, each reference to fair value in IFRSs should be assessed in relation to the definition. Where 'fair value' as used in an IFRS is not consistent with the agreed definition, the term should be replaced with a more descriptive term.

Discussion at the September 2008 IASB Meeting – Credit Crisis: Proposed amendments to disclosure requirements

Please see separate project page on Amendments to IFRS 7 – Credit Crisis

Discussion at the September 2008 IASB Meeting – Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets: Update

The staff presented the Board with an update on the work of the expert advisory panel formed in response to recommendations from constituents. The panel's task is to develop best practice guidance on measurement and disclosures for financial instruments in inactive markets. It was noted that the panel had met six times and will meet again in October. One single document would be published covering both measurement and disclosure. A draft report has just been posted on the IASB's website. The staff informed the Board that although comments would be solicited until 3 October, comment letters would not be published on the IASB's website. Asked by a Board member, the staff confirmed that this non-mandatory guidance would be considered when developing the fair value measurement standard and, hence, might become mandatory in the future.

Discussion at the September 2008 IASB Meeting - Fair Value Measurements Exposure Draft

The staff introduced the session by highlighting the objectives and timeline. The purpose of the session was to seek the Board's decision on:

• Whether a fair value measurement exposure draft should state that fair value reflects the highest and best use of an asset; and
• Whether blockage factors should be excluded from fair value measurement.

Blockage factors

The staff started with the second issue on blockage factors. The staff highlighted that it only sought the Board's input on this type of discount, not on other discounts or premiums. The staff defined a blockage discounts as a discount that represents a discount to the quoted price of an instrument (usually equity securities) to reflect the reduction in the price if the entity were to sell a large holding of instruments at once.

The Board had a lengthy debate on this. Some Board members were concerned about ignoring blockage factors as they would represent a real economic phenomenon. Others were of an opposite opinion and referred to academic research on the subject. It was noted that this is more of an issue of the unit of account and if one measured one security it would not carry a blockage discount. It was also acknowledged that it would be difficult to determine the blockage, mainly as there could be other factors leading to a discount or premium that could hardly be separated.

Finally, the Board agreed that for all levels of the proposed fair value hierarchy (1,2 and 3) blockage discounts should not be adjusted by a blockage factor.

Highest and best use

The staff then presented to the Board an analysis of the highest and best use-concept.

Some Board members where concerned over the term 'legally permissible' as the notion is more intended to cover situation where it the best use would be illegal.

The Board had a considerable debate on how the amounts necessary to make the decision on highest and best use are determined, notably whether the option to have a different use should be included if the current use of the asset is different from the highest and best use.

The staff then asked the Board whether a fair value measurement should reflect the highest and best use.

The Board agreed.

The Board made the decision to include an explanation and application guidance on how the criteria of 'physically possible', 'legally permissible' and 'financially feasible'.

It was also decided that the entity should disclose the value of an asset on its current use if it is different from the highest and best use.

Furthermore, the Board agreed to clarify in an exposure draft that the search for the highest and best use does not have to be exhaustive.

Discussion at the Special October 2008 IASB Meeting

The purpose of this session was to address the following three issues with regard to the staff draft proposals on amending the liquidity risk and fair value disclosures in IFRS 7:

• How and when to issue an ED;
• Comment period; and
• Transition.

The staff recommended to the Board to publish the ED within the next 2-3 weeks with a 120 day comment period. Although the need for changes is urgent, the staff highlighted that no final document will be published before year-end. Therefore, entities with an annual period beginning 1 January 2009 would not apply the amendments before 1 January 2010, and this would take some pressure from the proposals. Staff noted that, in the light of the public focus on these issues, the Basis for Conclusions in the exposure draft should include a proposed effective date of 1 January 2010.

Board members were mainly concerned about the usual 120 day comment period given the public attention on these issues. Most of the Board members tended towards a 60 day comment period, as the issues addressed were narrow and were not expected to create much resistance from constituents. One Board member asked the staff whether it would be possible to have an earlier effective date. The Chairman mentioned that the endorsement process of one of the significant constituents would need a certain amount of time, so an earlier effective date than proposed would not help.

One Board member noted that the disclosures for fair value might omit the information on hedging activities/relationships if they are not disclosed simultaneously. The staff agreed and confirmed that this was an issue already raised by the IASB's expert advisory panel. However, addressing this would go beyond the scope of this project. It was noted that entities wishing to provide information on hedging activities for which they use their derivatives would not be prohibited to do so.

In the end, the Board agreed with the staff proposal in general, but decided to have a 60 day comment period and propose an effective date of 1 July 2009. The Board also decided to include a question on the effective date in the invitation to comment.

The staff informed the Board that it will present separately, at a future Board meeting, additional issues in IFRS 7 that have been discovered during the discussions with constituents. Staff suggested that many of them could be addressed via the annual improvements process.

Discussion at the October 2008 Meeting – Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets: Update

The IASB staff noted that on 16 September 2008 it had released on the IASB Website a Draft Document reflecting the views of the IASB Expert Advisory Panel Measuring and disclosing the fair value of financial instruments in markets that are no longer active. 39 comment letters had been received: these had been broadly supportive but some had raised technical concerns.

In particular, in the measurement section, there was uncertainty about consistency between the EAP's paper and the comments of the US Securities and Exchange Commission's Office of the Chief Accountant released on 30 September and the related FASB staff position on FAS 157. The IASB staff has clarified (IASB Press Release 14 October 2008) that they are of the view that the documents are consistent. The staff will incorporate an example from the FASB Staff Position FSP FAS 157-3 issued on 10 October in the final IASB document that will be released later in October 2008.

The final staff guidance may be incorporated in future amendments to IFRS 7, but in the meantime it will have the status of a staff/educational document (IAS Plus comment: This statement would imply that it would be considered comparable to non-mandatory guidance (IAS 8.9)).

A Board member noted that the FASB staff had used, and been grateful for the work that the IASB's Expert Advisory panel had done and had taken comfort from the guidance that it had prepared when developing their own. In addition, he noted that the FASB staff had been impressed with the cooperation they had received from their IASB counterparts.

Board members asked the IASB staff to consider the responses to both the EAP's document and the FASB's Draft FSP 157-3 when developing the final IASB staff document. In particular, the comments from the CFA Institute that an orderly transaction in a stressed market was not a distressed sale should be reflected in the final guidance. If the seller has been able to attract bids from others, such a sale is an orderly sale. Transactions in a market might be infrequent, but if they are occurring, such transactions provide some evidence of current value. Board members noted that there would be areas in which the exercise of judgement was critical.

The staff noted that users of the document (preparers and auditors) were concerned about the status of the document. This will be addressed explicitly in the final document.

A Board member noted that recent communications from the Board had the potential to confuse rather than inform constituents. The press release on 14 October and that of 15 October accompanying the release of the Exposure Draft of proposed amendments to IFRS 7 seemed to be operating in parallel. The Director of Capital Markets agreed and acknowledged that there was a need to link the final staff document to the work on IFRS 7 and other matters.

October 2008: IASB publishes fair value guidance

On 31 October 2009, the IASB published educational guidance on the application of fair value measurement when markets become inactive. The guidance consists of a summary document prepared by IASB staff and the final report of the expert advisory panel established to consider the issue:

• IASB Press Release (PDF 167k)
• Expert Advisory Panel Report (download from IASB website, PDF 665k)
• IASB Staff Summary Document (download from IASB website, PDF 130k)

Discussion at the October 2008 Meeting

This session's purpose was to address the use of mid-prices or other pricing conventions, as a practical expedient for fair value measurements within a bid-ask spread. While the Board decided already in June 2008 that an entity should use the price within a bid-ask spread that is most representative for fair value, the detailed measurement issues were left open. The Board also discussed whether the bid-ask guidance should apply to all levels of the fair value hierarchy, not only when bid and ask prices are observable in a market.

Some commentators to the discussion paper on fair value measurements favoured establishing a single pricing convention to increase consistency and comparability. Others highlighted the difficulties in applying such guidance in hypothetical or inactive markets.

The Board had a more general discussion on what is and what is not part of the bid-ask spread. One Board member suggested using the mid-market price as a rebuttable presumption. It was noted, however, that this would lead to a default method which might undermine the objective of fair value measurement.

In the end, the Board agreed to the staff recommendation that the ED should state that an entity could adopt a policy of using a mid-range price or other pricing convention as a practical expedient.

The Board was split on whether to apply the bid-ask spread guidance in levels 2 and 3 of the proposed fair value hierarchy. Some Board members did not believe that a bid-ask spread exists in those levels and that entities might simply use the guidance as a means of applying conservatism in valuation. The staff recommendation was to state in the ED that the bid-ask pricing guidance should apply at all levels of the hierarchy. The Chairman suggested including cautionary words highlighting the objective of fair value measurement. The Board's vote was split 6-6, but the Chairman exercised its casting vote in favour of the staff recommendation.

The Board also confirmed that it is not necessary to address offsetting positions on the ED.

Discussion at the November 2008 IASB Meeting

(FASB staff joined the meeting by telephone.)

Day One Gain or Loss

The Board discussed whether, and if so, in what circumstances, to require the recognition of a day one gain or loss resulting from a fair value measurement. The staff reviewed the Board's tentative decisions made between June 2008 and October 2008 as a way of prefacing the discussion.

The staff presented its analysis about whether to require the recognition of day one gains or losses even when a fair value measurement is derived using unobservable inputs. With respect to initial recognition, this analysis was characterised at a high level as:

• Approach 1: Prohibit day one gains or losses in all circumstances.
• Approach 2: Require day one gains or losses in some circumstances, such as when the initial fair value measurement is based entirely on observable market inputs (the current IAS 39 approach).
• Approach 3: Require day one gains or losses in all circumstances, including when the initial fair value measurement is derived using unobservable inputs (the SFAS 157 approach).

The staff argued for Approach 3, noting that it was consistent with the Board's tentative decision to define fair value as a current exit price, and acknowledged that day one gains or losses were a direct consequence of a current exit price measurement objective. The Board was reminded that the working assumption that 'entry fair value equals exit fair value' applied in the situation of a transaction involving an identical asset in the same market on the same day.

In the wide-ranging debate that followed, it was clear that none of the Board was in favour of Approach 1, but favoured variants of Approach 2 ('Approach 2-plus') or Approach 3 ('Approach 3 with restrictions'). For example, some Board members would want any model being used in conjunction with non-observable inputs ('Level 3 inputs') to be 'calibrated' to the inputs being used, such that it was consistent with those inputs.

Subsequent Measurement

Although subsequent measurement was not discussed in detail, it was noted that issues surrounding subsequent measurement were more acute for financial items than for non-financial assets (for which IFRS does not usually require fair value for subsequent measurement-other than investment property and biological assets).

No firm decisions were made, but the staff acknowledged that the debate had given them enough direction to enable them to make progress on this issue.

Next steps

The Board expects to discuss the following topics in the near future:

• principal (or most advantageous) market;
• the valuation premise (that is, in-use or in-exchange);
• defensive value;
• valuation of liabilities (including non-performance risk and whether liabilities should be measured on a transfer basis or settlement basis); and
• fair value measurement disclosures.

The Board will also discuss a staff assessment of which fair value measurements in current IFRSs should be included or excluded from the scope of an IFRS on fair value measurement.

Discussion at the December 2008 IASB Meeting

Project plan

Before beginning the first of several sessions this week on aspects of the fair value measurement guidance project, the staff reviewed the proposed project plan. The staff intend to present the following topics at the January 2009 meeting:

• fair value measurement disclosures (taking into consideration the comments received on the exposure draft of improvements to IFRS 7 Financial Instruments: Disclosures);
• an assessment of which fair value measurements in current IFRSs should be included or excluded from the scope of an IFRS on fair value measurement;
• transition; and
• the comment period for the exposure draft.

The staff stated that they had begun drafting an exposure draft of an IFRS on fair value measurement guidance and that they were 'in good shape' to complete the pre-ballot draft shortly after the January 2009 meeting.

Defensive intangible assets acquired in a business combination

The Board held a lengthy debate on the fair value of intangible assets acquired in a business combination that the acquirer does not intend to use directly or intends to use in a way that is different from the way other market participants would use them (referred to as 'defensive intangible assets').

Throughout the discussion, the Board referred to the following staff example:

The Board confirmed its decision in IFRS 3 (revised in 2008) that defensive intangible assets should be recognised and measured at fair value in a business combination. The Board affirmed that it had determined in that IFRS that a defensive intangible asset meets the asset recognition criteria and should not reconsider this decision in the fair value measurement project.

In reaching this decision, the Board did not discuss Situation 1 in any depth, and agreed with the conclusion summarised therein. However, Situations 2 and 3 generated much more comment. Board members and the staff agreed that 'defensive intangible assets' laid bare the tension between several parts of the fair value measurement project-in particular it exacerbated the problems in the notions of market value and entity-specific values that underlay many constituents' concerns.

A Board member noted that there was a fundamental difference between abandoned assets and assets that were 'locked up': an entity could no longer control an abandoned asset and thus it could not be termed to be defensive. For example, a patent might not be renewed, giving others the right to access the patented item.

Whether to provide explicit guidance on measuring defensive intangible assets

The Board decided not provide explicit valuation guidance on measuring the fair value of defensive intangible assets. The Board agreed that the measurement of defensive intangible assets has been developed by practice that has evolved under the current IFRS 3.

In making this decision, the Board agreed with the staff that the fundamental question was whether the ED should propose explicit guidance on how to determine the fair value of a defensive intangible asset (the Board agreed it should not); or include a discussion of the methodologies that might be used, a discussion of the appropriate reference market, etc, similar to the discussion in FAS 157 (the Board agreed that the ED should include such a discussion).

Issues related to IAS 36 and IAS 38

The Board did not agree with a staff recommendation that IAS 36 should be amended to address the impairment testing of defensive intangible assets. Board members were critical of IAS 36 and were of the view that amending it would only make it worse.

The Board did not agree with a staff recommendation that IAS 38 should be amended:

• to provide guidance about determining the useful life of a defensive intangible asset;
• to state that the amortisation period and useful life for defensive research and development intangible assets begins on the date of acquisition because that is the point at which they are available for use (thus avoiding a misinterpretation of paragraph 97, which might be read to suggest that defensive research and development intangible assets are indefinite lived until their completion date); and
• require entities to distinguish in their disclosures the intangible assets acquired in a business combination between those being actively used in the business and those being used defensively, by asset class.
• Restrictions on assets and liabilities

The staff introduced this session by noting the Board's previous decision that a fair value measurement should consider the attributes (or characteristics) of an asset or liability that a market participant would consider when pricing the asset or liability. Implicit in this decision is that a market participant would consider a restriction on an asset or liability only if that restriction would transfer to market participants. The staff noted that FAS 157 addresses restrictions in the context of assets, but not liabilities. There is limited guidance in IFRSs about restrictions on assets and no guidance about restrictions on liabilities. The staff summarised the guidance in FAS 157 and that existing in IFRS. In addition, the staff noted that the IFRIC had referred an issue to the Board about restrictions on financial assets. The issue before the IFRIC turned on the meaning of 'immediate access' in IAS 39.AG71.

With reference to assets, the Board agreed that, if a restriction on the use or sale of an asset that transfers to market participants, the restriction is an attribute of the asset and should be reflected in a fair value measurement. In addition, if restrictions on an asset would not transfer to a market participant buyer, they would not affect the fair value of the asset.

The Board agreed that the ED should clarify that 'the ability to access' in the definition of a 'Level 1' input means that the entity only has to be able to access the market for the asset or liability, not necessarily that the entity must sell the asset on that date (that is, the 'reference market' is the market in which the entity would sell an asset. This conclusion applies even though it could not sell the asset at the reporting date because of restrictions [assuming no forced sale]).

With respect to liabilities, the Board agreed that the fair value of a liability is, almost by definition, an exit value. Restrictions on transfer do not affect the fair value measurement. There was some discussion of the effect on fair value of privileges (as opposed to restrictions) (e.g. prepayment rights) on the determination of fair value. The Board agreed that two loans, identical in all respects except that one may be repaid in full at any time and the other may be repaid only at term, would have different fair values.

Valuation premise

The Board discussed whether a fair value measurement consider whether market participants would maximise the value of an asset principally through its use in combination with other assets as a group (in-use) or on a standalone basis (in-exchange).

Board members thought that the staff had reached the correct conclusions and were prepared to support their recommendations, but that the route by which they reached those conclusions and recommendations was extremely tortuous and not always intuitive. They encouraged the staff to explain very clearly and carefully in the Basis for Conclusions the rationale for the Board's conclusions.

The Board agreed that:

• a fair value measurement considers whether market participants would maximise the value of an asset principally through its use in combination with other assets as a group or on a standalone basis;
• the valuation premise and highest and best use concepts are not relevant for financial assets;
• the valuation premise should not explicitly be reflected in the definition of fair value; and
• the exposure draft should not change or introduce new terminology for the valuation premise.

With respect to liabilities, the Board agreed that the valuation premise and highest and best use concepts are not relevant. This conclusion is consistent with the conclusions in FAS 157, which applies these concepts to assets only.

Continuation of discussion from Wednesday

Highest and best use: Application of a 'change of use option'

The Board noted that it had taken a tentative decision that when an entity measures an asset at fair value and currently uses the asset together with another asset in a use that differs from their highest and best use, the entity may need to split the fair value into two components: (a) the fair value of the asset assuming its current use and (b) a 'change of use option' reflecting the entity's ability to switch the asset to its highest and best use. The issue could arise in either of the following situations:

• when the assets are being measured at fair value in a business combination, or
• when the assets are being re-measured at fair value under the revaluation model in IAS 16 or IAS 40.

The staff proposed that the forthcoming exposure draft should provide explicit guidance for these situations, and noted several approaches that it had seen (either in major accounting firms' IFRS accounting manuals or elsewhere), some of which it could support others that it did not.

At least one Board Member disagreed with the staff recommendation, being fearful of creating 'a monster'. The Board Member noted that any occasion when an entity purchases a bundle of assets, it had to make arbitrary allocations. If the Board was going to provide guidance in the ED for every circumstance in which this was difficult, it would introduce lots of rules affecting relatively marginal, specialised situations that would be understood by relatively few experts.

However, a majority of the Board agreed that the forthcoming ED should provide guidance. A majority of the Board would accept the two approaches, which will be included in the ED for constituents' comments: The approaches used the following example:

Entity A acquired land and a factory building in a business combination. The land is currently zoned for industrial use. Nearby parcels of land are being rezoned to residential use and developers have begun building high-rise condominiums in the area. Entity A determines that the highest and best use of the land is residential use for high-rise condominiums. Therefore, the fair value of the land assumes that the factory is demolished and the land will be made available to build the condominiums. On this basis, the fair value of the site as a whole is CU300,000, net of costs to demolish the factory. The value of the factory, assuming its current use, is CU100,000. The value of the land, assuming its current use, is CU30,000.

The approaches to be included in the ED are:

Approach A: value the land as the difference between the total site in its highest and best use (in this case CU300,000) and the value of the factory in its current use (CU100,000), or CU200,000.

Approach B: This approach would result in Entity A recognising the following: Factory value in current use 100,000; Land value in current use 30,000; and a 'Change of Use Option' that reflects the option to convert land to an alternative use 170,000 (300,000 - 30,000 - 100,000).

The Board continued its deliberations on a proposed fair value measurement standard by addressing three issues:

• Reference market
• Day one gains or losses
• Control premiums

Reference market

Staff introduced the topic by providing background information including the preliminary view of the Board that fair value should be determined by reference to the principal market. Staff noted that there are at least four approaches to defining the reference market:

• Reaffirm the Board's preliminary view in favour of the principal market approach;
• Pursue a most advantageous market approach;
• Define the reference market as the market in which the entity expects to transact; and
• Be silent about the reference market.

Staff recommended the 'most advantageous market approach'. The Board was informed that transportation cost should be added to the 'most advantageous market approach'. It was also proposed to include words on capacity of the reference market.

Board members discussed both conceptual and practical issues of the approach by the staff in length. Some Board members showed continued sympathy for the principal market approach. Others were deeply concerned over the burdensome search for such an advantageous market, so that in practice entities will often end up with the principal market. Many Board members leaned towards a 'principal market unless the entities proves that a most advantageous market exists' approach.

It was agreed that a redrafted definition will be brought back to reflect the outcome of the discussion.

The staff continued to ask for the Board's input on whether guidance is needed for the reference market determination when there is no observable market. The staff proposed to clarify that in this situation an entity should look at the characteristics of market participants with whom the entity could transact. The Board had some discussion on this issue going into broader issues. The Board seemed to agree to the staff recommendation subject to changing 'could transact' to 'would transact'.

Day one gains or losses

This was a continuation of a discussion at the November 2008 meeting. The staff presented three possible approaches for the accounting treatment of day one gains or losses:

• Prohibit day one gains or losses in all circumstances;
• Require day one gains or losses in some circumstances, such as when the initial fair value measurement is based entirely on observable market inputs (the current approach in IAS 39 Financial Instruments: Recognition and Measurement); and
• Require day one gains or losses even when the initial fair value measurement is derived using unobservable inputs (the approach in FASB Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157)).

Staff recommended adopting the third approach and recognising day one gains or losses even for level three fair values. The Board had a lengthy discussion on this issue with some Board members expressing their strongly held views. Those Board members were concerned that this would enable entities to generate profits up front that do not exist just because the model calculated a number. Others believed this would be better addressed on a standard level and that this should not be addressed in the fair value standard, but in the standard by standard analysis on use of fair value in IFRSs.

The Board agreed by majority vote to pursue the staff recommendation with amended wording and integrating language that would make clear that the transaction price on day one is presumed to be fair value so that entities must 'prove' that a day one gain or loss exists.

The Board further agreed that the proposed standard would not address subsequent accounting for deferred gains or losses. With regard to transitional requirements it was agreed to bring this issue back at a future meeting.

The Board also agreed to the disclosure requirements proposed by the staff.

Control premiums

The staff presented a agenda paper that had been developed based on the staff's understanding of the tentative decision by the Board not to reflect blockage discounts and other discounts and premiums in fair value measurement at all levels. The staff asked to reconsider its decision on control premiums. The Board, particularly one Board member, responded to the staff that it misunderstood the Board's decision. The Board decided not to reconsider its decisions with regard to discounts and premiums.

Continuation of discussion on Friday

The Board continued its deliberations on an exposure draft of a proposed fair value measurement standard.

Measuring the effect of credit standing

The Board discussed whether the forthcoming IASB exposure draft should include two changes from Statement 157 with respect to:

• The credit standing of a liability is an attribute of the liability.
• Regulatory restrictions that require liabilities to meet certain requirements are attributes of the market in which a liability can be transferred. The idea that a market must be 'legally permissible' applies equally to markets for liabilities as for markets for assets.

The Board did not support the staff recommendation. Rather the Board seemed to be of the view that if an entity needed to transfer a liability (rated as BB) and could only do so if it was rated A, the additional 'cost' of upgrading the credit standing of that instrument to A would almost certainly be reflected in a reduced credit standing of other liabilities.

Credit standing

The Board discussed a staff proposal to include in the Invitation to Comment on the forthcoming exposure draft questions about credit standing.

The questions might include the following:

• Does a measurement described as fair value necessarily include the credit standing of a liability, both on initial recognition and in subsequent measurement? If not, what measurement do you support and how is it consistent with your notion of fair value?
• Does a measurement of liabilities that includes the effects of changes in credit standing enhance users' ability to make investment and stewardship decisions? If so, how do users employ the information? If not, what alternative do you propose and how would it provide more useful information?
• Is it possible to isolate and compute the effects of (a) changes in the credit standing of a liability from (b) changes in the credit spread unaccompanied by a change in credit standing from the total change in the fair value of a liability? If so, how would you propose that the computation be made?

The Board agreed that the questions raised by the staff were excellent questions and should be asked of constituents, but not in the ED on fair value measurement. They were properly the subject of a separate document.

The staff undertook to prepare an Invitation to Comment on the topic of Credit Standing to be issued in early 2009. The earliest that a draft of the document could be available for Board review would be February 2009, with publication likely either late in 2009 Q1 or in 2009 Q2.

Fair value of liabilities

The Board had a lengthy discussion about how to measure a liability. The staff stresses that this project did not address whether fair value was the right measurement basis for liabilities. That was a question of 'when to recognise a liability at fair value', something outside the scope of this project. The discussion was intended to decide whether the IASB's ED should provide guidance beyond that in US GAAP.

The Board ultimately agreed that the ED should:

• define the fair value of a liability as:

  The price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date

• provide guidance about how to measure the fair value of a liability when a transfer price is not observable, beyond that contained in FAS 157.

Discussion at the January 2009 IASB Meeting

FASB staff were present for this session via telephone.

The Board continued redeliberation of issues arising from the Discussion Paper Fair Value Measurements to be included in the forthcoming exposure draft.

Scope assessment

The Board discussed two issues related to the proposed scope of the ED on fair value measurement guidance:

• whether to exclude from the scope of a fair value measurement standard any uses of 'fair value' in IFRSs that have a measurement objective that is inconsistent with the Board's proposed definition of fair value as a current exit price (and the related guidance); and
• whether to place constraints on the use of 'fair value' in particular standards.

The staff noted that the 2006 discussion paper stated that the Board would complete a standard-by-standard review of fair value measurements required in IFRSs to assess whether the IASB or its predecessor intended each fair value measurement basis to be a current exit price. That review was completed and the results presented to the IASB in July 2008.

Entry equals exit price on initial recognition

The staff noted that there was a need to explain carefully what the Board means by 'entry equals exit'. In particular the staff noted that the fair value measurement approach developed by the Board considers two separate transactions (that is, the actual transaction to buy the asset and the hypothetical transaction to sell the asset). For both of those transactions, the focus is the reporting entity's perspective. The Board had a long and disjointed debate about this issue, which served to highlight that the use of a measure called an 'exit price' remains a stumbling block with a couple of Board members.

Applying fair value as an exit price to an entity's own equity instruments

The staff noted that unlike assets and liabilities, an entity cannot 'exit' its rights and obligations associated with its own ownership interests unless those interests cease to exist (for example, if the entity is acquired by another entity). This is because equity instruments represent a residual interest in the entity, irrespective of who holds them. The Board debated how best to address this conundrum, deciding that a practical solution would be to deem the exit price of an equity instrument for the issuer to be the same as the exit price for a holder.

Scope assessment and recommendations

The Board discussed the staff's scope assessment briefly and agreed that the ED should propose that the following be excluded from the scope of the fair value measurement guidance:

• share-based payment transactions;
• reacquired rights in a business combination; and
• financial liabilities with a demand feature (at least one Board member objected to this conclusion).

The presumption that fair value should be defined as an exit price was confirmed.

Other matters

The staff confirmed that, in the proposed conforming amendments to other IFRS, the ED would propose removing 'how to' guidance on fair value that was inconsistent with the proposed approach (e.g. that in IAS 40).

A review of older Interpretations would be undertaken to ensure that the use and application of fair value was consistent with the ED. The staff was confident (having worked with the IFRIC staff) that the more recent IFRIC Interpretations that used the term were consistent with the ED.

Day One gains-Service contracts

The staff noted that the Board had consistently taken the view that the transaction price is generally the best evidence of the fair value of an asset or liability at initial recognition (with some exceptions, such as related party transactions, distressed transactions, different markets or different units of account). The staff discussed that presumption in the context of a contract to provide services (such as a investment fund management contract, or an insurance contract).

Board members noted that many of the issues that the staff was raising were exactly the same as those addressed in the revenue recognition project, for which a Discussion Paper is currently open for comment. The staff agreed and noted that the staff recommendations were consistent with the Board's Preliminary Views in the DP.

The Board confirmed that for a contract to provide services:

• the only true exit market for the provider is the secondary (wholesale) market with other providers, not the primary (retail) market with customers.
• the exit price for the provider reflects the perspective of the provider, not the perspective of the customer.
• at initial recognition, the exit price for the provider is likely to differ from the transaction price because the provider will typically price the transaction to recover its direct and indirect origination costs and to provide a reasonable return on the origination activity. In contrast, a transferee would not require payment for the origination activity performed by the original provider.

Disclosure

The Board discussed a summary that presented and compared the current disclosure requirements of IFRS 7, the October 2008 ED of proposed improvements to IFRS 7 and FAS 157, with disclosures likely to be proposed in the FVM ED. In addition, the staff had highlighted certain differences between the IASB's proposed disclosures and those required by FAS 157. The Board agreed with the proposed disclosures.

In addition, the Board agreed:

• to require entities to disclose fair value measurement information by class of asset or liability rather than by major category;
• not to differentiate between recurring and non-recurring fair value measurements;
• to require disclosure of purchases, sales, issues and settlements separately for Level 3 assets and liabilities;
• to remove the reference to realised and unrealised gains or losses;
• to amend IAS 34 to require entities to provide updated interim fair value disclosures if, for example, there is a significant change in the business or economic circumstances; and
• to provide the disclosure examples in (non-mandatory) implementation guidance rather than in (mandatory) application guidance.

The disclosures required under the proposed IFRS would replace (and not supplement) those in IFRS 7.

Transition requirements

The Board agreed that the ED should propose that the fair value measurement requirements should be applied prospectively as of the beginning of the annual period in which the IFRS is initially applied, except for financial instruments measured at fair value at initial recognition using the transaction price in accordance with paragraphs AG76 and AG76A of IAS 39. Early adoption would be permitted under the usual rules. The Board agreed that the difference between the carrying amount and the fair value of a financial instrument that was measured at initial recognition using the transaction price prior to the initial application of the proposed IFRS should be applied retrospectively as an adjustment to retained earnings as of the beginning of the annual period in which the proposed IFRS is initially applied, presented separately. This would take into consideration the practical limitations involved in applying the change in accounting policy in all prior periods. In addition, the Board agreed not to require the disclosure requirements for a change in accounting policy under IAS 8.

In order to achieve comparability in future periods, the Board agreed that all of the disclosures required by the proposed IFRS would be required from the date of first applying the proposed IFRS, and that those disclosures need not be presented in periods prior to the initial application of the proposed IFRS.

Comment period

The Board agreed that the ED should be exposed for comment for 120 days, the normal comment period for a standards-level consultation document.

Sweep Issue

The staff raised an issue that emerged during the deliberations on fair value measurement. Under IAS 39 Financial Instruments: Recognition and Measurement, the amount initially recognised for items that are not remeasured at fair value is not fair value as it would be defined in the fair value measurement project. The staff proposed words that could address this issue. The Board agreed to the staff approach, but asked the staff to develop words with a positive and not a negative notion.

Discussion at the February 2009 IASB Meeting

Fair value of liabilities

The Board revisited the issue of how to measure fair value when there is no observable market price for a liability and whether the fair value of the corresponding asset is an input that an entity should consider when measuring the fair value of its liability. The staff had suggested that the liability value might differ from the asset value in some circumstances, including when the asset value includes:

• the effect of transfer restrictions or
• features such as third-party credit enhancements that are not part of the liability.

The Board disagreed with the staff's suggestion. Several Board members disputed the examples put forward by the staff, noting that the fair value measurement guidance that is being developed is explicit that the fair value is being determined for a transaction involving the same asset in the same market. In both cases in which it was alleged that the presumption that the fair value of the asset would not equal the fair value of the liability, the symmetry was not there. In one case, third-party credit enhancements are, by definition, separate from the asset and liability and would not affect the determination of fair value as explained in the proposed guidance. In the case of transfer restrictions, if the restrictions attached to the asset, the argument would not hold (since all market participants would face the same restrictions), and if the restrictions attached to the market participant, they would not be related to the asset and liability and would thus be excluded from the determination of fair value.

The Board noted that the proposed guidance for 'Level 2' measures goes in to considerable depth to explain how to apply the basic principle in the proposed IFRS. There is a presumption that the fair value of an asset will be the same as that of the corresponding liability, unless there are observable conditions related specifically to the transaction. Most differences that are said to exist are usually related to the counterparties not the asset or liability itself. However, the Board agreed that the assertion is a frequent challenge to the 'exit equals entry' presumption and that the Invitation to Comment should identify the issue and challenge respondents to address disprove the Board's analysis.

Day One gains and losses

The Board decided that for the initial measurement of financial instruments that will subsequently be classified as FVPL:

• An entity should apply the IASB's guidance on fair value measurement in determining the fair value of a financial instrument at initial recognition. Thus, fair value at initial recognition equals the transaction price unless one of the factors described elsewhere in the document (related parties, duress, different unit of account, different market) applies.
• If the fair value at initial recognition differs from the transaction price, the entity should recognise the resulting gain or loss as income or expense if, and only if, a specified observability criterion is met.
• If that observability criterion is not met:
  • the entity initially measures the financial asset or financial liability at fair value, adjusted to defer the difference between the transaction price and the initial fair value (a deferred gain or loss).
  • subsequently, as already required by IAS 39 paragraph AG76A, the entity recognises the deferred gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would consider in setting a price. It is beyond the scope of the project on fair value measurement to reconsider the subsequent accounting for these deferred gains and losses.

The Board then discussed whether it should retain the existing wording in IAS 39 for the observability criterion. The staff noted that this approach would minimise change to existing practice. However, it would result in two different, but overlapping, hierarchies for financial instruments: the 3-level fair value measurement hierarchy and a 2-level hierarchy that determines whether day one gains or losses are deferred (for financial instruments). The staff was concerned that this might cause confusion and complexity.

After a lengthy debate, the Board decided that it should not change the guidance in IAS 39 with respect to 'Day One' gains and losses. In addition, the guidance in IAS 39 AG76-78 would remain as currently. The Board considered that the guidance being proposed in the fair value measurement guidance was address 'how to do' fair value and used different words and thresholds, but should arrive at the same answer.

Liabilities with a demand feature

After some debate, the Board decided that the fair value measurement guidance should provide a scope exemption for liabilities with a demand feature - that is, the current requirements in IAS 39 would be unaffected by the new IFRS. The Board noted that the measurement and financial reporting issues related to such instruments is unresolved at both the IASB and FASB and will be addressed in other IASB financial instrument projects. To address it unilaterally in the IASB's proposed standard would open other thorny issues and it was best left alone for the time being.

Discussion at the March 2009 IASB Meeting

(FASB staff participated by video link.)

The objective of this session was to update Board members on recent developments in financial instruments accounting under US GAAP.

At its Monday 16 March 2009 the FASB discussed and decided on two issues:

• Additional fair value measurement guidance
• Changes to the impairment model for some financial instruments (securities)

The Board was informed that both issues would be issued as proposed FASB Staff Positions (FSPs) shortly.

Additional fair value measurement guidance

FASB staff introduced the new proposed guidance on additional guidance how to determine fair value. The proposals would introduce a two-step process:

• 1. Determine whether a market is active or inactive
• 2. If inactive, assume that quoted prices (including broker prices) are associated with distressed transaction unless:
  • There was a marketing period prior to the measurement date
  • There were multiple bidders for the asset

FASB staff noted that this should increase the use of level-3 fair values (measurement model) under SFAS 157 Fair Value Measurements. One Board member concluded that private equity instrument transactions are always level-3 measurements as there are rarely multiple bidders for the assets.

Other Board members interpreted the proposals as a requirement to ignore information. FASB staff explained that FSP 157-3, issued late in October 2008, was aimed at bringing more measurements into level 3 but did not do so.

It was also noted without more specific background information that the liquidity premiums on certain assets caused concerns – a level-3 measurement would ameliorate those concerns.

One Board member noted that this guidance would contradict the guidance issued in the final document of the IASB's Expert Advisory Panel (EAP), where it is specifically stated that even in inactive markets transaction prices should not be ignored.

Board members were informed that the members of the panel were already asked to provide their input on possible changes to the EAP document.

Another Board member asked how many of the criteria in the proposed FSP for determining whether a market is inactive or not would have to be met to reach this conclusion. FASB staff responded that it would be a result of applying judgement considering all the factors mentioned plus others if necessary (that is, the list of factors is not exhaustive).

Changes to the impairment model for some financial instruments (securities)

The FASB staff continued to present the proposals on impairment of debt and equity securities. The FASB has agreed to expose for comment a model that would change the way other-than-temporary impairments are determined to exist and recognised.

Under the proposed model, the entity would be required to assess whether it intends to sell the security or whether it is more likely than not that it will be required to sell the securities prior to the recovery of the cost basis.

Only credit-related losses would be recognised in profit or loss. The staff explained that as a first step all changes in fair value would be recorded in profit or loss, but the non-credit loss related piece would be transferred into other comprehensive income via a contra account in profit or loss.

Additional credit losses would have to be recorded in profit or loss. Further, if the intent to sell changes or a requirement to sell becomes more likely than not, the OCI portion would have to be recognised in profit or loss.

Many Board members had specific questions about the logic behind this model and how this would be applied in practice. It seemed many Board members were concerned over the discretion preparers would have in determining whether to recognise an impairment loss.

The chairman asked the FASB staff whether this model would impact the long-term project to improve reporting for financial instruments. FASB staff responded that this was not the case, but there was always the possibility that constituents would favour this proposed new model, which would be reflected in their comment letters.

The chairman asked the IASB Board members what the IASB's response to these developments should be. He proposed to issue the FASB proposals as an IASB 'wrap around'. It was agreed that any document would highlight the differences between US GAAP and IFRSs with respect to accounting for impairments.

There was some debate over the form of the document, as the objective is to ask constituents whether the IASB should develop similar guidance. It was agreed to wait until the IASB has seen the FASB proposals and discuss the form of the document in due course – [subsequently scheduled for Thursday 19 March 2009]. Further the Board agreed that any document should be exposed for comment for 30 days.

Discussion at the March 2009 IASB Meeting

The Board noted that the FASB had issued a proposal in the form of Proposed FSP FAS 157-e Determining Whether a Market is Not Active and a Transaction is Not Distressed on Tuesday 17 March 2009. The IASB staff is currently preparing a pre-ballot of an exposure draft (ED) on fair value measurement. The proposals in the ED differ from those in the proposed FSP. The Board discussed what, if anything, they should do, given that they were unlikely to be able to have any meaningful discussion of the proposed FSP so as not to delay the issue of the ED.

The Board agreed not to amend the ED, but to refer to the FASB's proposals in the Invitation to Comment. The IASB has already asked its Expert Advisory Panel and other interested parties to comment on possible actions that the IASB should take in response to the FASB's actions, and the Invitation to Comment should also refer to these activities.

The staff expects that the ED will be issued in mid- to late April 2009, for a comment period of 120 days.

The staff also noted that they now intend to schedule roundtable discussions after the comment period closes rather than during the comment period, as had previously been stated. The Board agreed.

Discussion at the March 2009 IASB-FASB Joint Meeting

The staff reviewed with the boards the decisions reached by the IASB in the development of their fair value measurement exposure draft that differ from those reached by the FASB in FAS 157.

The only item that was discussed in any real detail was the IASB's conclusions on the fair value of a liability.

A FASB member noted that the FASB was developing a FSP FAS 157-c Measuring Liabilities under FASB Statement No. 157, which would address many of the same issues. IASB members stated that the IASB's conclusions were based on the assumption that fair value remained the measurement objective. They did agree with the FASB's conclusions that in almost all instances in which it was suggested that this presumption was not valid could be disproved because the attributes which affected the measurement of the liability (for example, credit enhancement) were particular to the holder or issuer of the liability and not the instrument. But without hard data, they were uncomfortable with being unequivocal about that conclusion. A question would be raised in the Invitation to Comment asking whether there were any instances in which this presumption could be disproved.

There was a brief general discussion of various aspects of the project, but no new issues or positions were advanced.

In addition, the staff highlighted disclosures additional to those required by FAS 157 that the IASB would propose in the IASB's exposure draft. These were noted by both Boards without discussion.

The staff noted that the IASB expected to publish an exposure draft of the proposed IFRS on fair value measurement in 2Q 2009.

The staff also advised the FASB that the IASB had released a 'Request for Views' on 20 March 2009, containing the proposed FASB Staff Position FAS 157-e Determining Whether a Market Is Not Active and a Transaction Is Not Distressed and proposed FSP FAS 115-a FAS 124-a and EITF 99-20-b Recognition and Presentation of Other-Than-Temporary Impairments together with questions for IASB constituents. Comments were requested by 20 April 2009.

Other activities related to FAS 157 currently being undertaken by the FASB were noted.

Discussion at the April 2009 IASB Meeting

The Board made the following tentative decisions:

Fair value disclosure in interim financial statements

• Financial instruments measured at fair value

The fair value disclosures in the IFRS Fair Value Measurement should be required for financial instruments in both interim and annual periods.

• Financial instruments not measured at fair value

The fair value disclosures in paragraphs 25 and 27 of IFRS 7 be required for financial instruments in interim periods in IAS 34.

• Non-financial assets and liabilities measured at fair value

No specific fair value disclosure requirements should be introduced for interim periods for non-financial assets and liabilities measured at fair value.

• Non-financial assets and liabilities not measured at fair value

No specific fair value disclosure requirements should be introduced for interim periods for non-financial assets and liabilities not measured at fair value.

• Timing of the amendments to require specific interim disclosures for fair value

The proposed specific fair value disclosures for interim periods should be introduced in the ED on Fair Value measurements. These requirements should not be introduced more rapidly.

Whether FSP 157-4's disclosures should be required for major categories of assets and liabilities

FSP 157-4 refers to 'major categories' of assets and liabilities. In incorporating the requirements of the FSP into the forthcoming ED on fair value measurement, the IASB will refer to 'each class' of assets and liabilities, which is consistent with IFRS usage.

Reference market

The Board agreed that the most advantageous market is presumed to be the market in which the reporting entity would normally enter into a transaction for the asset or liability. In the absence of evidence to the contrary, an entity may assume that the principal market for the asset or liability is the most advantageous market, provided that the entity could sell the asset or transfer the liability in the principal market.

Discussion at the April 2009 IASB Meeting

Financial Instruments – FASB amendments on fair value measurement and other-than-temporary impairments

The Board received a summary of responses to their request for views on FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments.

The board received over 60 letters giving views on the FSP which were primarily from financial institutions, prudential regulators and national standard setters.

No respondents recommended full adoption of the FSP. Responses were broadly split into those that recommended limited amendments to the impairment rules of IAS 39 and those that recommended no immediate change but instead for the staff to focus on the broader IAS 39 project addressing methods of measurement and characteristics for categorising financial instruments.

Those that recommended limited amendments had a variety of suggestions, with banking entities focussing on attempting to achieve a level playing field with US GAAP and address the issue of the perceived overstatement of losses under the current model.

Board members recalled that at past round table discussions and in various comment letters received (including those to this FSP and the January ED on Investments in Debt Instruments) the general feedback has been an opposition to short term piecemeal changes to IAS 39 without due process.

It was noted that if amendments to the impairment rules was dealt with as a separate project it would put pressure on time and resources dedicated to the broader IAS 39 project. Further, if sufficient time is to be given for deliberation and due process any final amendment to the impairment rules would not be issued long before the final amendments arising from the broader IAS 39 project. Board members highlighted that if the impairment rules were first changed as part of a separate project then changed again (or removed) as part of the broader IAS 39 project this would lead to two changes to the standard in a short space of time increasing the cost of implementation for preparers.

As a result the Board unanimously decided there should be no piecemeal change to the impairment rules of IAS 39 but instead a focus on the broader IAS 39 project which should consider the suggestions received in the request for views on the FSP.

IASB Decisions on FASB Staff Positions

The IASB has reviewed two recent FASB Staff Positions (FSPs) on fair value and impairment of financial assets and has reached the following conclusions:

• FSP FAS 157-4, which provides guidance on determining fair value when market activity has decreased. The IASB has agreed that the guidance in FSP FAS 157-4 is broadly consistent with the principles of fair value in IFRSs and the recommendations of the IASB's Expert Advisory Panel. The IASB plans to include relevant guidance from the FSP in the IASB's exposure draft on Fair Value measurement, which will be published in May.
• FSP FAS 115-2 and FAS 124-2, which addresses other-than-temporary impairments for debt securities. The IASB has decided not to propose adopting the conclusions in this FSP. This FSP applies to debt securities and shifts the focus for assessing impairment from an entity's intent to hold until recovery to its intent to sell.

  FSP FAS 115-2 and FAS 124-2 requires: An entity must assess whether (a) it intends to sell the debt security or (b) it is more likely than not that the entity will be required to sell the debt security before its anticipated recovery (for example, to meet working capital needs). If it does intend to sell (or it cannot assert that it is more likely than not that it will not have to sell the securities before recovery), the entity will write the asset down to fair value through earnings. If an entity does not intend to sell a debt security (available-for-sale or held-to-maturity), but it is probable that the entity will not collect all amounts due according to the debt's contractual terms, the entity will bifurcate the impairment amount: The impairment due to credit, measured as the difference between amortised cost and the present value of expected cash flows discounted at the security's effective rate, would be recognised in earnings. The remaining amount of the impairment (noncredit portion) would be recognised in other comprehensive income (separately from other unrealised gains and losses on available-for-sale securities). The noncredit portion for held-to-maturity securities recorded in other comprehensive income should be amortised prospectively (with the offsetting amount increasing the value of the asset) over the remaining life of the security.

  In deciding not to adopt FSP FAS 115-2 and FAS 124-2, the IASB said that, instead, it will take up the broad issue of impairment as part of its comprehensive review of IAS 39. The IASB believes that an immediate response to the recent FSP on impairment is unnecessary. The IASB also announced a timetable for the IAS 39 review, which calls for issuance of an exposure draft of a proposed replacement for IAS 39 by October 2009.

• IASB Press Release (PDF 112k).
• More Information about the FSPs

May 2009: IASB exposure draft on fair value measurement

On 28 May 2009, the IASB published an exposure draft (ED) of proposed guidance on how fair value should be measured where it is required by existing standards. The ED does not propose to extend the use of fair value measurements in any way. It would add disclosure requirements about how fair values were determined. If adopted, the proposals would replace fair value measurement guidance contained within individual IFRSs with a single, unified definition of fair value, as well as further authoritative guidance on the application of fair value measurement in inactive markets. The IASB's starting point in developing the exposure draft was the equivalent US standard, SFAS 157 Fair Value Measurements as amended. The proposed definition of fair value (FV) is identical to the definition in SFAS 157 and the supporting guidance is also largely consistent with US GAAP. Comment deadline is 28 September 2009. Click for Press Release (PDF 101k).

June 2009: IAS Plus Newsletter about the Exposure Draft

Click to download the IAS Plus Update Newsletter: Exposure Draft Proposes Expanded Guidance on Fair Value Measurement (PDF 71k)

Discussion at the October 2009 IASB Meeting

Comment letter analysis

The staff presented a summary analysis of comment letters received in response to the IASB's Invitation to Comment and Exposure Draft of a proposed IFRS Fair Value Measurement. To date, 157 comment letters had been received. The staff noted that as issues are redeliberated, more detailed analyses of the comments received would be presented.

The staff noted that nearly all respondents were in favour of the project and that constituents generally identified the following:

• having a single source of guidance would reduce complexity and improve consistency in the application of fair value measurements
• the IASB and FASB should work together to develop fully-converged guidance for fair value measurement under both IFRSs and US GAAP
• an exit price notion is not relevant for assets when an entity does not intend to sell the asset (that is, when it is being used in the operations of the business or it is a financial asset not held for trading)
• a liability measure should reflect a settlement notion, not a transfer notion, if the liability cannot legally be transferred or if the entity does not intend to transfer it
• some of the guidance for measuring fair value in inactive markets in the Expert Advisory Panel's report should be added to the final IFRS on fair value measurement guidance.

Board members noted that some of these items reflected constituents' opposition to measuring an item at fair value (the 'when' question) rather than disagreement with the ED's proposals about 'how' to measure fair value when an IFRS required such a measure.

In addition, some Board members noted that the use of 'fair' in 'fair value' was an emotive issue for many constituents. Some constituents seemed to think that the Board had only two buckets, cost and fair value, and that there was no place in IFRSs for current measures other than fair value. It might be better that the IFRS be neutral and refer to 'exit price', 'entry price', etc. The confusion also extended to whether approximations/ estimations of fair value determined using present value techniques could be described as 'fair value'.

Another Board member was concerned about the application of the IFRS in less developed economies and economies in transition. In many such jurisdictions, hypothetical markets were 'beyond their experience and imagination'. As part of the Board's outreach activities during redeliberations, specific consideration should be given to engaging with these jurisdictions – either through activities in Africa, South America, and South-east Asia, or through meetings to be held as part of, or as an adjunct to, meetings of the SAC; or through remote meetings, utilising technology. There was support for such activities.

Preliminary project plan

The staff presented a preliminary project plan outlining their proposed approach to redeliberating issues in the exposure draft (ED) and for addressing developments in US GAAP (including Accounting Standards Updates 2009-5 and 2009-12) subsequent to the publication of the ED in May 2009.

While approving the project plan, Board members expressed concern that the plan gave the impression that the staff was concentrating on 'playing catch-up' with US GAAP and would not address IASB constituents' concerns and suggestions for joint improvement in the standards. The staff noted this concern and stated that such issues would be discussed at the forthcoming joint IASB-FASB meeting later in October 2009.

Discussion at the October 2009 Joint IASB-FASB Meeting

The IASB published the exposure draft Fair Value Measurement in May 2009 and received 156 comment letters at the time of the posting of the agenda paper.

Most respondents to the exposure draft urged convergence on the guidance for fair value measurement under IFRSs and US GAAP. The respondents were concerned with the use of different words in IFRSs and US GAAP might result in different approaches under fair value measurement and possibly different fair value conclusions. The staff presented three types of differences (please refer to the IASB Agenda Paper 11 for further details on each of the differences noted below):

• Type 1: Differences due to decisions taken by the IASB relating to
  • (a) scope,
  • (b) reference market,
  • (c) highest and best use,
  • (d) blockage factor,
  • (e) day 1 gains or losses,
  • (f) valuation premise and financial instruments,
  • (g) measurement of liabilities, and
  • (h) measurement of equity instruments
• Type 2: Differences to clarify some of the principles of Topic 820, namely
  • (a) highest and best use,
  • (b) valuation premise, and
  • (c) valuation techniques)
• Type 3: Differences in grammar, spelling and style

The staff then presented three approaches to the Boards on dealing with the differences that currently exist in the fair value measurement guidance. The approaches were:

• Approach 1: Eliminate all decision and wording differences. This approach requires both Boards to redeliberate all issues where differences have been identified.
• Approach 2: Eliminate Type 2 wording differences only. Under this approach the Boards would use the same words except for when each Board has reached a different decision.
• Approach 3: Continue as before. The IASB would publish an IFRS on fair value measurement guidance independently.

However, both Boards would monitor the activities of the other to minimise differences between the two standards. This is the approach undertaken so far in the project.

The Boards agreed to follow Approach 1 for the fair value measurement project moving forward.

November 2009: Notes from IASB fair value roundtable

On 2 November 2009, the IASB held a roundtable at the FASB offices in Norwalk, CT to discuss its Fair Value Measurements exposure draft (ED). Roundtable participants consisted of a cross-section of representatives including auditors, financial statement preparers, valuation experts and industry. Click to download the Notes Taken by Observers at the Roundtable (PDF 34k). Participants in the roundtable were asked to address the following issues and questions relating to fair value measurements:

November 2009: Notes from Tokyo fair value roundtable

On 27 November 2009, the IASB held a roundtable at the ASBJ offices in Tokyo, Japan, to discuss its Fair Value Measurements exposure draft (ED). Roundtable participants consisted of a cross-section of representatives including auditors, financial statement preparers, valuation experts, and industry. We have posted Notes Taken by Observers at the Tokyo Roundtable (PDF 29k). Those notes represent the roundtable observers' interpretations of the discussions, focussing on those issues that were not discussed at the Norwalk roundtable held on 2 November 2009 (see notes directly above). As with the Norwalk roundtable, the following issues were identified by the IASB staff for discussion during the roundtable:

• Issue A – Fair value as an exit price
• Issue B – Fair value of liabilities
• Issue C – Fair value of non-financial assets and liabilities
• Issue D – Fair value in inactive markets
• Issue E – Fair value in emerging and transition economies
• Issue F – Jurisdiction-specific issues
• Issue G – US GAAP convergence

December 2009: IASB seeks views on FV from emerging economies

Some of the comment letters received on the IASB's May 2009 Exposure Draft (ED) Fair Value Measurement indicated that entities in emerging and transition economies might find it difficult to apply the principles in the ED in practice. The IASB has decided it needs more information about this. Therefore, on its website, the IASB has invited its constituents to submit:

Discussion at the December 2009 IASB Meeting

Updated project plan

The Boards discussed an updated project plan for the fair value measurement project with the aim to eliminate all existing differences between the IASB fair value measurement project and ASC Topic 820. The Boards decided to deliberate all issues apart from scope of the project and effective dates jointly over the next three months. The FASB stated that it planned to publish its exposure draft on changes of Topic 820 in May 2010. IASB will provide a near final draft at the same time (or consider re-exposing depending on the changes from the exposure draft) in order to allow constituents to appreciate remaining differences, if any, between the FASB and IASB guidance. The Boards aim to publish a final standard in September 2010.

Discussion at the January 2010 Joint IASB-FASB Meeting

The IASB and the FASB discussed several issues connected with their efforts to issue converged fair value measurement guidance based on ASC Topic 820 and the IASB's exposure draft Fair Value Measurement.

Definition of fair value

The Boards confirmed individually to define fair value as an exit price. The definition would be 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'.

Although some IASB members would prefer the Standard to refer to 'exit price' (both to avoid the emotive term 'fair value' and to be explicit about the measurement objective), the Boards agreed to retain 'fair value' as the term the Standard will use.

Fair value at initial recognition

The Boards discussed whether to confirm the proposals in paragraph 36 of the Fair Value Measurement ED, which contains a list of situations indicating when a transaction price might differ from fair value, is sufficient; and whether a comment that the 'list is not exhaustive' should be added.

The IASB agreed to conform the forthcoming IFRS to the language used in ASC Topic 820-10-30-3 that 'a transaction price might not represent the fair value of an asset or liability at initial recognition if any of the following conditions exist:

• (a) the transaction is between related parties;
• (b) the transaction takes place under duress or the seller is forced to accept the price in the transaction;
• (c) the unit of account represented by the transaction is different from the unit of account for the asset or liability measured at fair value; and
• (d) the market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability.'

The Boards explicitly refused to make any comment about the list not being exhaustive: in the view of many around the table, to do so would be to invite abuse.

Board members also discussed condition (b) and observed that the wording should be more explicit that an orderly transaction in an inactive market may still represent fair value as defined. When there is a lack of market activity, it may be that more work is required to determine that the transaction price does represent fair value.

Recognition of Day 1 gains and losses

The IASB did not agree with a staff proposal that he IASB should address the recognition of Day 1 gains and losses in the fair value measurement project. A majority of the IASB thought that addressing 'when' to recognise a Day 1 gain or loss represented scope creep in a 'how to do fair value' Standard and created unnecessary noise in that Standard.

Measuring liabilities at fair value

After a long discussion, the IASB agreed that the IFRS should:

• (a) require an entity to measure the fair value of a liability, in the absence if a quoted price in an active market representing the transfer of a liability, as follows:
  • (i) using the quoted price of the identical liability when traded as an asset (that is, a Level 1 measurement), if that price is available
  • (ii) if that price is not available, using quoted prices for similar liabilities or similar liabilities when traded as assets (that is, a Level 2 measurement)
  • (iii) if observable inputs are not available, using another valuation technique such as:
    • (1) an income approach (for example, a present value technique) or
    • (2) a market approach (for example, using the amount that a market participant would pay to transfer the identical liability or receive to enter into the identical liability)
• (b) describe the compensation a market participant would demand for taking on an obligation in the application of a present value technique
• (c) clarify that the transfer of a liability assumes that a market participant transferee has the knowledge and ability to fulfil the obligation.

Non-performance risk

Without substantial discussion, the IASB agreed:

• (a) that the fair value of a liability includes the effect of non-performance risk; and
• (b) the IFRS should clarify what non-performance risk represents.

The IASB agreed that the fair value of a liability should not be adjusted for the effect of a restriction on its transfer.

Measuring own equity instruments at fair value

The IASB agreed to include guidance in the IFRS for measuring the fair value of an entity's own equity instruments. That guidance should reflect the proposal in the IASB's ED, paragraphs 32 and 33.

Measuring fair value when markets become less active

Following the earlier discussion, the Boards agreed that the converged Standard should:

• (a) provide guidance for measuring fair value when markets become less active, specifically that the guidance to be provided shall be used when there has been a significant decline in the volume or level of activity for the asset or liability;
• (b) state that when measuring fair value when markets are less active, the issue is whether an observed transaction price represents fair value, not about the level of market activity (although changes in market activity may be an indication that an observable price does not represent fair value, and that an entity may need to make further efforts to determine fair value). The IASB's exposure draft and Topic 820 do not address this explicitly.
• (c) state that it is the nature of the transaction and not the state of the market that is important. An orderly transaction in a disordered market may still represent fair value as defined; simply because the transaction took place when the market was disordered is not sufficient to move away from the transaction price.

Discussion at the February 2010 Joint IASB-FASB Meeting

The Boards continued their discussions on fair value measurements in accordance with the project plan presented at the December 2009 joint meeting.

Measuring the fair value of a financial instrument

As part of their deliberations on measuring the fair value of a financial instrument, the Boards were asked:

• if the highest and best use concept is relevant for the measurement of liabilities and financial assets;
• if the valuation premise concept is relevant for liabilities and financial assets;
• how the fair value of a financial instrument should be measured when there are offsetting risk positions; and
• if valuation adjustments should be made in a fair value measurement using valuation techniques.

Without much deliberation the Boards tentatively agreed that the 'highest and best use' concept is only relevant for non-financial assets because financial assets do not have alternative uses, as changes in the terms of the financial asset will result in a different asset. A similar principle applies to liabilities where a change in the terms of a liability will result in a different liability. The Boards then also agreed that if the highest and best use concept does not apply to liabilities and financial assets, the valuation premise is not relevant either. This will avoid the need to determine a valuation premise for liabilities and financial assets when there is only one possible result.

The Boards then considered whether to provide a practical expedient allowing entities to measure fair value of a financial asset or a financial liability by considering offsetting market risk positions, including credit risk in Levels 2 and 3 of the fair value hierarchy. In considering the merits of the practical expedient, the Boards were presented with two illustrative examples prepared by the staff (these were not made public) dealing separately with credit risk adjustments and other market risk adjustments.

The Boards deliberated at length whether an adjustment should be made for credit risk when financial instruments are valued as part of a portfolio. Several Board members noted that they support the view in the illustrative examples where an adjustment for credit risk have been made, although they acknowledged that such a view is not in accordance with existing and proposed guidance on fair value measurement. The staff explained that this is the reason why a practical expedient has to be included in the guidance. By a very small margin, the Boards tentatively supported the adjustment for credit risk. One Board member reminded the Boards that such a significant change to the proposed guidance will require re-exposure of the guidance and may result in this Board member dissenting from the proposed guidance.

The Boards then considered the illustrative example dealing with offsetting other market risk positions. Both Boards indicated that such an adjustment would not be in accordance with existing guidance, with some members questioning why an entity would make adjustments for offsetting market risk positions when presentation in the statement of financial position will be on a gross basis. The majority of Board members did not support the staff recommendation to allow entities to measure fair value by considering offsetting market risk positions.

The Boards also deliberated the valuation adjustments that may be needed when measuring the fair value of a financial instrument when there is not a quoted price that instrument (that is, when a valuation technique is used). The Boards tentatively agreed to describe the type of valuation adjustments that might be needed in measuring fair value, without being too prescriptive.

It was also agreed to include a requirement that any valuation adjustments must be consistent with the objective of fair value measurement, that is, only including those adjustments that market participants would include.

Premiums and discounts in a fair value measurement

Comments received on the IASB's ED and at round-table discussions highlighted divergent interpretations of the term 'blockage factor'. The Boards were asked to clarify what a blockage factor is. The Boards agreed that is an estimate of the reduction in a quoted price that would occur if a market participant were to sell a large holding of instruments at one time. A blockage factor is, therefore, specific to the transaction and not to the instrument – for this reason it should not be included in a fair value measurement at any level of the fair value hierarchy.

The Boards also tentatively confirmed that this does not preclude the application of other premiums and discounts within Levels 2 and 3, such as control premiums, lack of marketability discounts, and minority interest discounts, because those are adjustments that a market participant would consider in pricing and asset of liability.

Valuation premise for non-financial assets

In the ED, the IASB asked whether the proposed guidance for the in-use and the in-exchange valuation premise is appropriate. Some respondents commented that they do not agree that an asset is sold individually in the in-use valuation premise because the assets are typically sold as a group. The Boards were asked to confirm their assumption that the asset is sold individually.

The Boards confirmed that the in-use valuation premise assumes that the individual asset's value is measured in the context of its use with other assets as a group and that the market participant buyer has the complementary asset – the right to manage or operate it. The Boards therefore tentatively agreed that the in-use and in-exchange valuation premise assume that the asset is sold individually and not as part of a group of assets or a business.

There appears to be confusion about the terms 'in-use' and 'in-exchange' as both relate to the use of an asset, and both rights are sold in exchange transactions. The Boards were presented with two alternatives for resolving the confusion:

• Approach 1: retain the existing methodology but better explain the meaning of the terms; or
• Approach 2: delete the terms and rather describe the objective each in the standard.

One Board member recommended that the guidance should be written in such a way that not only valuers will understand the meaning, and that the meaning of the terms should be made clearer in way that 'ordinary' people will be able to understand what the standard requires them to do. The Boards tentatively expressed support for Approach 2, subject to the understanding that the objectives are expressed in a better way.

Highest and best use

At their January 2010 joint meeting, the Boards tentatively confirmed that fair value measurement reflects market participant views. At this meeting, the Boards tentatively agreed that as market participant buyers will consider how they will use the non-financial asset when determining the price they are willing to pay – the price will reflect the asset's highest and best use by market participants.

In addition, the Boards were asked whether to include and describe the terms 'physically possible', 'legally permissible', and 'financially feasible' in the context of 'highest and best use' in the proposed standard. The Boards agreed to include a description of the terms and their impact on highest and best use in the proposed standard.

Incremental value

The IASB's ED referred to incremental value as the difference between the current use value of an asset and its fair value (highest and best use value). The Boards considered whether to require entities to separate the fair value of an asset into two components or only require the disclosure of relevant information when an entity uses an asset (recognised at fair value) together with other assets in a way that differs from its highest and best use.

Staff recommended that disclosures should only be provided when an asset is used in a way that is different from highest and best use, and this would be expected to occur only in rare circumstances. One Board member commented that the issue has been raised at the Hong Kong roundtable meetings, where it may be possible to operate a hotel on a site that can be of higher and better use as an apartment building; however, it would take a number of years to convert the hotel.

The Boards had a short discussion on whether assets should be componentised, but when asked to vote, the majority tentatively supported the staff's proposal to require disclosure only.

Measuring the fair value of difficult-to-value assets and liabilities (including unquoted equity instruments)

Without much discussion, the Boards agreed not to provide specific guidance for measuring the fair value of difficult-to-value assets and liabilities (including unquoted equity instruments) in the converged fair value measurement Standard, as any guidance would be prescriptive and inconsistent with principle-based standards.

Nonetheless, the staff noted that it plans to develop educational material that should address potential concerns by constituents.

The Boards also agreed not to include guidance about when cost might be an appropriate estimate of fair value in the converged fair value measurement Standard. The IASB decided that such guidance will be retained in the individual standards (that is, in IFRS 9 and IAS 16). Some IASB members said that eventually all the guidance should be in the fair value measurement Standard or, if redundant, eventually withdrawn from IFRS 9 and IAS 16.

Discussion at the February 2010 IASB Meeting

Measuring the Fair Value of Alternative Investments

The Board considered the requirements under US GAAP (ASU 2009-12 Investments in Certain Entities that Calculate Net Asset Value per Share (or its equivalent)).

The Board agreed not to provide a practical expedient by allowing entities applying IFRSs to use net asset value (NAV) as an estimate of fair value for alternative investments. The Board was concerned that such a practical expedient would be not operational as under IFRSs there are not specific accounting requirements how to calculate the NAV.

Some Board members noted that in many cases the NAV would be the best estimate of fair value as NAV would be the exit price of the investment. On the other hand, in different fact patterns NAV would be inconsistent which the objective of fair value measurement (for example, investment that could be redeemed at NAV, which consists of investment of that generates higher return). Therefore, the Board decided not to include the US guidance that is jurisdiction specific in the Fair Value Measurement Standard and explain its rationale in the Basis for Conclusions.

Discussion at the 3 March 2010 Special Joint IASB-FASB Meeting

Educational material on fair value measurement to accompany the Standard

The Boards discussed the nature and content of the planned educational guidance for measuring the fair value of difficult-to-value assets and liabilities. The IASB has solicited feedback about the practical application of fair value measurement principles in emerging and transition economies through extensive outreach and request for input. Based on the feedback received, constituents asked for further guidance on how the principles should be applied in more challenging situations.

Some Board members were concerned that the proposed guidance was too broad and would cover application of judgement. Other Board members noted that if the guidance is necessary it should be included in the Standard itself. They also expressed their concerns how such non-authoritative guidance would interact with IVSC Guidance noted (for instance, the recently published Guidance Note on valuation of intangibles).

Finally, the Boards agreed that the guidance should be similar to the guidance published by the Expert Advisory Panel and include examples (case studies) of how to apply the fair value measurement principles in practice. When preparing the guidance, the staff would consider whether some of the examples should be included in the Standard itself. Nonetheless, the staff noted that based on the IASB's approach in other Standards, the majority of the examples would be included in the educational material. The Boards expect to publish this education material a few months after publication of the final IFRS (currently planned for the third quarter of 2010).

Discussion at the 11 March 2010 Special Joint IASB-FASB Meeting

Measuring the fair value of financial instruments within a portfolio

The staff opened the discussion by noting that the topic was one of the most controversial issues in the fair value measurement project and was the main issue that financial institutions wanted to discuss with the IASB after the publication of the exposure draft (ED) Fair Value Measurement in May 2009. Those constituents were concerned that the proposals in the ED would:

• change practice significantly with respect to how entities measure the fair value of financial instruments managed within a portfolio;
• result in significant operational challenges and costs; and
• result in financial reporting being divorced from risk management systems.

The staff undertook intensive outreach activities with several large financial institutions to determine how entities measure financial instruments within portfolios in practice. The agenda paper noted two approaches to measurement – the individual instrument approach and the portfolio approach. The staff recommended that a portfolio approach be permitted. In that approach, the unit of account and the unit of valuation might differ. This is the approach currently used in practice for measuring the fair value of financial instruments that are managed within a portfolio.

Bid-ask

The staff recommended that the boards permit entities:

1. to use mid-prices as a basis for establishing fair values for offsetting (ie long and short) market risk positions (as market risk is defined in IFRS 7), and
2. to apply the price within the bid-ask spread that is most representative of fair value to the net open risk position.

Such an approach would be limited to circumstances in which:

1. the entity manages its financial instruments on the basis of the net open risk positions in accordance with the entity's documented risk management strategy (that is, it would not apply to entities that 'exit' a financial instrument by selling or transferring an individual financial instrument, but it would apply to entities that 'exit' a financial instrument by entering into an offsetting risk position).
2. the market risks (for example, interest rate risk, currency risk, or other price risk) that are being offset are substantially the same.
3. the financial instruments share common characteristics (for example, maturities).
4. the financial instruments are measured at fair value on a recurring basis.

There was much disquiet with this recommendation. Some Board members thought it was inviting inappropriate entity-specific measurements, in particular because of the way entities would be allowed to assemble the portfolios for measurement purposes. Those Board members criticised a staff comment that the value of the portfolio depends on the other instruments held by the entity and the entity's risk preferences. The use of 'depends' in this statement created a presumption of an entity-specific measure. Those Board members also thought that an entity's risk preferences had no bearing on measuring fair value.

Other Board members were more sympathetic: they saw it as a pragmatic approach that aligned financial reporting models with best practices in business.

The Boards eventually concluded that the staff proposal could be supported; however, it must be described as an exception to the general principle in the Fair Value Measurement standard. Board members continued to be concerned about establishing discipline around the net positions being measured. Both Boards supported the staff recommendations by majorities.

Counterparty credit

The Boards agreed to permit entities to consider offsetting counterparty credit risk positions when measuring the fair value of financial instruments when there is a legally enforceable right of offset (such as in a master netting agreement) with the counterparty in the event of bankruptcy (or other default).

Again, some Board members were unhappy with the staff recommendation – some seeing it as an inappropriate use of offsetting, compounding the measurement error. However, others were happier to see the measurement proposals used in this situation than in the bid-ask spread situation, above. The staff recommendations were agreed by majorities in both Boards.

Discussion at the March 2010 IASB Meeting

Scope considerations regarding IFRS 2 Share-based Payment

The Board decided to exclude IFRS 2 from the measurement and disclosure requirements in the final Standard on Fair Value Measurement.

The Board also agreed to provide a note to IFRS 2 that would clarify that requirements of the Fair Value Measurement Standard do not apply to IFRS 2. As one of the Board members noted in some instances the fair value reference in IFRS 2 relates to fair value as proposed in the Standard (such as fair value of goods and services), whereas in other instances (such as equity settled share based payments), fair value is assessed from a different perspective that is inconsistent with the fair value measurement Standard.

Scope considerations regarding IAS 17 Leases

The Board discussed a possible scope exemption for IAS 17 in the context of using the exit price notion or highest and best use (especially in the context of classification of leases and the timing of recognising gains or losses for sale and leaseback transactions). Some Board members were uncomfortable with a blanket scope exemption in this case and would prefer clarification of the fair value measurement standard to ensure that this is a particular application of fair value for non-financial items (that is, using an entry rather than exit price). The Board agreed that the staff should try to clarify the text of the Standard if possible. If such clarification is impractical, leases should be excluded from the scope of the Fair Value Measurement Standard. The Board also noted that amending IAS 17 would be impractical as new guidance for leases is planned to be finalised by June 2011.

Other scoping considerations

Without much discussion the Board agreed not to replace the term 'fair value' in IFRS 3 Business Combinations when referring to the measure for reacquired rights (as an exception to the measurement principle in IFRS 3).

The Board also decided not describe the measurement of the reimbursement rights in IAS 19 Employee Benefits as the present value of the related obligation as a practical expedient for determining fair value.

The Board discussed the potential scope exemption in IAS 39 for measuring financial liabilities with a demand feature (IAS 39.49). Most Board members agreed that the conclusion from IAS 39 should be confirmed and guidance in IAS 39.49 is 'deemed to be fair value for the purposes of liabilities with demand features'.

One Board member asked the staff how this would influence the convergence with the FASB. The staff responded that FASB is considering to change the guidance for liabilities with demand feature (to remove the demand deposit floor and measure the intangible), in which case there would be differences between IASB and the FASB guidance. Most IASB members noted that the final guidance should precisely describe what the measurement is and what attributes it includes. The Board agreed to retain the term 'fair value' for measuring financial liabilities with a demand feature.

The Board decided that each of the IFRSs that are excluded from the scope of the Fair Value Measurement Standard should state the reasons for that decision and why the term 'fair value' was nevertheless retained in that Standard.

IFRIC 13 Customer Loyalty Programmes

The Board considered whether an IFRS on fair value measurement should exclude IFRIC 13 Customer Loyalty Programmes from its scope. After the IFRIC meeting in March, After the IFRIC meeting the staff became aware of a potential conflict between IFRIC 13 and the proposed fair value measurement guidance. This issue was not raised in any of the comment letters on the exposure draft ED/2009/5 Fair Value Measurement.

For various reasons, the staff had concluded that the use of the term 'fair value' in IFRIC 13 was consistent with the proposed fair value measurement guidance in the forthcoming IFRS on fair value measurement. Consequently, they recommended that the fair value measurement IFRS exclude IFRIC 13 from its scope. This approach would result in IFRIC 13 using the term 'fair value' and retaining the current definition of fair value. However, even though IFRIC 13 refers to 'fair value', transactions within the scope of IFRIC 13 would not be subject to the measurement and disclosure requirements of the IFRS on fair value measurement.

The Board disagreed with the staff on a number of levels. Board members were unconvinced by the staff's analysis and the suggestion that the revenue recognition project would address the issues in IFRIC 13 satisfactorily. To exempt IFRIC 13 from the fair value measurement IFRS would send the wrong message and could lead to regressive practices. The last thing the Board needed to do when it issued the IFRS was to send incoherent signals along with it.

The staff recommendation was defeated. IFRIC 13 will be within the scope of the IFRS on fair value measurement.

Discussion at the March 2010 Joint IASB-FASB Meeting

Disclosures about fair value measurements

The Boards discussed the disclosure requirements of a converged fair value measurement Standard. The staff presented the Boards a comprehensive comparison of disclosure requirements under U.S. GAAP and proposed IFRS guidance. The staff noted that most of the differences resulting from different wording could be addressed by the drafting process and the Boards would discuss only the substantial differences.

The Boards considered the difference in the definition of 'class' (as the proposed guidance requires disclosure by 'class' of assets or liabilities. The Boards agreed that the 'class' should be defined in the Standard and the definition should consider the following principles:

1. an entity should determine the appropriate classes of assets and liabilities based on the nature, characteristics and risks of the assets and liabilities and their classification in the fair value hierarchy.
2. a class of assets and liabilities often will require greater disaggregation than the entity's line items in the statement of financial position
3. judgment is needed to determine the appropriate classes of assets and liabilities.

Although all Board members supported this guidance, some Board members expressed their preference for a wording that would emphasise disaggregation based on nature of assets or liabilities, risks and their concentrations in order to be truly useful. The staff will consider this input in drafting of the Standard.

Without much discussion the Boards agreed not to require disclosure of information about the change in fair value in the non-performance risk of a liability in the fair value measurement Standard, i.e. the disclosure should remain in IFRS 7 and ASC 825.

The Boards agreed to require disclosure of the policy for determining when transfers between levels of fair value hierarchy are recognised.

The IASB affirmed the proposed amendment to IAS 34 Interim Financial Reporting to require disclosures about fair value measurement for financial instruments in an entity's interim financial statements.

The Boards continued their discussion about the requirement of Topic 820 that requires disclosure about fair value measurement only in periods after initial recognition. The IASB members did not agree with such requirement as they believed that movement of fair value in the period of initial recognition can be significant and should be disclosed. FASB members also noted that the FASB should also clarify the meaning of the requirement of Topic 820 as it might not be appropriate. Finally, both Boards agreed that disclosures about fair value measurements should be required for all the assets and liabilities that are subject to subsequent re-measurement (whether or not fair value at the reporting date is different from fair value at initial recognition).

The Boards also agreed to require the same disclosures for both recurring and nonrecurring fair value measurements, except for the Level 3 rollforward and information about transfers between Levels 1 and 2 that would be required for recurring measurements only. One IASB member expressed his concerns about the language used as the IFRSs do not define the recurring/non-recurring notion and asked the staff whether it planned to introduce such notions into the fair value measurement Standard. The staff clarified that the concept would be described in full (that is, when assets and liabilities are measured and recognised at fair value on the statement of financial position on a regular basis) rather than introducing the concept of recurring/non-recurring. The Board agreed.

Finally, the Boards agreed to require entities to disclose fair value information by level in the fair value hierarchy even for items that were not measured at fair value in the statement of financial position (consistent with current IFRS 7 requirements for financial instruments). Most Board members argued that these information are useful for the users of financial statements as they pointed out to the significance of judgement about the fair value (especially in the context of the allegations that disclosures in the notes are audited much less rigorously than the information provided on the face of primary statements). In addition, the Boards agreed that the cost/benefit argument not to require such disclosure was not persuasive as the entities have to ascertain (calculate) the fair value and thus must know which inputs or assumptions they used in the calculation.

The Boards discussed the requirement proposed by the IASB ED/2009/05 Fair Value Measurement to disclose sensitivity analysis for Level 3 fair value measurements for all assets and liabilities measured at fair value.

The feedback from constituents on this required was mixed. Users on one hand supported this requirement as they considered it to be helpful in indentifying and assessing the degree of subjectivity in Level 3 fair value measurement as well as in understanding company's valuation processes and assumptions. Preparers, on the other hand, considered these proposals to be burdensome and impracticable.

The Boards were split on these requirements. Although a clear majority of both Boards supported retaining of the sensitivity requirements in some form, a great variety of views were presented, indicating no apparent consensus on details of such requirements.

One FASB member suggested that the requirements on sensitivity analysis should not be included in the fair value measurement Standard in their entirety. He suggested that the fair value measurement Standard should include only general guidelines on Level 3 fair value sensitivity analysis, whereas the decision whether to require the Level 3 fair value sensitivity analysis disclosure should be made in individual standards (that is, financial instruments, investment property etc.). This suggestion initiated a considerable debate that included the discussion whether to require Level 3 fair value sensitivity analysis for financial instrument only or to all asset and liabilities measured at fair value.

Some Board members were particularly concerned that by limiting the sensitivity analysis to financial instruments only, the guidance would miss investment properties, certain commodity derivative contracts or biological assets. Finally, the Boards agreed that the 'how to' perform a sensitivity analysis would be included in the fair value measurement Standard, whereas the decision whether to require sensitivity analysis as well as more detailed requirements for sensitivity analysis would be included in the individual Standards. The Boards asked the staff to explore an alternative suggestion, proposing that the fair value measurement Standard would require a Level 3 sensitivity analysis for all assets and liabilities measured at fair value and individual Standards would provide exemptions from this requirement when necessary.

Although some Board members in principle supported the staff recommendation to specify that the sensitivity analysis disclosure should consider the effects of interdependencies or correlations between inputs, where practicable, they expressed their concerns how operational would be these requirements, especially in the context of a smaller financial institution. Instead, they suggested a requirement based on the most significant input and qualitative disclosures about other inputs and potential interdependencies. Moreover, some Board members felt that the nation of interdependence should be defined more rigorously (i.e. joint effects of two or more inputs or effects of changing one input on other inputs). One Board member noted that such requirement on interdependency would lead to more entities using Value at Risk rather than sensitivity analysis.

Some Board members also noted that the whole reason behind sensitivity analysis is to provide disclosures about measurement uncertainty at the reporting date and not variability of fair value measurement. The Boards also clarified that sensitivity analysis disclosure was not based on a worst-case scenario and it was not forward looking but related to the measurement date.

Another set of concerns were expressed about the frequency of presenting this sensitivity analysis. Some Board members were concerned that quarterly disclosure of sensitivity analysis was not operational, given the tight reporting deadlines and filing requirements.

The Boards expressed also concerns about the consistency of the disclosures and asked the staff to consider providing tighter wording that would establish more consistency of disclosures.

The Boards will reconsider details of the requirement to provide Level 3 fair value sensitivity analysis.

Finally, the Boards agreed not to provide any additional guidance for assessing the significance of an input or significant changes in fair value (in addition to those already in IFRS 7 and Topic 820). One Board member suggested deleting the discussion on assessing of significance currently in IFRS 7 as in his view materiality and significance is matter of judgement that was not always assessed in reference to profit or loss, total assets or total liabilities.

The staff noted that the IASB would discuss the recognition of day 1 gains or losses for financial instruments at a future meeting.

June 2010: Limited-scope ED on fair value measurement

On 29 June 2010, the IASB issued an exposure draft (ED) Measurement Uncertainty Analysis Disclosure for Fair Value Measurements proposing relatively minor amendments to the proposals in its May 2009 ED on fair value measurement. The May 2009 ED proposed a three-level fair value hierarchy that categorises observable and non-observable market data used as inputs for fair value measurements. Under that hierarchy, Level 3 inputs are 'unobservable inputs' used for the fair value measurement of assets or liabilities for which market data are not available. Required disclosures would include a 'measurement uncertainty analysis' (sometimes called a 'sensitivity analysis'). The newly proposed amendments would enhance the original proposal by requiring the measurement uncertainty analysis disclosure to reflect the interdependencies between unobservable inputs used to measure fair value in Level 3. Comment deadline is 7 September 2010. The US FASB has also issued a similar exposure draft, Fair Value Measurements and Disclosures (Topic 820): Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, relating to the measurement uncertainty analysis disclosure.

Click for:

• IASB Press Release (PDF 101k)
• IFRS in Focus Newsletter – IASB issues Exposure Draft on Fair Value Measurement Disclosures (PDF 60k).

Presented below are the IASB's key conclusions to date on fair value measurement, based on the May 2009 ED and subsequent redeliberations and decisions.

A comprehensive project summary, prepared by the IASB staff, has been posted to the fair value measurement project page of the IASB's site. The project summary (PDF 951k) provides the background to the IASB's fair value measurement project and explains how the IASB plans to finalise an IFRS on fair value measurement. The summary also includes a comparison of the tentative decisions reached so far in the project with the proposals in the IASB’s May 2009 exposure draft Fair Value Measurement and the proposals in the US Financial Accounting Standards Board’s (FASB) exposure draft of a proposed Accounting Standards Update (ASU) Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (link to FASB website).

July 2010: IASB publishes fair value measurement questionnaire for financial statement users

The IASB has published a questionnaire for financial statement users on its June 2010 exposure draft ED/2010/7 Measurement Uncertainty Analysis Disclosure for Fair Value Measurements - Limited re-exposure of proposed disclosure. The ED proposes that companies disclose sensitivity information ('measurement uncertainty analysis') about all 'Level 3' fair value measurements included in financial statements - not just for financial instruments, but also other items such as investment properties, biological assets and property, plant and equipment measured on the revaluation basis.

The questionnaire is targeted at users of financial statements, particularly analysts, and requests feedback in areas such as:

• The usefulness of 'measurement uncertainty analysis' to different categories of assets and liabilities
• How measurement uncertainty analysis information is used - 'worst case' or 'best case' scenarios, or for other uses
• Whether information presented by class of asset and liability is sufficient
• Additional disclosures that would be useful.

The deadline to complete the questionnaire is 7 September 2010. The questionnaire can be accessed on the IASB website. More information on the proposals is available in our IFRS in Focus newsletter (PDF 60k).

The IASB and FASB have posted a joint webinar to introduce their respective exposure drafts on fair value measurement. The webinar has been prepared by the staff of the IASB and the FASB to help constituents understand the proposals in the FASB Exposure Draft Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (link to FASB website) and the IASB Exposure Draft Measurement Uncertainty Analysis Disclosure for Fair Value Measurements.

August 2010: IASB staff draft of IFRS on Fair Value Measurement

The IASB has posted to its website a staff draft of a forthcoming IFRS on fair value measurement, reflecting the tentative decisions made to date by the IASB and the FASB.

The IASB's initial exposure draft on fair value measurement was issued in May 2009 and has been followed up a number of requests for information and feedback, including an additional limited scope exposure draft issued in June 2010.

The IASB is not requesting comments on the staff draft, but notes the FASB issued a nearly identical proposed Accounting Standards Update (ASU) Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Accordingly, constituents may wish to comment on the proposals by submitting a comment letter to the FASB prior to the end of the comment period for the proposed ASU (7 September 2010).

The IASB and FASB expect to jointly consider comments received in developing a joint standard, which is expected to be issued early in 2011. Click for Access to IASB staff draft (link to IASB website).

Discussion at the September 2010 IASB Meeting

The staffs of both the IASB and FASB presented to the two Boards the results of comments received from the IASB's exposure draft on the sensitivity analysis disclosures and the FASB's proposed Accounting Standards Update amending certain measurement guidance and disclosure requirements as a result of the joint deliberations with the IASB.

The feedback received through the comment letter process can be summarised in three primary categories:

• highest and best use concept
• application of premiums and discounts, and
• the measurement uncertainty analysis.

Highest and Best Use Concept

Some respondents agreed that the highest and best use concept applies to non-financial assets rather than financial instruments. However, many commented that this may result in a lack of clarity regarding the unit of account when other standards do not clearly specify the appropriate unit of account. An example was mentioned of an investment company and whether the appropriate unit of account would be the holding or the individual instruments that make up the investment. Some suggested utilising a concept of "value maximising behaviour" similar to the highest and best use concept.

Application of Premiums and Discounts

Some respondents disagree with the prohibition of considering blockage factors in determining fair value of a holding. Others felt that additional guidance on blockage factors would be beneficial to provide clarity why a control premium is permitted while a blockage factor is prohibited.

Measurement Uncertainty Analysis

Many respondents had significant concern over the proposals on the measurement uncertainty analysis (sensitivity analysis). Comments received on the IASB exposure draft focused on the scope of the proposal as IFRS 7 already includes a sensitivity analysis. The comments on the FASB exposure draft were overwhelmingly opposed to the disclosure requirement.

Concerns raised on the proposed measurement uncertainty analysis include the belief that the disclosure undermines the legitimacy of the level 3 measurement, a lack of guidance on the inclusion of correlation in the disclosure, a lack of guidance on consideration of assumptions that could have been used, questions on the use of third party information such as broker quotes in the level 3 measurement, concerns that level 3 items hedged by other instruments classified as level 1 or 2 may provide misleading results, and concerns over the scope of the disclosure requirements for specific items (e.g., unquoted equity investments).

Project Plan

The staff presented the Boards with a project plan to redeliberate those items where new information was obtained during the fourth quarter of 2010. The IASB staff expects to issue the final fair value measurement standard during the first quarter of 2010.

Discussion at the October 2010 IASB Meeting

The Boards began their redeliberations on the pending fair value measurement standard based on feedback received to the IASB’s exposure draft on measurement uncertainty and the FASB’s proposed ASU, Amendments for Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.

Disclosure of Highest and Best Use

The IASB and FASB have proposed a disclosure requirement for assets subsequently measured at fair value in the statement of financial position (for IFRSs assets under IAS 16 and IAS 40) that if the highest and best use of an asset is other than its current use, a disclosure of the reason that asset is being used in an alternative manner than its highest and best use.

An IASB Board member asked whether impaired assets would fall into this disclosure requirement. The IASB staff stated they would not apply now, but that the IASB would separately consider the disclosure requirements for IAS 36 and whether they should follow the fair value disclosure requirements.

The Boards tentatively agreed to require that for assets subsequently measured at fair value in the statement of financial position and for items disclosed at fair value but not measured at fair value in the statement of financial position to disclose the reason the asset is being used in a manner other than its highest and best use. Additionally, the Boards agreed not to limit the scope to particular types of non-financial assets so that any future decisions to require fair value measurement or disclosure would also be subject to this disclosure.

Disclosure of Level 1 and Level 2 Transfers

The Boards have proposed requiring a disclosure of any transfers between Level 1 and Level 2 of the fair value hierarchy. IFRS 7 and ASC 820 already require similar disclosures for significant transfers between Level 1 and Level 2 and many respondents to the comment letter process did not support the proposal because of the potential burden of monitoring for insignificant transfers.

Several members of both Boards were concerned with the inclusion of the term significant in that it adds an additional layer of complexity to financial reporting as entities have to assess the level of significance to transfers. One IASB Board member also questioned the additional burden created be disclosing all transfers believing the information would already be available and that disclosing all could actually be less burdensome than having to monitor for significance. One FASB member mentioned that he viewed the trend analysis of this disclosure as an important source of information (to monitor items moving down the hierarchy) and that only including significant transfers could impede the quality of the information provided.

Both Boards tentatively agreed to retain the language in the proposals that all transfers between Level 1 and Level 2 be disclosed.

Disclosure of Fair Value Hierarchy for Disclosed but not Recognised Items

The Boards have proposed to require that items for which fair value is disclosed, but not recognised at fair value, also be categorised within the fair value hierarchy. Many comment letter respondents (typically preparers) did not see the relevance of providing the level within the fair value hierarchy as these items are not managed on a fair value basis.

However, users feel that understanding the level of subjectivity in the fair value measurement is helpful.

Both Boards tentatively agreed to retain the language in the proposals that items disclosed at fair value but not measured at fair value in the statement of financial position be categorised within the fair value hierarchy.

Unit of Account Guidance

Certain standards under U.S. GAAP and IFRS require fair value measurement but do not contain specific guidance on the appropriate unit of account. Based on the comment letters received on the exposure drafts, preparers are applying valuation guidance to address unit of account questions. Additionally, the proposals removed the concept of highest and best use for financial assets.

The most notable example of the lack of unit of account guidance is for investment entities where an entity owns 100% of the outstanding shares of an investee and also provides debt financing to the investee. Fair valuing the entire interest in the entity and fair valuing the equity and debt investments separately may result in different valuations.

The staffs of both the IASB and FASB acknowledged that guidance is needed in these instances, but that providing that guidance should be done within the context of those specific standards rather than the fair value measurement standard. The staff believes it can incorporate guidance through drafting within the fair value measurement standard on the value maximisation concept to provide some amount of clarity until a more permanent solution can be achieved.

The Board tentatively agreed not to address the issue of unit of account guidance within the fair value measurement standard.

Discussion at the November 2010 IASB Meeting

The Boards continued their discussion on the fair value measurement project. Discussions focused on the following topics:

• measuring the fair value of an entity's own equity instruments
• premiums and discounts in a fair value measurement
• the measurement uncertainty analysis disclosure
• measuring the fair value of a group of financial assets and liabilities.

Measuring the Fair Value of an Entity's Own Equity Instruments

The staff provided a Board's with a summary of the relevant proposals in the current proposed ASU on fair value measurement, as well as an overview of certain feedback received from respondents. The staff noted that some respondents indicated that measuring the fair value of a reporting entity's own equity should be consistent with measuring the fair value of liabilities, and asked the Board's to provide additional clarification in this regard. The staff then provided the Boards with its analysis of circumstances in which guidance for measuring the fair value of liabilities is equally applicable when measuring the fair value of a reporting entity's own instruments. The staff recommended to the Boards that the final fair value measurement standard acknowledge that although equity instruments are different from liabilities, the guidance for measuring their fair value is the same in some respects, as outlined in the staff agenda documents.

Both the IASB and FASB unanimously supported the staff's recommendation.

Premiums and Discounts in a Fair Value Measurement

The staff provided the Board's with a summary of the relevant proposals in the current proposed ASU, as well as a summary of respondents' feedback pertaining to blockage factors and other premium and discount adjustments used in determining fair value. Staff noted that respondents generally supported the additional guidance the Boards provided on the meaning of a blockage factor, with some noting the term is often used broadly in practice to pertain to any discount or premium related to size or liquidity. Respondents also requested the Boards to provide additional clarity on multiple items, including (1) why an entity can apply a control premium but not a blockage factor when the application of both depend on the size of a holding, (2) distinguishing between blockage factors and adjustments for liquidity and concentration risk, and (3) whether it is appropriate to recognise a gain or loss at initial recognition when a premium or discount was priced into the transaction to buy an instrument but cannot be applied in the fair value measurement for accounting purposes to recognise a loss or gain upon an actual exit transaction. The staff then provided an overview of their additional analysis to the Boards, and recommended the Board take the following actions:

1. Not to allow consideration of discounts and premiums in a fair value measurement when such discounts or premiums are inconsistent with the unit of account specified in other standards (consistent with the proposal in the exposure draft). By doing so, any changes to the unit of account in other standards after the finalisation of the fair value measurement standard would not require further amendments to the standard.
2. Not to explicitly describe or distinguish between any premiums or discounts that might be applied in a fair value measurement.
3. Not to address the recognition of gains or losses when a transaction price differs from fair value because of the existence of a blockage factor.

In discussing the staff's recommendations, one Board member requested clarification that the recommendation would remove the term blockage factor, and questioned if a user of the guidance would not have interest in guidance on the application of a blockage factor. The Board member believed that the guidance can, and has articulated the difference between a blockage factor and a control premium. In turn, staff further described its intent, stating that it wanted to avoid making definitions for specific terms (i.e., a control premium, what is in a discount for marketability, what is included or excluded in a blockage factor, etc.). The staff then provided the Board with an overview of the intended flow of applying the guidance when valuing a fair value instrument: a level 1 price quote should be used if available, if not, determine if there is clear unit of account guidance. If such guidance exists, determine what premiums or discounts a market participant would use in valuing that unit account. If such guidance does not exist, utilise a value maximisation principle. Multiple Board members indicated that such language could still be included in the guidance without being prescriptive, but rather to clarify and articulate the intent the staff discussed. One Board member suggested such views be expressed in the standard's basis for conclusions. By majority vote, both the IASB and FASB agreed with the staff's recommendations, subject to their recommended clarifications.

Measurement Uncertainty Analysis Disclosure

The third topic on the fair value measurement project was a discussion on the measurement uncertainty analysis disclosure included in the proposed standard, beginning with a summary of the feedback provided by respondents. The staff noted that most IFRS respondents' concerns focused on the scope of the disclosure and various practical questions, and also noted the respondents did not have particular disagreements with the overall disclosure. Conversely, the staff noted respondents currently following U.S. GAAP strongly disagreed with the overall proposal. The staff then presented the Boards with a proposed discussion plan, encouraging the Boards to first clarify its objective for such a disclosure, and to in turn discuss the best means to achieve the objective. The staff recommended the Boards specify the objective of a measurement uncertainty analysis as follows:

“To provide a range of reasonable values (exit prices) that could have resulted from the use of other reasonable unobservable inputs in the fair value measurement.”

Before opening the topic for general discussion, the staff then provided the Boards with three potential approaches to disclosing information about measurement uncertainty for Level 3 fair value measurements:

• Option 1: Proceed with a measurement uncertainty analysis disclosure, with some modifications to the proposal.
• Option 2: Proceed with a sensitivity analysis about fair value measurements, excluding the effect of inter-relationships between unobservable inputs (as required in IFRS 7 today, with some modifications)
• Option 3: Proceed with a disclosure of additional information about Level 3 fair value measurements.

The Boards then discussed at length the intended objectives of the disclosure, the merits and drawbacks of the options presented by the staff, and potential resolutions for the issue. Multiple FASB members expressed significant concern about the potential cost for preparers to provide the disclosures, and believed that not enough research and analysis had been performed for the Boards to appropriately understand such concerns. An IASB member also highlighted investors' perspectives, noting such disclosures would provide useful and needed information for an investor to make an informed investment decision. Many board members agreed that Option 1 represented an ideal outcome, but recognised the concerns posed over the cost/benefit of the disclosure. Most Board members also agreed that Option 3 represented a minimum disclosure that would be present regardless of the ultimate outcome.

The Boards discussed various proposals on how to proceed with this aspect of the project and how the staff could best perform additional analysis and outreach. Multiple Board members stated a desire that continued deliberations on the measurement uncertainty analysis disclosure should not delay other aspects of the project in which the Boards had already reached a consensus. The Boards instructed the staff to perform additional analysis, and agreed to perform the analysis as a separate part of the project to be finalised after completion of the standard.

Measuring the Fair Value of a Group of Financial Assets and Liabilities

After discussing the measurement uncertainty analysis disclosure, the staff initiated discussion on the proposal to permit an exception to fair value measurement requirements for measuring the fair value of a group of financial assets and financial liabilities that are managed on the basis of an entity's net exposure to a particular market risk(s) or to the credit risk of a particular counterparty. However, before providing an overview of its agenda documents, the staff asked the Board if there was a need to defer the topic in order to further discuss the interplay of presentation and measurement netting given the conclusions the Boards reached on the offsetting project during the November 17th meeting. The staff noted that some Board members may have concerns about how a decision to present financial instruments on a gross basis, except in limited circumstances, would affect the measurement of those instruments. The staff did not make a recommendation to the Boards on the matter, but asked if the proposed fair value guidance on portfolios should be amended given the previous decisions on offsetting.

The Boards discussed the staff's question, with multiple Board members expressing a viewpoint that the presentation of a financial instrument should not impact how that instrument is measured, and that changing fair value guidance as a result of the offsetting decisions would create more significant issues in practice. After further discussion, both the IASB and FASB decided that deferring the topic to further consider the interplay between presentation and measurement was unnecessary, and agreed to proceed with the discussion as originally planned.

The staff then provided the Boards with an overview of their analysis, including a summary of the current proposal, and a summary of the feedback received from respondents. The staff indicated that respondents provided positive feedback on the decision to include the exception for portfolios of financial assets and financial liabilities that are managed as a group, noting such treatment is consistent with current practice and guidance. Accordingly, respondents suggested various clarifications be included in the final standard. In turn, the staff provided the Boards with multiple recommendations:

• Permit the application of the exception when financial instruments are managed on the basis of an entity's net exposure to a particular market risk or to the credit risk of a particular counterparty.
• Permit the application of the exception only to financial instruments measured at fair value in the statement of financial position, and not to those financial instruments that are not measured at fair value in the statement of financial position, but whose fair value is required to be disclosed.
• Require entities to make a consistently applied accounting policy decision to use the exemption (and disclosure that policy).
• Require that when there is a Level 1 instrument within a portfolio, an entity must use that quoted price without adjustment, even when the exception is used.
• Require that market risk that are being offset must be substantially the same (and provide an example)
• Clarify that a fair value measurement using the exception should reflect arrangements that mitigate credit risk exposure when such arrangements are legally enforceable.
• Clarify that a calculation of the credit adjustment should take into account the life of the potential exposure to credit risk.
• Not to require a particular method of allocation of the bid-ask and credit adjustments to the unit of account, but require that such allocations should be done on a reasonable, non-arbitrary and consistent basis.

After discussing each of the staff's analysis, the Boards agreed with the recommendations of the staff, noting they had appropriately addressed the comments received from constituents. With regard to the final recommendation, the Boards noted the staff should not draft too prescriptive guidance, but rather provide examples which describe common methodologies.

Discussion at the December 2010 IASB Meeting

Disclosure requirements for modifications to fair value

The IASB and FASB staffs have received questions on whether the proposed disclosure requirements would also apply to those fair value measurements when fair value is adjusted as part of the measurement attribute (e.g., fair value less cost to sell). This issue would be most relevant to IFRS 5 and IAS 41 and ASC Topic 360 Property, Plant and Equipment under US GAAP.

The Boards had not specifically addressed this issue during their initial deliberations. Both the IASB and FASB tentatively agreed to provide explicit guidance in the final standard that fair value measurement disclosures are required even in instances when fair value is modified.

Fair value measurement of a liability issued with an inseparable third-party guarantee

US GAAP's ASC Topic 820 Fair Value Measurements and Disclosures specifically addresses how to determine an issuer's unit of account for a liability issued with an inseparable third-party guarantee (originally issued as EITF Issue No. 08-5 Issuer's Accounting for Financial Liabilities Measured at Fair Value with a Third-Party Credit Enhancement). However, existing IFRS does not have explicit guidance on this issue. Paragraph BC 92 of IAS 39 simply provides that "the [IASB] also noted that the fair value of liabilities secured by valuable collateral, guaranteed by third parties or ranking ahead of virtually all other liabilities is generally unaffected by changes in the entity's creditworthiness."

Measurement of the liability

Under the guidance within ASC Topic 820, no separate asset would be recognised by the issuer for the packaging of the guarantee as part of the issued debt instrument. Instead, the amount initially recognised upon the issuance of the debt would be the net cash received (amount recognised for the debt issuance less the guarantee premium paid). If the liability were subsequently measured at fair value (i.e., the fair value option has been elected), the issuer would consider their own credit risk rather than the credit risk of the guarantor as part of the measurement of the liability at fair value.

Due to the lack of specific guidance within IAS 39 on this topic, the accounting may differ depending on whether the fair value of the liability is determined based on the packaged debt instrument including the guarantee, or whether the liability is measured separately from the attached guarantee. The IASB's exposure draft Fair Value Measurement proposed guidance that would require the fair value of a liability to be adjusted from the observable price of the liability when held as an asset by another party for features present in the asset but not in the liability, such as a third-party credit enhancement being packaged along with the liability.

In order to ensure the fair value guidance is applied consistently under IFRS and US GAAP, the staffs of the IASB and FASB have suggested moving the guidance outside the scope of the fair value measurement standard and instead address the unit of account issue within the guidance on measurement of financial instruments. The staffs have also recommended that the fair value measurement standard include guidance as mentioned above in the IASB exposure draft that the unit of account when fair valuing a liability might differ from the unit of account for the corresponding asset and therefore would not include the effect of third-party credit enhancement.

The Boards focused their discussion on whether the accounting under IFRS would result in a different answer than that under US GAAP and how the IASB plans to address the lack of specific guidance. The IASB discussed whether clarification would require a separate exposure draft on financial instruments, whether guidance could be included through the annual improvements process or whether the guidance could be included through consequential amendments to other standards as part of the issuance of the fair value measurement standard. The staff mentioned that the guidance was included in the exposure draft and therefore would not necessarily require a re-exposure.

The IASB and FASB both tentatively agreed with the staff recommendation to provide guidance within the fair value measurement standard that the unit of accounts for the liability and associated asset may differ. The FASB agreed to relocate the unit of account guidance within Topic 820 to ASC Topic 825 Financial Instruments. The IASB agreed to provide unit of account guidance within IAS 39 and IFRS 9 as part of the consequential amendments from the issuance of the fair value measurement standard.

Scope of the guidance

The guidance within Topic 820 related to third-party credit enhancements excludes when the credit enhancement is provided by 1) a government entity, 2) a parent to a subsidiary (or vice versa), or 3) entities under common control.

The IASB and FASB tentatively agreed that the guidance that the unit of account may not be the same for corresponding assets and liabilities and therefore not including the effect of third-party credit enhancement would only apply to guarantees purchased by the issuer and does not apply to liabilities guaranteed by entities within a consolidated group.

Disclosure of the guarantee

US GAAP already requires disclosure of the existence of a third-party credit enhancement on its issued liability. The IASB tentatively agreed to require similar disclosures.

IAS 19 plan assets measured at fair value

The exposure draft Fair Value Measurement had originally proposed to require fair value measurement disclosures for each category of plan assets under IAS 19, unless the deferred recognition model were utilised.

However, in the IASB's project to amend IAS 19 the Board has decided that disclosures about the fair value of plan assets were unnecessary because the entity did not hold those assets directly and therefore does not necessarily have information about the assumptions, inputs and a valuation techniques used. This decision contradicts the FASB's requirements for fair value disclosures related to employee benefit plans; however those disclosure requirements are part of ASC Topic 715 Compensation – Retirement Benefits rather than part of ASC Topic 820 Fair Value Measurements and Disclosures.

As a result, the Board tentatively agreed to exclude plan assets measured at fair value in IAS 19 from the scope of the fair value disclosure requirements. Doing so will not create a divergence in the fair value Standard issued by each Board.

IAS 36 asset impairments

The exposure draft Fair Value Measurement did not distinguish between recurring and non-recurring fair value measurements as IFRS does not have non-recurring fair value measurements (e.g., impairments are recorded at recoverable amount which is the higher of fair value less cost to sell and value in use). Comment letter respondents have requested similar information to be provided for impairments under both US GAAP and IFRS.

The IASB staff recommended that when the recoverable amount of an asset is determined based on fair value less costs to sell in IAS 36, an entity should disclose:

• the amount of the fair value measurement,
• the level within the fair value hierarchy,
• any changes to the valuation technique and reasons for the change,
• quantitative information about significant inputs used in measuring fair value, and
• whether the highest and best use differs from the current use.

Certain Board members expressed varying level of concern with the proposals. Those concerns included that IAS 36 already proscribed disclosure requirements to the proposals requiring information that may not be overly relevant. For example, the requirement to disclose the change in the valuation technique would likely have no relevance for an impairment measurement as there would not be a recurring fair value measurement. However, the Board ultimately agreed with the staff proposals.

Next steps

These discussions finalised the Board's decisions with respect to the fair value measurement requirements. The Board approved the staff's request to begin drafting of the final Standard and no Board members expressed their intent to dissent. The staff will come back to the Board in early 2011 to discuss the effective date of the Standard.

Discussion at the March 2011 IASB Meeting

The Boards discussed the effective date and transition requirements for the forthcoming standard (IFRS)/accounting standards update (ASU) (US GAAP) on fair value measurements.

The IASB exposure draft proposed prospective transition but did not propose an effective date for application of the fair value measurement IFRS. Comment letter respondents were generally supportive of the proposed prospective transition; therefore, the IASB staff is not bringing transition as an issue for discussion with the Board. The IASB staff recommended an effective date of 1 January 2013 with early application permitted.

One of the IASB members stated his support for the proposed effective date but questioned when the educational materials would be prepared so that jurisdictions where valuation principles were not as advanced as other markets could begin preparation for adoption. The staff mentioned they expected the educational materials to be ready for Q3 2011.

Two IASB Board members expressed concern with the proposed effective date as they felt this standard should be considered along with the other standards currently under deliberation with respect to effective dates. However, another IASB member felt the January 2013 date was too long as it was 21 months after issuance whereas the IASB has traditionally required implementation between 6 and 18 months after issuance. He was concerned that precedence may be set where constituents will request in excess of 18 months on future standards. The IASB ultimately agreed with an effective date of 1 January 2013 and to permit early application.

The FASB's proposed ASU would require application as of the period of adoption with a cumulative-effect adjustment to opening retained earnings in the period of adoption if applying the revised guidance would result in a difference in the previously determined fair value measurement (a limited retrospective transition). However, some comment letter respondents disagreed with the limited retrospective transition proposals stating that this approach contradicts the original adoption of FAS 157. The FASB tentatively decided to require prospective application of the measurement guidance with any changes resulting from application treated as a changed in accounting estimate. The disclosure requirements in the ASU would also be applied prospectively.

The FASB also tentatively decided to require an effective date for public companies of the first interim period in the fiscal year beginning after 12/15/2011 (i.e., quarter ended March 31, 2012) and no early adoption for public entities. For nonpublic entities, the effective date will be the annual period ending on or after 12/15/2012. Nonpublic entities may early adopt as of the public company effective date.

May 2011: IASB publishes final standard on fair value measurement

The IASB has issued IFRS 13 Fair Value Measurement which replaces the guidance on fair value measurement in existing IFRS accounting literature with a single standard.

The IFRS is the result of joint efforts by the IASB and FASB to develop a converged fair value framework; the FASB has also issued conforming amendments to their own fair value guidance in ASC 820. IFRS 13 defines fair value, provides guidance on how to determine fair value and requires disclosures about fair value measurements. However, IFRS 13 does not change the requirements regarding which items should be measured or disclosed at fair value.

IFRS 13 is effective for annual periods beginning on or after 1 January 2013 with early application permitted.

IFRS 13 is available to eIFRS subscribers (link to IASB website). Click for:

• IASB press release (link to IASB website)
• Our summary of IFRS 13
• Deloitte IFRS podcast – Andrew Spooner, Lead IFRS Partner on Financial Instruments, discusses the new IASB standard on Fair Value Measurement with Robert Bruce.
• FASB Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (link to FASB website

Discussion at the October 2011 IASB Meeting

At their October 19, 2011 joint meeting, the boards discussed the development of educational material relating to fair value measurements. The IASB staff first described the objectives and processes underlying the staff plan to develop these educational materials. Following the staff's presentation, members of both Boards commented.

Proposed plan for developing educational material

The IASB staff first described this overarching project objective: educational material relating to fair value measurements will describe the thought process that one might go through to meet the objective of a fair value measurement consistent with both IFRS 13 Fair Value Measurement and ASC Topic 820 Fair Value Measurement in the FASB Accounting Standards Codification.

The staff then described the process identified for developing these materials. The fair value measurement project team, comprised of staff from both the IASB and FASB, will develop the educational material. An advisory panel comprised of experts preparing fair value measurements in both emerging and developed economies will assist the project team. Membership would include experts (a) who attended the Emerging Economies Group (EEG) meeting in July 2011, (b) from other emerging economies, (c) from the International Valuation Standards Council (IVSC), (d) from the United States, and (e) from other parts of the world. This panel would help develop educational material covering examples discussed at the EEG meeting in July 2011 and would bring other relevant examples to assist in meeting the objective of describing the process involved when applying the fair value measurement principles of IFRS 13.

The IFRS Foundation will publish educational materials developed by the project team, which will model the materials on the IASB's fair value Expert Advisory Panel's report issued in 2008 entitled Measuring and disclosing the fair value of financial instruments in markets that are no longer active. Similar to this report, the educational materials discussed today would not be authoritative. The target date for issuance is June 2012. The IASB staff will post a draft document on the IASB's website, enabling interested parties to review the document and provide their views.

As noted above, the IFRS Foundation will publish the educational materials. However, because IFRS 13 and Topic 820 represent substantially converged standards, any material developed for applying IFRS 13 could be used by entities applying US GAAP.

Comments from members of the boards

Some board members expressed concern that the materials might be wrongly viewed by the public as authoritative and that issues raised during the process to develop these materials may indicate a need to amend IFRS 13 or Topic 820. In response, the staff highlighted its intention to make clear that all materials are not authoritative. Leslie Seidman, Chairman of the FASB, also noted that the boards would jointly consider any potential amendments to IFRS 13 or Topic 820, including any practical expedient for determining a fair value measurement. In a related comment, the staff also noted its intention to carefully word the educational materials, avoiding language that could be construed as amending or interpreting the measurement and disclosure requirements of the standards.