Fair Value Measurements
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- The explicit discussion of 'exit values' in the draft guidance was seen by some as problematic.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.