Fair Value Measurement
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:
- 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.
- a class of assets and liabilities often will require greater disaggregation than the entity's line items in the statement of financial position
- 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 emphasize 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.