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Fair Value Measurement

Date recorded:

The Board continued its deliberations on a proposed fair value measurement standard. At this session, the staff presented 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 recognizing 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.

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