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