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Fair value measurement

Date recorded:

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.

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