Unit of account for fair value measurements (IASB only)
The IASB discussed the unit of account for financial assets measured at fair value (i.e., the investment as a whole or the individual financial instruments included within that investment). The IASB staff paper specifically considered the unit of account for financial assets that are investments in subsidiaries, joint ventures and associates that are measured at fair value. However, a similar question would be relevant in measuring controlling interests in investment entity subsidiaries (as defined in the amendment to IFRS 10 Investment Entities.
The staff noted that the unit of account for investments in subsidiaries, joint ventures and associates is perhaps less clear than most other financial instruments. These investments are accounted for in accordance with IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements (2011) and IAS 28 Investments in Associates and Joint Ventures (2011). The measurement requirements in those Standards refer to IFRS 9 Financial Instruments and IFRS 9 refers to the fair value measurement of individual financial instruments. Therefore, some constituents have questioned whether references to IFRS 9 should be understood to refer only to the measurement basis of the investments (i.e., fair value through profit or loss) or whether they should also be understood to prescribe the unit of account of those investments (i.e., the individual financial instruments that make up the investment).
The staff believed that the determination of the unit of account should consider the nature and characteristics of the asset or liability. One of the key characteristics of an investment is the level of control or influence of an investor in an investee. The investor’s level of control or influence over an investee leads to investments in subsidiaries, joint ventures and associates each having a different nature (each of these is different from an investment in an individual financial instrument, which is usually covered by IFRS 9). Therefore, the staff believed this supported the view that the unit of account of financial assets should be the investment as a whole, not the individual financial instruments that make up the investment.
A number of Board members supported the staff recommendation. They saw the unit of account as being determined by IFRS 10, IAS 27 and IAS 28, while cross-references to IFRS 9 were seen as a matter of classification of the investment (i.e., fair value or amortised cost) that do not alter the unit of account. Most of the discussion of this view focused on the basis of the control premium. Specifically, several Board members noted that valuation of a controlling interest should include a control premium, which would not be considered if the unit of account is individual financial instruments that make up the investment.
Some Board members bifurcated their views dependent on whether a quoted price exists in an active market (Level 1 within the fair value hierarchy as compared to Level 2 or 3 of the fair value hierarchy). Specifically, many of these Board members saw the unit of account as the entire investment. However, in cases in which individual shares in the investment are quoted in an active market, they believed the investment should be valued on the basis of price multiplied by the number of shares held.
In contrast, other Board members disagreed with the staff recommendation. They believed the requirements in IFRS 10 and IAS 27 (2011) are to measure an investment in a subsidiary at fair value in accordance with IFRS 9. Therefore, the unit of account is determined by IFRS 9 (and IFRS 13.BC47(b) notes that the unit of account in IFRS 9 is generally an individual financial instrument). This view would generally dictate that a controlling interest in an investment should be valued as the aggregate of the fair value of each share, with no adjustment for any control premium. However, some suggested a control premium adjustment could be applied to the individual investment valuation to reflect fair value assuming the premium is consistent with the unit of account.
Acknowledging that many Board members expressed concerns with any tentative decisions which result in the deviation of fair value measurement from available quoted market pricing (Level 1 inputs), one Board member suggested the Board could prioritise Level 1 inputs from the unit of account question. Specifically, he noted investments could be measured as the product of the quoted price multiplied by the quantity held, with disclosure of other fair value measurement information in cases where the entity does not believe price multiplied by quantity appropriately reflects the fair value of the investment. This view would effectively amend the level at which an asset or a liability is aggregated or disaggregated for the purpose of measuring fair value. Multiple Board members expressed varying levels of support with this recommendation.
After a long debate, the Board was unable to reach a consensus on whether the unit of account is the investment as a whole or of the individual financial instruments included within that investment. The staff, acknowledging the cross-purpose debate, suggested that it could prepare a future paper outlining the consequences for Level 1 investments separately from Level 2/3 investments. Board members agreed with this action plan. Several Board members also requested that future staff papers consider the issue of investments in subsidiaries, associates and joint ventures separate from acquiring interests in investment entity subsidiaries. The staff intend to bring back further analysis at a future IASB meeting.