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Fair Value Measurement

Date recorded:

The IASB and the FASB discussed several issues connected with their efforts to issue converged fair value measurement guidance based on ASC Topic 820 and the IASB's exposure draft Fair Value Measurement.

Definition of fair value

The Boards confirmed individually to define fair value as an exit price. The definition would be 'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'.

Although some IASB members would prefer the Standard to refer to 'exit price' (both to avoid the emotive term 'fair value' and to be explicit about the measurement objective), the Boards agreed to retain 'fair value' as the term the Standard will use.

Fair value at initial recognition

The Boards discussed whether to confirm the proposals in paragraph 36 of the Fair Value Measurement ED, which contains a list of situations indicating when a transaction price might differ from fair value, is sufficient; and whether a comment that the 'list is not exhaustive' should be added.

The IASB agreed to conform the forthcoming IFRS to the language used in ASC Topic 820-10-30-3 that 'a transaction price might not represent the fair value of an asset or liability at initial recognition if any of the following conditions exist:

  • (a) the transaction is between related parties;
  • (b) the transaction takes place under duress or the seller is forced to accept the price in the transaction;
  • (c) the unit of account represented by the transaction is different from the unit of account for the asset or liability measured at fair value; and
  • (d) the market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability.'

The Boards explicitly refused to make any comment about the list not being exhaustive: in the view of many around the table, to do so would be to invite abuse.

Board members also discussed condition (b) and observed that the wording should be more explicit that an orderly transaction in an inactive market may still represent fair value as defined. When there is a lack of market activity, it may be that more work is required to determine that the transaction price does represent fair value.

Recognition of Day 1 gains and losses

The IASB did not agree with a staff proposal that he IASB should address the recognition of Day 1 gains and losses in the fair value measurement project. A majority of the IASB thought that addressing 'when' to recognise a Day 1 gain or loss represented scope creep in a 'how to do fair value' Standard and created unnecessary noise in that Standard.

Measuring liabilities at fair value

After a long discussion, the IASB agreed that the IFRS should:

  • (a) require an entity to measure the fair value of a liability, in the absence if a quoted price in an active market representing the transfer of a liability, as follows:
    • (i) using the quoted price of the identical liability when traded as an asset (that is, a Level 1 measurement), if that price is available
    • (ii) if that price is not available, using quoted prices for similar liabilities or similar liabilities when traded as assets (that is, a Level 2 measurement)
    • (iii) if observable inputs are not available, using another valuation technique such as:
      • (1) an income approach (for example, a present value technique) or
      • (2) a market approach (for example, using the amount that a market participant would pay to transfer the identical liability or receive to enter into the identical liability)
  • (b) describe the compensation a market participant would demand for taking on an obligation in the application of a present value technique
  • (c) clarify that the transfer of a liability assumes that a market participant transferee has the knowledge and ability to fulfil the obligation.
In making this decision, some IASB members were uncomfortable about the implications of this guidance on the measurement of non-financial liabilities (see the Alternative Views expressed in ED 2010/01).

Non-performance risk

Without substantial discussion, the IASB agreed:

  • (a) that the fair value of a liability includes the effect of non-performance risk; and
  • (b) the IFRS should clarify what non-performance risk represents.

Restrictions on the transfer of a liability

The IASB agreed that the fair value of a liability should not be adjusted for the effect of a restriction on its transfer.

Measuring own equity instruments at fair value

The IASB agreed to include guidance in the IFRS for measuring the fair value of an entity's own equity instruments. That guidance should reflect the proposal in the IASB's ED, paragraphs 32 and 33.

Measuring fair value when markets become less active

Following the earlier discussion, the Boards agreed that the converged Standard should:

  • (a) provide guidance for measuring fair value when markets become less active, specifically that the guidance to be provided shall be used when there has been a significant decline in the volume or level of activity for the asset or liability;
  • (b) state that when measuring fair value when markets are less active, the issue is whether an observed transaction price represents fair value, not about the level of market activity (although changes in market activity may be an indication that an observable price does not represent fair value, and that an entity may need to make further efforts to determine fair value). The IASB's exposure draft and Topic 820 do not address this explicitly.
  • (c) state that it is the nature of the transaction and not the state of the market that is important. An orderly transaction in a disordered market may still represent fair value as defined; simply because the transaction took place when the market was disordered is not sufficient to move away from the transaction price.

The Boards will continue their discussions later in the week.

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