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Fair value measurement guidance

Date recorded:

The Boards began their redeliberations on the pending fair value measurement standard based on feedback received to the IASB's exposure draft on measurement uncertainty and the FASB's proposed ASU, Amendments for Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.

Disclosure of highest and best use

The IASB and FASB have proposed a disclosure requirement for assets subsequently measured at fair value in the statement of financial position (for IFRSs assets under IAS 16 and IAS 40) that if the highest and best use of an asset is other than its current use, a disclosure of the reason that asset is being used in an alternative manner than its highest and best use.

An IASB Board member asked whether impaired assets would fall into this disclosure requirement. The IASB staff stated they would not apply now, but that the IASB would separately consider the disclosure requirements for IAS 36 and whether they should follow the fair value disclosure requirements.

The Boards tentatively agreed to require that for assets subsequently measured at fair value in the statement of financial position and for items disclosed at fair value but not measured at fair value in the statement of financial position to disclose the reason the asset is being used in a manner other than its highest and best use. Additionally, the Boards agreed not to limit the scope to particular types of non-financial assets so that any future decisions to require fair value measurement or disclosure would also be subject to this disclosure.

Disclosure of Level 1 and Level 2 transfers

The Boards have proposed requiring a disclosure of any transfers between Level 1 and Level 2 of the fair value hierarchy. IFRS 7 and ASC 820 already require similar disclosures for significant transfers between Level 1 and Level 2 and many respondents to the comment letter process did not support the proposal because of the potential burden of monitoring for insignificant transfers.

Several members of both Boards were concerned with the inclusion of the term significant in that it adds an additional layer of complexity to financial reporting as entities have to assess the level of significance to transfers. One IASB Board member also questioned the additional burden created be disclosing all transfers believing the information would already be available and that disclosing all could actually be less burdensome than having to monitor for significance. One FASB member mentioned that he viewed the trend analysis of this disclosure as an important source of information (to monitor items moving down the hierarchy) and that only including significant transfers could impede the quality of the information provided.

Both Boards tentatively agreed to retain the language in the proposals that all transfers between Level 1 and Level 2 be disclosed.

Disclosure of fair value hierarchy for disclosed but not recognised items

The Boards have proposed to require that items for which fair value is disclosed, but not recognised at fair value, also be categorised within the fair value hierarchy. Many comment letter respondents (typically preparers) did not see the relevance of providing the level within the fair value hierarchy as these items are not managed on a fair value basis.

However, users feel that understanding the level of subjectivity in the fair value measurement is helpful.

Both Boards tentatively agreed to retain the language in the proposals that items disclosed at fair value but not measured at fair value in the statement of financial position be categorised within the fair value hierarchy.

Unit of account guidance

Certain standards under U.S. GAAP and IFRS require fair value measurement but do not contain specific guidance on the appropriate unit of account. Based on the comment letters received on the exposure drafts, preparers are applying valuation guidance to address unit of account questions. Additionally, the proposals removed the concept of highest and best use for financial assets.

The most notable example of the lack of unit of account guidance is for investment entities where an entity owns 100% of the outstanding shares of an investee and also provides debt financing to the investee. Fair valuing the entire interest in the entity and fair valuing the equity and debt investments separately may result in different valuations.

The staffs of both the IASB and FASB acknowledged that guidance is needed in these instances, but that providing that guidance should be done within the context of those specific standards rather than the fair value measurement standard. The staff believes it can incorporate guidance through drafting within the fair value measurement standard on the value maximisation concept to provide some amount of clarity until a more permanent solution can be achieved.

The Board tentatively agreed not to address the issue of unit of account guidance within the fair value measurement standard.

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