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Fair value measurement (IASB only)

Date recorded:

At a previous (February 2013) meeting, the Board discussed questions received about the unit of account for financial assets that are investments in subsidiaries, joint ventures and associates measured at fair value. In particular, Board discussed whether the fair value of such investments should reflect the measurement of the investment as a whole or of the individual financial instruments included within that investment.

The staff noted their previous stance in that they believed that the unit of account for investments in subsidiaries, joint ventures and associates is the investment as a whole.

During the February Board meeting, the Board directed the staff to analyse the effects that different profiles of investors may potentially have on the fair value measurements of those investments. In this meeting, the staff discussed examples in which the investors are financial investors and strategic investors and have investments that will result in Level 2 or Level 3 fair value measurements. The staff conclusions in both cases was that measurements based on the unit of account being the investment as a whole would provide a better depiction of the underlying economics of the entity’s investment; and an entity should consider all relevant facts and circumstances when measuring the fair value of those investments.

The staff noted that regardless of the conclusion on the unit of account, IFRS 13 generally provides sufficient guidance to perform Level 2 or Level 3 fair value measurements. However, the staff noted that it was less clear with regard to Level 1 measurements. The staff submitted that where Level 1 inputs exist for the underlying financial instruments that make up the investment, the Board has two options to consider; namely, to use adjusted Level 1 inputs or unadjusted Level 1 inputs.

At the previous Board meeting (February 2013), the Board discussed that depending on what was considered more important (i.e., the unit of account or the requirement in IFRS 13 to prioritise Level 1 inputs), two views could develop:

View 1: That Level 1 inputs are defined as quoted prices for identical assets, there is no Level 1 price for the investment as a whole. Instead, the Level 1 price is for the underlying financial instruments, which are not ‘the asset’ being measured at fair value. Consequently, that Level 1 input cannot be the sole determinant of the fair value of the investment and the investment’s fair value must either be measured using another valuation technique or by adjusting the Level 1 input to reflect differences between the investment and the underlying individual financial instruments. Proponents of this view would prioritise the unit of account of the asset or liability that is measured at fair value above the availability of Level 1 inputs.

View 2: That because the investment comprises individual financial instruments that have a Level 1 price, that Level 1 input must be used and the fair value measurement of those investments would be the product of the quoted price multiplied by the quantity held (PxQ) without adjustments. Proponents of this view would prioritise the availability of Level 1 inputs above the unit of account (i.e., Level 1 inputs always provide the most reliable evidence of fair value).

The staff discussed pros and cons with regard to each of these and the approaches to fair value that have previously been discussed and agreed by the Board.

The staff summarised their recommendations in that the unit of account for investments in subsidiaries, joint ventures and associates is the investment as a whole. This conclusion would then imply certain amendments to the measurements requirements in IAS 27 Separate Financial Statements, IAS 28 Investments in Associates and Joint Ventures and IFRS 10 to clarify that references to IFRS 9 Financial Instruments should be understood to refer only to the measurement basis rather than to the unit of account.

The Board was asked whether it agree with the staff’s conclusion that the unit of account in the Standards dealing with the accounting for subsidiaries, joint ventures and associates should be the investment as whole. Assuming agreement, the Board was also asked to comment on which of the options they consider to be the most appropriate for:

  1. measuring investments in subsidiaries, joint ventures or associates at fair value, whose underlying individual financial instruments have a Level 1 price:
    1. Option 1 (unit of account is considered to be more important), or
    2. Option 2 (prioritisation of Level 1 inputs is considered to be more important)?
  2. measuring fair value less costs of disposal for impairment testing purposes:
    1. Option 1 (unit of account is considered to be more important), or
    2. Option 2 (prioritisation of Level 1 inputs is considered to be more important)?

The Board discussed the nature of the staff proposals and there was a particular focus on how the unit of account should be determined at the level the market participants are dealing in. After deliberation, a vote was taken to which the Board tentatively supported the staff’s conclusion that the unit of account in the Standards dealing with the accounting for subsidiaries, joint ventures and associates should be the investment as whole. The Board then voted that prioritisation of Level 1 inputs is considered to be more important when measuring investments in subsidiaries, joint ventures or associates at fair value, whose underlying individual financial instruments have a Level 1 price. In the same way, the Board also tentatively decided that the fair value measurement of cash-generating units (CGUs) for impairment testing when those CGUs correspond to a quoted entity should be the product of their quoted price multiplied by the quantity of instruments held (P × Q).

The Board asked the staff to prepare a summary of the due process steps undertaken, before preparing an Exposure Draft of proposed amendments to IFRS 13.

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