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Fair value measurements

Date recorded:

Agenda Paper 6: Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value (Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13) Illustrative Example for IFRS 13 — Portfolios

The Board started redelibarations of the Exposure Draft (ED) Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value (Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13). The Board discussed the application example prepared by the staff related to question 4 of the ED. The Board tentatively agreed with the example; however decided not to publish it as part of the proposed amendments; instead the Board would issue a detailed IASB update to explain the issue.

The Project manager introduced the agenda paper. He said that the paper started the redeliberations with the IASB in relation to the Exposure Draft (‘ED’) Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value (Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13). Specifically, the paper addressed the comments received on question 4 of the ED relating to the inclusion of an illustrative example in IFRS 13 Fair Value Measurement to illustrate the application of paragraph 48  of IFRS 13 to a group of financial assets and financial liabilities whose market risks were substantially the same and whose fair value measurement were categorised within Level 1 of the fair value hierarchy. The example illustrated that the fair value of an entity’s net exposure to market risks arising from such a group of financial assets and financial liabilities should be measured in accordance with the corresponding Level 1 prices. The IASB also concluded that amendments to IFRS 13 were not needed to clarify the application of paragraph 48 for the specific case discussed. However, because the existence of different views could impair consistent application of the Standard, the IASB had decided to propose including an example to illustrate the application of that paragraph.  The project manager explained that most respondents agreed that the proposed example appropriately illustrated the application of paragraph 48 of IFRS 13 while some respondents requested additional examples in areas including financial instruments within level 1 and level 2, level 2 and level 3 and financial instruments that have different level 1 prices.  He said that the staff concluded that no further changes were needed to the proposed illustrative example and also no additional examples should be dealt with because the original IFRIC submission was limited to a particular fact pattern.  He then said that the Board would have to decide on whether they agreed with the illustrative example and how to publish it. He then opened the discussion to the Board.

[Note: the agenda paper stated that the forthcoming steps would be: conducting further research on the use of PxQ and redeliberations related to the measurement of quoted investments at fair value and the expected date of this was between Q2 and Q3 2015.]

The Board members expressed support for the illustrative example in that it appropriately reflected the principle of IFRS 13. However, there were different concerns raised as to how to deal with it.

One Board member said that the example confirmed the discussions held while IFRS 13 was being debated. When the portfolio exception was discussed, the objective was to maintain the status quo under IAS 39 particularly with banks. The portfolio exception dealt only with a practical issue and the Board was not saying anything dramatic. She also indicated that the Board was very clear that the unit of account was not answered by IFRS 13 and, based on IAS 39, the unit of account was the single instrument (other than the issue to be discussed to measure quoted investments in subsidiaries, joint ventures and associates at fair value). The project manager confirmed that to maintain the practice under IAS 39, the portfolio exception was introduced and he also agreed that the issue was not unit of account; instead it was related to the application of the exception in IFRS 13 paragraph 48.

One Board member expressed concerned that it would not be appropriate to deal first with the example before having discussed the main issue that was raised to IFRIC which was the measurement of quoted investments in subsidiaries, joint ventures and associates at fair value.

Another Board member said that the wording of the example on page 12  of the agenda paper indicated that the net exposure to market risk coincided with the measurement of the net long position. He said that an entity would not know whether a net position coincided until they performed the calculations. The Project manager responded that it was not a condition, the main condition was that the financial instruments were very similar and that the net risk position coincided with the exposure. The staff agreed to clarify the wording of the example.

One Board member said that he agreed with the example because it only related to an issue related to the banking industry and they were only clarifying how to deal with the simplification brought in with the portfolio exception.

Another Board member said that given that IFRS 13 paragraph 48 intended to be a continuity of IAS 39 and that standard (IAS 39) had been in practice for 15 years, he was concerned as to why it would be necessary to add an example. He believed that there was no need for clarification. The Project manager responded that the question was raised to IFRIC and for that reason they decided to add the example; however, the Board never intended to change practice.

One Board member said that she was concerned that if the example were published they could bring other issues rather than solving anything. Under IAS 39 it was clear that the unit of account was the individual instrument; so it was not reasonable to bring the discussion as to whether it would be possible to add adjustments for a block of investments. But she expressed that they could also be sending a message that, only if the instruments were level 1, an entity would not make adjustments. She suggested taking the issue back to IFRIC. The Chairman suggested making additional clarifications in the Basis of Conclusions.  The Project manager responded that IFRIC had already analysed the issue because it was originally an IFRIC submission. He also said that IFRS 13 allowed making adjustments when the instruments are level 2 or 3. The Board member responded that the discussion had already provided all the necessary guidance.

Another Board member asked how the public would know about the discussion. The project manager responded that they could prepare a very detailed IASB update.

The Chairman then called to vote and all IASB Board members agreed with the substance of the example prepared by the staff. They also agreed not to publish the example but to prepare a detailed IASB update.

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