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IFRS 13 — The Fair Value Hierarchy – Using quoted prices provided by third parties

Date recorded:

The project manager introduced Agenda Paper 13 (link to IASB's website) which relates to a request to clarify under what circumstances prices provided by third parties (especially consensus prices) qualify as Level 1 input for the fair value hierarchy in IFRS 13 Fair Value Measurement. The staff conducted outreach activities which were summarised in the agenda paper.

The submitter had identified two views:

View A: a fair value measurement based only on unadjusted prices from an active market for an identical instrument would be a Level 1 measurement. Prices from pricing services based on in-house models (consensus or evaluated prices) are to be qualified as Level 2 or Level 3 inputs; or

View B: the fair value hierarchy in IFRS 13 focuses on the relative certainty of the fair value measurement as an exit price and also on the liquidity of an instrument. If the fair value measurement of a security with a verifiable high market activity has been determined following appropriate due diligence, it should be categorised in Level 1 of the fair value hierarchy.

The staff observed that the description of consensus prices included in the submission indicated that they were derived from in-house models that used a variety of inputs. Consequently, the categories of those inputs may range from Level 1 to Level 3.

The final classification within the fair value hierarchy would depend on the significance of the particular inputs to the entire measurement.  If the fair value measurements were based on quoted prices which had been adjusted for market information that was not observable, the fair value measurements would not be classified within Level 1 of the fair value hierarchy.

The staff concluded that the issue should not be taken onto the Interpretation Committee agenda because the conclusion could be derived from the standard.

Discussion

The Chairman opened up the discussion by asking the staff whether View A was clear enough and why the staff reworded the agenda decision.  The staff responded that the conclusion would depend on the analysis of the inputs used in the measurement and could not be derived automatically simply because there were consensus prices.

One IASB Board member pointed out that there was a subtle difference between View A (as submitted) and the agenda decision. The agenda decision stated that it depended on how many inputs were level 1 in the consensus prices; while View A said directly that consensus prices were level 2 or 3. The staff responded that what was relevant in IFRS 13 were the inputs and not how the prices were “labelled”, this was why they decided not to take view A as submitted.

Another IC member indicated that he understood that the issue was widespread and there was diversity in practice; however the conclusion was clear from the standard, because adjusted level 1 inputs were not level 1. Several members agreed with the assessment that the issue was widespread.

Another IFRIC member expressed a concern based on how the agenda decision was written because it could imply that the decision was on how consensus prices should be classified instead of focusing on the principle. Several members agreed with this concern and pointed out that the agenda decision had to reflect the principle. Another member expressed that the existence of both views should not be reflected in the agenda decision.  Another member also pointed out that a classification for a particular instrument may have variations between jurisdictions.

Decision

The Chairman concluded that the agenda decision would not mention that the issue was not widespread. In addition, the analysis would be simplified to stay with the principle without mentioning view A or View B and removing references to any particular pricing technique. No objections were raised and the agenda decision was approved.

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