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IFRS — 13 Fair value hierarchy

Date recorded:

The purpose of the agenda paper provided was to provide an analysis of the comments received on the tentative agenda decision, and to set out the wording for the final agenda decision.  The Technical Manager introduced the agenda paper and explained that additional questions to be addressed were raised in the comment letters received, as set out in paragraph 18 of the agenda paper.  The staff believed that answering the additional questions raised by constituents would be helpful to stakeholders, and therefore, recommended that additional work be undertaken.

One Committee member noted that he was supportive of the staff performing further research.  He noted that for users, it was important information whether an item was categorised in Level 1 or Level 2 of the fair value hierarchy.

The Chairman questioned the staff as to whether the research the staff intended to perform would include an assessment to understand the effects of any changes in practice.  The Technical Director confirmed that such an assessment would be performed.  He further questioned the Committee members as to how prevalent they believed this issue was, noting that he did not believe there was divergence in practice.  He added that he had only come across this issue in matrix pricing, which was clearly not in Level 1 because the matrix prices were being changed.

Another Committee member noted that she did not believe practice was diverse in this area at all.  She added that most people were less concerned with the difference between Level 1 and Level 2, and that the focus was more on the boundary between Level 2 and Level 3.  She added that she did not believe this issue should detract from the Interpretations Committee finalising the agenda decision on the original issue.

The Chairman questioned whether the distinction between Level 1 and Level 2 entered into regulatory capital decisions.  The Committee member noted that she believed it did not.

Another Committee member noted that he also believed the issue was not widespread, and suggested that the Committee proceed with finalising the agenda decision on the original issue.

A further Committee member also agreed with proceeding to finalise the agenda decision.  He added that there had been an evolution in this area, with a number of institutions having made reclassifications from Level 1 into Level 2 for assets priced using a pricing service.  He believed there had been diversity in the past, but that it had reduced significantly. 

A Committee member in favour of performing more research noted that he believed this was an issue that was particularly relevant to the banking and insurance industries.  He also raised the issue of situations where there were observed prices on three different exchanges with different closing rates, and the effects of this on pricing.

The Chairman noted that there had been a discussion during redeliberations on IFRS 13 with respect to what would happen in the situation where one had an observed price in London and Tokyo.  He noted that he believed the conclusion was that if one tried to average the two prices, the time difference could not be avoided, and therefore, it would fall into Level 2.

One of the IASB members present highlighted the fact that in a situation where one had access to two markets, the fair value should be the price in the most advantageous market that can be accessed.

Another Committee member noted that while he could see that a valid issue had been raised, he questioned whether the Interpretations Committee was the right body to deal with it as he did not believe it would result in the issuance of an interpretation or amendment to IFRS 13.

A further Committee member also agreed with proceeding to finalise the agenda decision.  However, with respect to the additional questions raised, he believed it was premature to say that no diversity existed in practice by just asking around the table.  He suggested it might be worthwhile asking the staff to perform some outreach to determine whether there was any diversity in practice, particularly in relation to binding offers and binding quotes, and based on the results of said outreach, the Interpretations Committee could make a decision as to whether to take the issue on.

The Chairman proposed that the Interpretations Committee proceed with finalising the agenda decision to bring the issue with respect to the fair value hierarchy when third-party consensus prices are used to a close.  He also proposed that the Interpretations Committee gave the staff permission to perform some research on the other questions that had arisen and report back at the next meeting; and based on the results of the research performed by the staff, the Interpretations Committee could make a decision what to do with these additional questions.

All Committee members agreed with the Chairman’s proposals.

A Committee member added that the language in IFRS 13 was the same as that in FAS157, and cautioned the Committee to ensure that they did not create a difference between the two standards where one should not exist.

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