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Amendments to IAS 39: The Fair Value Option

Date recorded:

Summary of Comments Received on the Preliminary First Draft of a Possible New Approach

A clarification was made at the outset to consider the responses to the exposed paper as 'reactions' and not comments in the normal sense, due to the process followed in obtaining those responses. It was also pointed out, that due to this process, the reactions received which included oral and email communication, none of the responses had been posted onto the IASB website.

It was indicated that the wide variety of needs in this area results in difficulty when determining the appropriateness of the fair value option to those that can and want to use it, whilst trying to place restrictions on it in order to address the needs of others.

After some discussion, some Board members expressed their concern at the lack of clarity of the bank regulators' concerns as regards the fair value option, and underscored that there was a possibility that there might in fact, be nothing wrong with the fair value option. Some Board members pointed out that the 'roundtable discussions' should be replaced by a public education session at which the bank regulators, particularly the European Central Bank, would be provided the opportunity to put forward their concerns to the full Board.

A general concern was raised regarding the reason why a particular constituency's concerns, which appeared contrary to the majority's view, were being considered so extensively by the Board. It was also pointed out that an overwhelming majority of respondents disagreed with the 'possible new approach' and fully supported IAS 39 with the unrestricted fair value option.

The issues raised by the bank regulators at the round-table discussions were noted as follows:

  • The fair value option introduced risks in situations where internal controls, systems etc are not operating adequately, leading to an incorrect application of the fair value option.
  • Certain instruments which could only be measured by valuation models would present an opportunity for entities to manage earnings by 'cherry picking' those instruments that would give the desired outcome.
  • The inadvertent measurement at fair value of only one side of the balance sheet, thereby creating a mismatch in measurement basis across the balance sheet.

Responses to these concerns by Board members highlighted the following:

  • Application guidance is already in place that addresses the criteria and circumstances under which valuation models can be used under IAS 39.
  • Disclosure requirements already in place address the earnings management concerns.
  • The risks that the bank regulators are trying to manage do not arise from the accounting, but rather the terms and conditions of the contracts entered into by management.
  • The fair value option is an irrevocable choice at the point of initial recognition; therefore, there is no risk of cherry picking as the future performance is unknown at that point in time.

The point was made, that it appeared as though the concerns raised by the bank regulators were in fact issues that they themselves, could manage given their mandate and that the debate around the fair value option was not really an accounting debate, but possibly something else.

It was pointed out that another paper would be considered at the February meeting which would incorporate the reactions received to date on the proposed new approach.

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