Fair Value Option

Date recorded:

The notes from this day's meeting were compiled based on a telephone link that was not always very clear. Technical problems did not allow us to listen to some of the discussion. No Board decisions were made during any of the sessions.

Insurance Session

There was general support for the latest draft of the restricted fair value option in comparison to the first draft of the same. Some participants made the point that they preferred the original unrestricted fair value option although they could work with the restricted version.

Some participants congratulated the IASB for listening to responds and developing the revised approach.

Various comments were made regarding detailed issues related to the fair value option, which suggested that there would be some difficulty in applying the new approach to certain specific situations, but it did not seem as though those challenges would undermine the proposals.

Some participants suggested that where the unrestricted fair value option had been applied, that for those instruments, entities should be allowed to continue with that designation after the new approach becomes effective so as not to create a mismatch going forward.

The IASB staff provided an overview of the discussions regarding the transitional provisions agreed upon by the Board (see notes from 15 March 2005 Board meeting).

Banking Session

There was general support for the new approach as drafted. Participants encouraged the IASB to proceed with the finalisation of the restricted fair value option as currently drafted subjected to any minor editorial amendments.

The point was made that in South Africa, the unrestricted fair value option has been applied already for some time and that an assessment of the instances in which it had been used indicated that use of fair value measurement would continue under the restricted option. Consequently, there was general support for the proposal on that basis.

There was some discussion of the detailed issues related to the proposal with some participants requesting additional guidance to cover areas of application difficulty.

Other Session

The point was made as to why if an entity manages its financial instruments on a fair value basis it should not be required to use fair value accounting (not just an option to do so, or a restricted one for that matter).

Concern was raised regarding the words 'significantly reduces' in paragraph 9(b)(i) of the proposals as it is not clear on what basis this would be measured - that is 'significantly reduces' in comparison to what? In the same paragraph, the notion of 'an accounting mismatch' is introduced where as in the Basis for Conclusions, the notion of a mismatch in an economic hedge is discussed. The issue raised was whether these two notions are supposed to refer to the issue, and what that issue really is.

It was clarified that on first-time adoption of IFRS, an entity can designate any instrument for fair value measurement under the new approach, not just new instruments arising after first-time adoption.

Board session

After the round-table sessions, the Board convened to discuss and summarise the issues raised as well as to map out the way forward. The following issues were identified for consideration:

  • Transition problems particularly for entities subject to the 'carve out'.
  • What is an accounting mismatch in comparison to what is a mismatch of an economic hedge? The point was made that guidance could be drafted on the basis of clarifying that an accounting mismatch is a broader concept than just the mismatch in an economic hedge. In addition, the Board would be careful not to introduce a type of effectiveness test to this area of IAS 39.
  • The meaning of a 'significant reduction' in a measurement or recognition inconsistency.
  • Can an entity designate or de-designate into or out off the fair value through profit or loss category?
  • There was a request for guidance on the level of documentation that would be required to fulfil paragraph 9(b)(ii) as regards a 'documented risk management or investment strategy'. The Board indicated that such documentation would not be at the same level required for hedge accounting.
  • Whether the fair value option can be applied to a component of a financial instrument (for instance, interest rate risk).

Regarding some of those issues, the Board seemed to identify the need for additional guidance on how to tackle specific issues facing preparers as the underlying concerns. The staff was requested to formulate proposed solutions for the Board to consider at the April meeting.

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