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Fair Value Measurements – Exposure Draft on Fair Value Measurements

Date recorded:

The staff introduced the session by highlighting the objectives and timeline. The purpose of the session was to seek the Board's decision on:

  • Whether an fair value measurement exposure draft should state that fair value reflects the highest and best use of an asset; and
  • Whether blockage factors should be excluded from fair value measurement.

Blockage factors

The staff started with the second issue on blockage factors. The staff highlighted that it only sought the Board's input on this type of discount, not on other discounts or premia. The staff defined a blockage discounts as a discount that represents a discount to the quoted price of an instrument (usually equity securities) to reflect the reduction in the price if the entity were to sell a large holding of instruments at once.

The Board had a lengthy debate on this. Some Board members were concerned about ignoring blockage factors as they would represent a real economic phenomenon. Others were of an opposite opinion and referred to academic research on the subject. It was noted that this is more of an issue of the unit of account and if one measured one security it would not carry a blockage discount. It was also acknowledged that it would be difficult to determine the blockage, mainly as there could be other factors leading to a discount or premium that could hardly be separated.

Finally, the Board agreed that for all levels of the proposed fair value hierarchy (1,2 and 3) blockage discounts should not be adjusted by a blockage factor.

Highest and best use

The staff then presented to the Board an analysis of the highest and best use-concept.

Some Board members where concerned over the term 'legally permissible' as the notion is more intended to cover situation where it the best use would be illegal.

The Board had a considerable debate on how the amounts necessary to make the decision on highest and best use are determined, notably whether the option to have a different use should be included if the current use of the asset is different from the highest and best use.

The staff then asked the Board whether a fair value measurement should reflect the highest and best use.

The Board agreed.

The Board made the decision to include an explanation and application guidance on how the criteria of 'physically possible', 'legally permissible' and 'financially feasible'.

It was also decided that the entity should disclose the value of an asset on its current use if it is different from the highest and best use.

Furthermore, the Board agreed to clarify in an exposure draft that the search for the highest and best use does not have to be exhaustive.

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