Fair Value Measurements

Date recorded:

This session's purpose was to address the use of mid-prices or other pricing conventions, as a practical expedient for fair value measurements within a bid-ask spread. While the Board decided already in June 2008 that an entity should use the price within a bid-ask spread that is most representative for fair value, the detailed measurement issues were left open. The Board also discussed whether the bid-ask guidance should apply to all levels of the fair value hierarchy, not only when bid and ask prices are observable in a market.

Some commentators to the discussion paper on fair value measurements favoured establishing a single pricing convention to increase consistency and comparability. Others highlighted the difficulties in applying such guidance in hypothetical or inactive markets.

The Board had a more general discussion on what is and what is not part of the bid-ask spread. One Board member suggested using the mid-market price as a rebuttable presumption. It was noted, however, that this would lead to a default method which might undermine the objective of fair value measurement.

In the end, the Board agreed to the staff recommendation that the ED should state that an entity could adopt a policy of using a mid-range price or other pricing convention as a practical expedient.

The Board was split on whether to apply the bid-ask spread guidance in levels 2 and 3 of the proposed fair value hierarchy. Some Board members did not believe that a bid-ask spread exists in those levels and that entities might simply use the guidance as a means of applying conservatism in valuation. The staff recommendation was to state in the ED that the bid-ask pricing guidance should apply at all levels of the hierarchy. The Chairman suggested including cautionary words highlighting the objective of fair value measurement. The Board's vote was split 6-6, but the Chairman exercised its casting vote in favour of the staff recommendation.

The Board also confirmed that it is not necessary to address offsetting positions on the ED.

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