Fair Value Measurements

Date recorded:

This session's purpose was to update the two Boards on the:

  • Activities of the IASB Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets (the EAP), and
  • Status of the IASB's Fair Value Measurements project.
The staff did not ask for and the Boards did not make any decisions at this meeting. The agenda papers were for informational purposes only.

Activities of the IASB Expert Advisory Panel on Valuing Financial Instruments in Inactive Markets

To begin the discussion, the staff referred the Boards to the draft report of the EAP that was posted for comment in September 2008. The staff stated that, in general, the comments received were supportive of issuing this document in final form. However, some commenting parties were confused as to its status, for instance, whether the guidance in the document is mandatory. The staff explained that the document was being updated to make it clear that it is intended to be educational and is not required to be used unless the guidance in the document is already required in existing IFRSs.

The staff summarised the comments received on the EAP's draft report and separated those comments into two broad categories, measurement and disclosure. Regarding measurement, the staff addressed several comments received including:

  • Clarifying that the draft document was consistent with the joint release from the SEC and FASB on September 30, 2008 as well as FASB Staff Position FAS 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.
  • Clarifying that 'fundamental value' is not equivalent to fair value. The reference to fundamental value in the draft document was deleted and replaced with an entity-specific determination of value, which is also clearly stated as not a fair value measurement.
  • Adding more information to the description of a forced transaction.
  • Adding the example from FSP FAS 157-3 to the document to help clarify how a model can be used in the place of irrelevant observed transaction data.

Regarding disclosure, the staff received comments about whether regulators and auditors would require the disclosures in the EAP's document and whether the document should suggest where the disclosure should be located (for example, management's discussion and analysis). The staff decided not to address these concerns but reiterated that the disclosures in the document are not required unless they are required pursuant to existing IFRSs. It also stated that the location of disclosure will depend on an entity's policies and circumstances.

Some of the feedback received that was not addressed by the staff because it was out of the scope of this project included:

  • Changes to the reclassification rules in IAS 39 (this issue was addressed by the IASB in its recent reclassification project).
  • Changes to the tainting rules for held-to-maturity financial instruments.
  • Changes to the impairment rules for available for sale financial instruments.
  • Suspension of fair value accounting.
  • Exclusion of an entity's own credit risk from the fair value measurement of liabilities.
  • How the US Government's asset purchase program will affect fair value measurement.

Lastly, the staff stated that the final EAP document will be posted to the IASB's website in late October 2008.

Status of the IASB's Fair Value Measurements project

The IASB staff updated the Boards as to the status of its work on a comprehensive fair value measurement standard. In general, the principles of the IASB's project are consistent with the principles of Statement 157; however, the words may differ. The staff and several Board members acknowledged that the wording between a final IFRS standard and Statement 157 should be consistent and the two Boards/staffs should work together to ensure wording is consistent wherever possible.

The staff's summary of the project status included any potential difference between the IASB's decisions to date and Statement 157 and potential opportunities to enhance the guidance in Statement 157.

First, the staff informed the Boards that the IASB has made a tentative decision to use 'exit price' in the definition of fair value. This is consistent with Statement 157. However, the definition will also include some wording that reflects that the exit price considers a market participant's ability to generate economic benefit by using the asset or by selling it to a third party. Further, the IASB is still considering whether the 'in use' concept could be applied to financial assets. Currently, Statement 157 is not prescriptive as to whether that concept is applicable to nonfinancial assets.

Second, the IASB staff discussed the highest and best use concept and stated that the concept is generally the same as in FAS 157. The staff discussed whether an entity must allocate value to the individual units of account using the highest and best use valuation amount if the current use by the entity is something other than the highest and best use. Currently, FAS 157 is silent as to how an entity should perform this allocation.

The third issue presented by the staff related to blockage factors. Currently, FAS 157 disallows the use of blockage factors in a Level 1 fair value measurement. The IASB has tentatively decided that blockage factors (and control premiums) should not be used in any fair value measurement. The staff stated that it may revisit the control premium tentative decision based on additional information that it has received to date.

The staff also stated that the IASB has not deliberated the following issues:

  • Bid-ask spreads and whether the use of mid-market pricing as a practical expedient is acceptable
  • Defensive value
  • Reference market
  • Valuation premise
  • Day one gains and losses
  • Disclosures (other than the current IFRS 7 project)
  • Fair value measurement of liabilities (settlement vs. transfer)
  • Restrictions (will be included in the discussion on the fair value measurement of liabilities - transfer restrictions)
  • Non-performance risk

These issues will be deliberated in future IASB meetings from October 2008 through December 2008.

Lastly, the staff noted some potential improvements for Statement 157 based on feedback from the comment letters on the Fair Value Measurements discussion paper and observations by the Valuation Resource Group (the VRG). These included additional guidance on (1) the use of unobservable (Level 3) inputs and the efforts necessary to ensure that these inputs are based on market participant assumptions and (2) the in-use valuation premise and how to apply that concept in practice.

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