Day One Gain or Loss

The Board discussed whether, and if so, in what circumstances, to require the recognition of a day one gain or loss resulting from a fair value measurement. The staff reviewed the Board's tentative decisions made between June 2008 and October 2008 as a way of prefacing the discussion.

The staff presented its analysis about whether to require the recognition of day one gains or losses even when a fair value measurement is derived using unobservable inputs. With respect to initial recognition, this analysis was characterised at a high level as:

• Approach 1: Prohibit day one gains or losses in all circumstances.
• Approach 2: Require day one gains or losses in some circumstances, such as when the initial fair value measurement is based entirely on observable market inputs (the current IAS 39 approach).
• Approach 3: Require day one gains or losses in all circumstances, including when the initial fair value measurement is derived using unobservable inputs (the SFAS 157 approach).

The staff argued for Approach 3, noting that it was consistent with the Board's tentative decision to define fair value as a current exit price, and acknowledged that day one gains or losses were a direct consequence of a current exit price measurement objective. The Board was reminded that the working assumption that 'entry fair value equals exit fair value' applied in the situation of a transaction involving an identical asset in the same market on the same day.

In the wide-ranging debate that followed, it was clear that none of the Board was in favour of Approach 1, but favoured variants of Approach 2 ('Approach 2-plus') or Approach 3 ('Approach 3 with restrictions'). For example, some Board members would want any model being used in conjunction with non-observable inputs ('Level 3 inputs') to be 'calibrated' to the inputs being used, such that it was consistent with those inputs.

Subsequent Measurement

Although subsequent measurement was not discussed in detail, it was noted that issues surrounding subsequent measurement were more acute for financial items than for non-financial assets (for which IFRS does not usually require fair value for subsequent measurement-other than investment property and biological assets).

No firm decisions were made, but the staff acknowledged that the debate had given them enough direction to enable them to make progress on this issue.

Next steps

The Board expects to discuss the following topics in the near future:

• principal (or most advantageous) market;
• the valuation premise (that is, in-use or in-exchange);
• defensive value;
• valuation of liabilities (including non-performance risk and whether liabilities should be measured on a transfer basis or settlement basis); and
• fair value measurement disclosures.

The Board will also discuss a staff assessment of which fair value measurements in current IFRSs should be included or excluded from the scope of an IFRS on fair value measurement.