Fair Value Measurement

Date recorded:

The Board continued its deliberations on an exposure draft of a proposed fair value measurement standard.

Measuring the effect of credit standing

The Board discussed whether the forthcoming IASB exposure draft should include two changes from Statement 157 with respect to:

  • The credit standing of a liability is an attribute of the liability.
  • Regulatory restrictions that require liabilities to meet certain requirements are attributes of the market in which a liability can be transferred. The idea that a market must be 'legally permissible' applies equally to markets for liabilities as for markets for assets.

The Board did not support the staff recommendation. Rather the Board seemed to be of the view that if an entity needed to transfer a liability (rated as BB) and could only do so if it was rated A, the additional 'cost' of upgrading the credit standing of that instrument to A would almost certainly be reflected in a reduced credit standing of other liabilities.

Credit standing

The Board discussed a staff proposal to include in the Invitation to Comment on the forthcoming exposure draft questions about credit standing.

The questions might include the following:

  • Does a measurement described as fair value necessarily include the credit standing of a liability, both on initial recognition and in subsequent measurement? If not, what measurement do you support and how is it consistent with your notion of fair value?
  • Does a measurement of liabilities that includes the effects of changes in credit standing enhance users' ability to make investment and stewardship decisions? If so, how do users employ the information? If not, what alternative do you propose and how would it provide more useful information?
  • Is it possible to isolate and compute the effects of (a) changes in the credit standing of a liability from (b) changes in the credit spread unaccompanied by a change in credit standing from the total change in the fair value of a liability? If so, how would you propose that the computation be made?

The Board agreed that the questions raised by the staff were excellent questions and should be asked of constituents, but not in the ED on fair value measurement. They were properly the subject of a separate document.

The staff undertook to prepare an Invitation to Comment on the topic of Credit Standing to be issued in early 2009. The earliest that a draft of the document could be available for Board review would be February 2009, with publication likely either late in 2009 Q1 or in 2009 Q2.

Fair value of liabilities

The Board had a lengthy discussion about how to measure a liability. The staff stresses that this project did not address whether fair value was the right measurement basis for liabilities. That was a question of 'when to recognise a liability at fair value', something outside the scope of this project. The discussion was intended to decide whether the IASB's ED should provide guidance beyond that in US GAAP.

The Board ultimately agreed that the ED should:

  • define the fair value of a liability as:

    The price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date

  • provide guidance about how to measure the fair value of a liability when a transfer price is not observable, beyond that contained in FAS 157.

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