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Financial Instruments: Recognition and Measurement – Comprehensive Project

Date recorded:

The staff introduced the session by reminding the Board that at the March 2009 Joint Meeting the boards decided tentatively to consider three potential measurement models:

  • (a) fair value (defined as exit price);
  • (b) another remeasurement method based on discounted cash flows (DCF remeasurement method); and
  • (c) amortised cost (including impairment).

At the April 2009 Meeting the IASB discussed amortised cost and possible impairment approaches. This discussion will continue at the May IASB meeting.

The purpose of the special meeting was a public education session on the DCF remeasurement method. It is an opportunity for the Board to identify questions about the method and request additional information they may require to understand the model.

The staff noted that the FASB will be discussing the method tomorrow, and the FASB will be provided with feedback from this meeting. Further discussions on the model will be held at future IASB meetings.

The IASB staff's agenda paper for this meeting was accompanied by a Paper Prepared by the Staff of the FASB describing the DCF remeasurement method - referred to in the FASB staff paper as the 'Current Value Measurement Method'. The FASB staff paper states:

The current value measurement method is based on the notion of calculating a value for a financial asset or financial liability based on the present value of expected future cash flows of the financial asset or financial liability. The value calculated by this method is not based on an exchange price but instead is based on the cash flows in the instrument that an entity would realize through the collection or payment of the cash flows with the counterparty to the instrument. The purpose of this method is to provide an alternative to fair value for certain instruments in certain situations and not to replace fair value in all situations.

The staff said that this model is not intended to be a replacement of the fair value method. The chairman then asked each Board member to provide input in turn.

A number of Board members expressed concern as to how the risk premium was calculated in the model. They were unclear as to how this calculation was done. A number of Board members also asked the staff to provide clarification as to what additional guidance would be required to ensure that the model presented could be applied consistently to enable comparability.

In relation to the Current Value Measurement Method in the staff paper, one Board member described this as 'arithmetic magic'. Many of the Board members expressed concerns relating to this method. A number of other Board members had concerns around how method 2 would be operationalised. One Board member queried why this Method includes three scenarios when the method works fine on the total. The same Board member queried how it was possible to obtain a cash flow greater than $100,000.

Also in relation to the Current Value Measurement Method, many Board members queried whether this was an entity specific measure or market based. A number of Board members also asked the staff to clarify how or why the two methods get to different answers. Some Board members noted that they thought that the objective was that both methods would get to the same answer. One Board member queried whether from a practical point of view whether the methods could actually be applied in practice.

Some Board members also queried when the model would actually be applied - all the time or only in extenuating circumstances? Other Board members queried whether the model would only be applied for Level 3 estimations. The Chairman noted that understanding when the model would be applied was critical. Further, he noted that it is important to understand where the model fits in - is it a third method or a replacement for amortised cost?

The staff thanked the Board for their feedback and will provide the questions and comments to the FASB staff. One Board member concluded by noting that the comments the Board members have raised will be difficult to answer.

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