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Fair value measurement

Date recorded:

Agenda Paper 6: Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value (Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13): Comment letter analysis and feedback received from users

The Technical Manager opened the session by informing the IASB that the first part of the session concerned user feedback that had been received through outreach activities. The discussions with users focused on the question of which measurement method provided the most useful information. This could be either the multiple of the quoted price and the quantity (P x Q) or an adjusted P x Q. The majority of users expressed a strong preference for P x Q as there was no judgement required. Day one gains or losses resulting from this measurement method were appropriate in their view as they reflected the risk of doing business. They also said that the fact that level 1 prices were available made it difficult to justify another measurement technique.

One Board member asked whether users had elaborated why day one gains or losses would reflect the risk of doing business as it was not intuitive to him. The Senior Technical Manager replied that they had not elaborated on that but proposed disclosures on those gains and losses. The Technical Director said that one possible explanation was the risk that a premium or discount would not subsequently be reflected in market prices. One Board member said that it could also be the information asymmetry. The former Board member disagreed as there was no information asymmetry in his view. The Technical Director disagreed because control might provide the investor with more information than the information that was available to market participants.

The Technical Manager continued with the second part of the session which focused on the comment letters received on the Exposure Draft (ED). The first question asked in the ED concerned the unit of account. The ED had proposed that the investment as a whole was the unit of account rather than the individual instrument. This had been supported by the majority of respondents.

Question 2 in the ED proposed to use P x Q as measurement method for quoted investments in subsidiaries, joint ventures and associates. Respondents (excluding users) disagreed with this proposal and suggested alternative measurement techniques or adjustments to level 1 inputs. Respondents found that P x Q was conflicting with the proposal to see the investment as a whole as the unit of account. They argued that IFRS 13 required to measure consistently with the unit of account. Respondents believed that there was no level 1 input for the unit of account. They suggested a rebuttable presumption stating that P x Q best represented the fair value of quoted investments unless an entity could identify a measurement technique that represented fair value more faithfully.

Some respondents favoured the P x Q methodology because other measurement techniques were less reliable and more costly. Furthermore, the P x Q approach would maintain convergence with US GAAP.

Question 3 concerned the proposal to align the fair value measurement of a CGU that corresponded to a quoted entity to the fair value measurement of a quoted investment. Respondents agreed with this proposal but referred to their view on Question 2.

Question 4 concerned the proposed illustrative example to IFRS 13. The example concerned measurement of a group of financial assets and financial liabilities whose market risks were substantially the same and whose fair value measurement was categorised within level 1. It illustrated that the fair value of an entity’s net exposure to market risks arising from such a group was to be measured in accordance with the corresponding level 1 prices. Some respondents did not agree with this.

Question 5 addressed transition provisions. Respondents expressed mixed views on the transition provisions for IFRS 10, IAS 27 and IAS 28 whilst most agreed with the transition provisions on IFRS 12 and IAS 36.

Other comments included the expansion of the proposals to investments held-for-sale under IFRS 5, as well as transactions that resulted in the loss of control under IFRS 10 and business combinations that were achieved in stages under IFRS 3. Some proposed to include the proposed amendments in IFRS 13 instead of the other Standards.

Next steps would be to discuss the illustrative example in April and to complete further research in Q2 of 2015.

One Board member said that he had opposed P x Q in the discussions leading to the ED but had not dissented. He said that he agreed that level 1 measurement was more reliable but he said that it was less relevant. He therefore signalled his intent to dissent if the Board were to proceed with P x Q.

Another Board member said that the Board should revisit the scope of the project as the feedback revealed concerns about how robust fair value measurement was. She also said that the Board had published the ED under the impression that the issue was not widespread. Furthermore, the Board had believed that control premiums were not large amounts. She said that research should be performed to confirm that the Board and constituents had the same understanding of control premiums. She also said that the project was looking to redefine fair value for a specific fact pattern. She asked if this could be covered during the post-implementation review (PIR) of IFRS 13. One Board member agreed and said that he would like to see evidence of the occurrence and amounts of day one gains and losses in the market. He said that, in his view, P x Q was a relevant measure in efficient markets. The Technical Director agreed but said that it might be challenging to provide the evidence as those gains and losses were not required to be disclosed.

The Vice-Chairman pointed out that no users had formally replied to the ED.  One Board member said that P x Q was the perspective of the market participants so the Board would have to decide whether they wanted to step away from that perspective. The Technical Director said that this depended on the assumption that the control premium was not reflected in the price.

One Board member said that investment entities would also be affected by the outcome of this discussion. He said that there was no realistic alternative to P x Q as there would be the question of how to subsequently account for any adjustment recognised.

Another Board member asked whether P x Q was really the most relevant information when the free-float was extremely low. He said that if the Board would wait until the IFRS 13 PIR, practice was likely to develop accounting policies along the lines of the ED. A fellow Board member said that the narrow issue (i.e. the conflict between IFRS 10 and IFRS 13) should be addressed timely whilst the broader issues brought up by respondents to the ED should be addressed in the IFRS 13 PIR.

One Board member said that another issue with P x Q was that those instruments were usually traded in ownership blocks. A fellow Board member added that those blocks did not have level 1 prices. Another Board member added further that, for example, a 40% block could not be sold at the market price as sales of a large ownership block would influence the price.

The Senior Technical Manager concluded that the illustrative example on the portfolio would be brought to the Board separately as this seemed to be less contentious. On the other issues, she suggested an assessment of the effects of the proposed amendments. The Technical Director added that the relevance issue should also be researched by staff.

One Board member asked whether a reason for the investment entities exemption that had been introduced to IFRS 10 had been the higher level of observability for the fair value. One Board member said that the only reason for this exemption had been the higher relevance of fair value for such entities. The level of observability had never been a point in the discussion.

A Board member suggested that for scoping the project the arguments in the comment letters on the interactions of the scopes of the Standards should be extracted and explored.

No further comments were made.

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