Post-implementation review of IFRS 13 Fair Value Measurement [Agenda paper 7]

Background

The IASB is undertaking a post-implementation review of IFRS 13. The Board published a request for information (RFI) in May 2017 and a review of relevant academic literature was undertaken. The Board discussed a summary of the RFI comments received and the academic review in January 2018. The Chair observed that there is a general consensus that IFRS 13 is working well and asked that the staff focus only on potential changes that are absolutely necessary. The Board is now considering specific issues.

At this meeting the staff are asking the Board to assess whether the feedback indicates that IFRS 13 is working as intended and to decide whether it wants to consider performing any follow up work.

Responding to the feedback [Agenda paper 7A]

Staff analysis

Is IFRS 13 working as intended?

Users of financial statements have said that IFRS 13 provides useful information as it helps them understand valuation techniques and inputs used to develop measurements, judgements made in arriving at those measurements as well as the effect of fair value measurements on financial performance, citing the fair value measurement hierarchy, information about valuation techniques and inputs, and quantitative information about significant unobservable inputs. The IASB received many suggestions for how disclosures could be improved.

Have unexpected costs arisen as a result of applying IFRS 13?

The PIR has found that some requirements in IFRS 13 are costly to implement. However, the Board was aware of those costs at the time of finalisation of IFRS 13. The most costly disclosures relate to level 3 inputs: the reconciliation of changes in Level 3 fair value measurements; quantitative analysis of the sensitivity of Level 3 measurement to reasonably possible changes in significant unobservable inputs; quantitative information about significant unobservable inputs; and information on unrealised gains and losses relating to Level 3 measurements. The disclosures in interim financial statements for financial instruments measured at fair value were also considered to be costly to prepare, particularly given the limited time available to prepare them.  The Basis for Conclusions on IFRS 13 recognised the costs of preparing the above disclosures and explained the expected benefits.

Do areas of IFRS 13 present implementation challenges that might result in inconsistent application of requirements?

Stakeholders have reported implementation challenges in all areas of focus listed in the PIR relating to how to measure fair value: assessing whether a market is active, and whether an input is significant and observable; when the unit of account for the fair value measurement does not correspond to the available Level 1 inputs (the PxQ issue); assessment of highest and best use; and the fair value measurement of biological assets and unquoted equities. 

Potential amendments

The staff thinks that no major amendments to IFRS 13 are required as a result of the findings from the PIR. However, there is evidence that the way some disclosures are presented by some entities does not provide useful information. Some of that may be due to ‘poorly specified’ disclosure requirements. There might also be disclosures that are currently not required but would improve the usefulness of information about fair value measurements. Some of the improvements suggested by stakeholders are the same as those considered by FASB. Considering those improvements could provide an opportunity to enhance convergence between IFRS Standards and US GAAP in disclosures about fair value measurements. The staff recommends that the findings from the PIR relating to disclosures are fed into the Principles of Disclosures project as well as the Primary Financial Statements project.

Although the PxQ issue is not pervasive, many stakeholders have said that it is important to them that the Board clarifies the requirements. Nevertheless, on balance, the staff does not recommend any follow up work because: (a) the Board’s previous significant work on the topic3 as well as the PIR suggests the issue is narrow and affects only a limited population of entities. The staff thinks that costs of work on the unit of account issue would exceed the benefits.

The staff thinks that follow-up work on the assessment of whether a market is active, and whether an input is significant and unobservable, could be considered as there is some evidence of divergent practice in these areas. However, the staff does not recommend the Board amends IFRS 13 to provide further guidance in this area. They think that because the requirements are principle-based there will always be a need for exercise of judgement in making these assessments. Also the challenges raised are detailed valuation assessments and an accounting standard-setter may not be the best placed to provide guidance in this area. Also, other bodies are already developing guidance.  

The staff also conclude that no amendments to IFRS 13 are required in relation to (a) the assessment of highest and best use, because there is no evidence of inconsistent application of the requirements; (b) biological assets, detailed application questions might best be addressed by the valuation profession and because some stakeholders hold the view that the issues in this area may not be material; and (c) fair value measurement of unquoted equities, because there is no evidence of inconsistent application. 

Supporting materials to accompany IFRS 13

The Board could consider instructing staff to develop supporting materials, such as illustrative examples. 47. The staff thinks supporting material could be useful to help preparers improve usefulness of disclosures, for example case studies on good presentation of disclosure of valuation techniques or on disaggregation. However, given the scope of the project on Principles of Disclosures, the staff thinks that project should consider whether it would be worth developing such material. The staff does not recommend a standalone project resulting from the PIR.

The staff does not recommend developing supporting material in other areas of focus in the PIR.

Staff questions for the Board

The staff are asking the Board the following:

• a) Does the Board agree that IFRS 13 is working as intended?
• b) Does the Board agree that it should:
  • incorporate the findings regarding usefulness of disclosures into the work on Better Communication in Financial Reporting, in particular the Principles of Disclosure and Primary Financial Statements projects, and, in due course, consider whether to start separate projects to look at issues that were identified by the PIR and will not be addressed within the scope of work on Better Communication in Financial Reporting; and
  • continue liaison between the Board and the valuation profession, to monitor new developments in practice and promote knowledge development and sharing.
• c) Are there should be any other follow-up activities the staff need to undertake? If yes, in which areas and why?
• d) If the Board decides that no further follow-up is needed, can the staff prepare the Report and the Feedback Statement? If not, what additional work do the staff need to do?

Discussion

A member commented on the lack of voluntary disclosures in relation to fair value and thought that some disclosures could be improved, but that they are perceived as being burdensome.

One member said the Board should at least look at disclosures around level-two inputs. That member also said it was unclear whether the FASB has made a final decision not to proceed with similar disclosure amendments. The staff said that their understanding was that the FASB was not proceeding with those particular changes.

The overall assessment is that the Standard is working well and the Board should not tweak it.  

On passing the feedback on disclosures to the Principles of Disclosure (POD) project, Board members wanted to know what happens of that team does not want to pursue this further. Some Board members commented that IFRS 13 could be a potential project for developing the Board’s drafting guide for disclosure requirements. The Vice-Chair said that as well as drafting aspects the Board should look at particular disclosures, particularly around realised and unrealised. One member was concerned that the Board seemed to be pre-judging what might be a good candidate for the POD. Another member was very supportive of having IFRS 13 as a candidate for POD. The staff said that if it is not picked up by POD the Board would have the opportunity to pick it up as a discrete project, or decide not to progress it further.

Two members highlighted that emerging economies benefit most from educational material and guidance and they do need support. One member wondered whether a case study on judgements and estimates would be helpful (using other people’s material). The Research Director said that during the financial crisis the IASB put out some guidance in the form of a case study. The Chair cautioned that it can be a lot of work. One member reminded the Board that the unquoted instrument educational material is helpful and that it is labelled Chapter 1 and that people are waiting for Chapter 2. The staff said they are liaising with the valuation profession and they have established working groups to look at areas identified in the PIR such as biological assets. The staff think they are better able to provide that guidance than the IASB. A member said that the IASB has a role in making people aware of this guidance.

On disaggregation and aggregation and moving some of this to the PFS project, a member was concerned about delaying that project. The staff assured them that this was unlikely to be an issue.

On P*Q, a member asked how this will be explained.  The staff said it will be explained in the final report. 

Board decisions

The Board decided that:

• IFRS 13 is working as intended (12 members, with 2 absent);
• Feedback on disclosures would be passed to the Principles of Disclosure project (11 members, with 2 absent);
• The feedback on aggregation and disaggregation would be passed to the PFS project (12 members, with 2 absent);
• It would continue to liaise with the valuation profession (12 members, with 2 absent);

The Board therefore decided to undertake no further follow-up beyond these steps and the staff will prepare a final report and complete the review.

Background–Detailed analysis of feedback received [Agenda paper 7B]

This paper has been included as background information for the Board. It is a re-posting of Agenda Paper 7B, which was discussed in the January 2018 IASB meeting. A summary of this paper is included in the IAS Plus notes for that meeting.

Effect of Implementation of IFRS 13 Fair Value Measurement: Summary of the Literature Review [Agenda paper 7C]

This paper has been included as background information for the Board. It is a re-posting of Agenda Paper 7C, which was discussed in the January 2018 IASB meeting. A summary of this paper is included in the IAS Plus notes for that meeting.

Background - Prioritising Level 1 inputs or the unit of account [Agenda paper 7D]

Staff analysis

This paper will not be discussed in the Board session, but is provided as background material relating to the fair value measurement of quoted investments.

IFRS 13 requires that the fair value measurement of an asset or a liability or a group of assets and/or liabilities take into consideration the unit of account for the item being measured (for example a financial instrument or a cash-generating unit or a business). IFRS 13 does not, generally, state what the unit of account should be. That will be in the Standard that requires the fair value measurement.

An entity selects inputs that are consistent with the asset or liability characteristics that market participants would take into account in a transaction for the asset or liability. Level 1 inputs should be used without adjustment to measure fair value whenever those inputs are available. After IFRS 13 came into effect, some stakeholders, in particular preparers and auditors, indicated that the measurement of fair value was not clear when Level 1 inputs exist but do not correspond to the unit of account. As a result, these stakeholders asked the Board to clarify whether Level 1 inputs or the unit of account should be prioritised in arriving at the measurement.

In February and March 2013, the Board discussed fair value measurement of investments in subsidiaries, joint ventures and associates, when those investments are quoted in an active market and the recoverable amount of cash-generating units (CGUs) on the basis of fair value less costs of disposal when the CGUs are entities that are quoted in an active market.

Exposure Draft

In September 2014, the Board published the Exposure Draft, Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value. The ED proposed amending IFRS 10, IAS 27 and IAS 28 to make it clear that the unit of account for investments within the scope of IFRS 10, IAS 27 and IAS 28 was the investment as a whole rather than the individual financial instruments included within that investment. The Board determined that the extent of an entity’s control or influence in an investee determines whether that investment in that investee is within the scope of IFRS 10, IAS 27 or IAS 28. As a result, that characteristic (ie the level of control or influence) would highlight that the relevant unit of account in those Standards is the investment to which that key characteristic applies (ie the investment as a whole), instead of the unit of account prescribed in IFRS 9 (ie individual financial instruments that make up the investment).

However, the amendments would also make it clear that the fair value measurement of quoted investments in subsidiaries, joint ventures and associates should be the product of the quoted price (P) multiplied by the quantity of financial instruments held (Q), or P × Q, without adjustments. The Board reached this conclusion because it believed that the resulting measurements are more relevant, objective and verifiable when they are based on unadjusted Level 1 inputs.

The Board discussed the feedback received on the proposals and in July 2015 decided that further evidence-based research should be undertaken with respect to quoted investments and quoted CGUs.

Additional research

The staff undertook additional research. They learned that the valuation specialists they spoke to use P×Q as a reasonableness check, and not the primary or sole measurement, when it is listed. The users they spoke to preferred the measurements applying P×Q in respect of quoted investments because they considered this measurement to be more verifiable and objective, and not because they considered it more relevant.

A review of the academic literature found evidence that listed price includes a premium for a transfer of control, the fair value measurement of such controlling interest should reflect any marketability constraints not captured in the listed price of the shares and the price that market participants would pay in the mergers and acquisitions market would differ from the listed share price.

The Board discussed this research at its meetings in November 2015 and January 2016 and decided that the PIR would be a better setting for considering further work on this topic.

IFRS 13 PIR

Most respondents to the RFI said the unit of account issue was not applicable to them. However, many respondents said that although the issue does not occur frequently, it can have a material effect when it occurs.  Some respondents provided further comments, mostly referring to the Board’s 2014 Exposure Draft on this issue and their comment letters; stating that the measurement should be for the investment as a whole, adjusting PxQ for the value of control, value of synergies, market liquidity as applicable; and urging the Board to clarify the Standard in this regard and provide application guidance to ensure consistency of application.

Background—Current level of convergence between IFRS 13 and Topic 820 [Agenda paper 7E]

Staff analysis

The fair value measurement project was a joint project between the IASB and the FASB as part of their convergence efforts. The FASB’s requirements came into effect in 2007. The IASB issued IFRS 13 in May 2011, when the FASB also amended its fair value measurement requirements. The result was that fair value has the same meaning for those applying the requirements of the two boards, and the framework for measuring fair value measurement and disclosure requirements is largely the same.

Both boards have amended their Fair Value Measurement Standards since then, and the purpose of this agenda paper is to assess the extent to which changes they have made has affected the level of convergence that was achieved when IFRS 13 was issued. 

The staff assessment is that the amendments to IFRS 13 since May 2011 have provided clarification of the original requirements rather than changing them. The amendments to the FASB’s requirements (Accounting Standards Codification Topic 820) have included a correction to a converged disclosure requirement and an amendment to re-emphasise the converged requirement on changes in valuation techniques and related disclosures. In addition, as part of its Technical Corrections and Improvements process, the FASB replaced the term technique by the term approach in some of the converged requirements in Topic 820. The staff are of the view that the amendments carried out by the FASB to Topic 820 subsequent to 2011 enhance or clarify further the original requirements rather than substantively modifying them.

On the basis of the analysis performed, the staff are of the view that the amendments to the Standards the boards have made do not challenge the level of convergence achieved in May 2011.

There are no questions for the Board.