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IASB exposure draft on fair value measurement

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28 May 2009

The IASB has published an exposure draft (ED) of proposed guidance on how fair value should be measured where it is required by existing standards.

The ED does not propose to extend the use of fair value measurements in any way. It would add disclosure requirements about how fair values were determined. If adopted, the proposals would replace fair value measurement guidance contained within individual IFRSs with a single, unified definition of fair value, as well as further authoritative guidance on the application of fair value measurement in inactive markets. The IASB's starting point in developing the exposure draft was the equivalent US standard, SFAS 157 Fair Value Measurements as amended. The proposed definition of fair value (FV) is identical to the definition in SFAS 157 and the supporting guidance is also largely consistent with US GAAP. Comment deadline is 28 September 2009. Click for Press Release (PDF 101k).

Overview of the Proposals in the Fair Value Measurement ED

  • FV definition. The IASB proposes an exit price definition of FV: "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date".
  • Most advantageous market. FV measurement of an asset or liability assumes sale or transfer in the most advantageous market for the asset or liability available to the entity.
  • Measurement assumptions. FV measurement of an asset or liability should use the assumptions that market participants would use in pricing the asset or liability.
  • Highest and best use of an asset. FV measurement of an asset assumes that the asset will be sold to a market participant who will use it at its highest and best use.
  • Assume transfer of a liability. FV measurement of a liability assumes that the liability is transferred to a market participant at the measurement date.
  • Day one gains/losses. In four cases identified in the ED, FV measurement at initial recognition might differ from the transaction price. An entity would recognise any resulting gain or loss unless the relevant IFRS for the asset or liability requires otherwise.
  • Valuation techniques. The ED proposes guidance on valuation techniques, including specific guidance on markets that are no longer active. Valuation techniques must be consistent with the 'market approach', 'income approach' or 'cost approach'. An entity would choose the valuation technique most appropriate in the circumstances and for which sufficient data are available to measure fair value.
  • Hierarchy of inputs to valuation. The ED proposes a fair value hierarchy that prioritises into three levels the inputs to valuation techniques used to measure fair value:
    • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
    • Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
    • Level 3 inputs are inputs for the asset or liability that are not based on observable market data (unobservable inputs).
  • Disclosures. The ED proposes various disclosures about how assets and liabilities were measured at fair value -- "information that enables users of its financial statements to assess the methods and inputs used to develop those measurements and, for fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period".


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