The May 2009 ED proposed a three-level fair value hierarchy that categorises observable and non-observable market data used as inputs for fair value measurements. Under that hierarchy, Level 3 inputs are 'unobservable inputs' used for the fair value measurement of assets or liabilities for which market data are not available. Required disclosures would include a 'measurement uncertainty analysis' (sometimes called a 'sensitivity analysis'). The newly proposed amendments would enhance the original proposal by requiring the measurement uncertainty analysis disclosure to reflect the interdependencies between unobservable inputs used to measure fair value in Level 3. Comment Deadline is 7 September 2010. Click for IASB Press Release
(PDF 101k). The US FASB has also issued a similar exposure draft, Fair Value Measurements and Disclosures (Topic 820): Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
, relating to the measurement uncertainty analysis disclosure. Presented below are the IASB's key conclusions to date on fair value measurement, based on the May 2009 ED and subsequent redeliberations and decisions.
Goal of the IASB's fair value measurement project:
The goal of the project is to define fair value, establish a framework for measuring fair value, and require disclosures about fair value measurements. However, it would not change the circumstances in which assets, liabilities, equity, and disclosure items must be measured at fair value under IFRSs.
IASB conclusions to date on fair value measurement:
- Fair value is defined as 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 (an exit price).
- In the absence of an actual transaction at the measurement date, a fair value measurement assumes that a transaction takes place at that date in the principal (or most advantageous) market for the asset or liability.
- Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, a fair value measurement does not consider an entity's intention to hold an asset or to settle or otherwise fulfil a liability.
- For a non-financial asset, fair valuation presumes the asset is used at its highest and best use.
- To increase consistency and comparability in fair value measurements and related disclosures, the IASB would establish a fair value hierarchy that prioritises into three levels the inputs to valuation techniques used to measure fair value, giving the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs):
- 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 or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
- Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs would be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same – an exit price from the perspective of a market participant who holds the asset or owes the liability at the measurement date. Therefore, unobservable inputs should reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.