Fair Value Measurement
Where are we in the project?
Expert advisory panel discusses the valuation of financial instruments in markets that are no longer active
In response to the report of the Financial Stability Forum (FSF), Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience [PDF], the IASB has formed an expert advisory panel that will assist it in:
- reviewing best practices in the area of valuation techniques, and
- formulating any necessary additional guidance on valuation methods for financial instruments and related disclosures when markets are no longer active.
The expert advisory panel comprises preparers and users of financial statements, as well as regulators and auditors.
A summary of the activities of the expert advisory panel is available here.
Standard-by-standard review
The project team has completed the standard-by-standard review [608 KB] of existing measurements in IFRSs that are identified as ‘fair value’ to assess whether they were intended to be an exit price.
The staff's analysis will be made available publicly when the Board deliberates the outcome of the review during the third quarter of 2008.
Round-table meetings
The Board plans to hold round-table discussions with interested parties during the fourth quarter of 2008.
Next due process step
Stage 4: Development and publication of an exposure draft
Comments received on the Fair Value Measurements discussion paper, which was published in November 2006 (see ‘Due process steps completed’ below), will aid the Board in developing an exposure draft of an IFRS on fair value measurement guidance. Given the need for consistent fair value measurement guidance and the commitment to adhere as closely as possible to the time line established in the Memorandum of Understanding, the Board aims to publish an exposure draft in mid-2009.
When preparing an exposure draft the Board will consider the requirements of FASB’s Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157). However, the IASB’s exposure draft might differ from SFAS 157 in its requirements and wording.
Estimated project completion
The current project plan envisages that an IFRS on fair value measurement guidance will be published in 2010.
Why are we undertaking this project?
IFRSs require some assets, liabilities and equity instruments to be measured at fair value. However, guidance on measuring fair value has been added to IFRSs piecemeal over many years as the Board or its predecessor decided that fair value was the appropriate measurement basis in a particular situation.
As a result, guidance on measuring fair value is dispersed across many IFRSs and it is not always consistent. Furthermore, the current guidance is incomplete, in that it provides neither a clear measurement objective nor a robust measurement framework. The Board believes that this adds unnecessary complexity to IFRSs and contributes to diversity in practice.
Through this project the IASB aims to replace the dispersed fair value measurement guidance in IFRSs with a single source of guidance that would apply whenever an IFRS requires or permits an asset, liability or equity instrument to be measured at fair value. Because this project aims only to develop a framework for measuring fair value, it will neither introduce nor require any new fair value measurements.
Project objectives
The Board’s objectives in the fair value measurement project are:
(a) to establish a single source of guidance for all fair value measurements required or permitted by existing IFRSs to reduce complexity and improve consistency in their application;
(b) to clarify the definition of fair value and related guidance to communicate the measurement objective more clearly; and
(c) to enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used to measure assets and liabilities and to provide them with information about the inputs used to derive those fair values.
To establish a single standard that provides uniform fair value measurement guidance for all fair value measurements required or permitted by IFRSs, conforming adjustments will need to be made to existing guidance dispersed throughout IFRSs. These adjustments might change how fair value is measured in some IFRSs and how the requirements are interpreted and applied.
No extension of fair value
The fair value measurement project is not a means of expanding the use of fair value in financial reporting.
The objective is to develop a single standard that provides guidance for measuring fair value when required or permitted in existing IFRSs.
Determining the measurement basis to be applied in future IFRSs (and in making changes to existing IFRSs) will be subject to the Board’s due process and is outside the scope of this project.
Tentative decisions to-date
In October 2007 the Board tentatively confirmed the project objective to develop principles and measurement guidance for fair value measurements in IFRSs.
The Board also confirmed its plan to complete a standard-by-standard review of fair value measurements currently required or permitted in IFRSs to assess whether each standard’s measurement basis was intended to be an exit price.
For situations in which the measurement basis was not intended to be an exit price, the Board plans to assess whether it should develop additional measurement guidance. The most likely additional measurement basis candidate is current entry price.
In November 2007 the Board tentatively agreed on preliminary definitions of current entry price and current exit price for the standard-by-standard review.
The preliminary definition of current entry price is the price that would be paid to buy an asset or received to incur a liability in an orderly transaction between market participants at the measurement date.
A liability can be incurred by originating it or by assuming it from a third party. The preliminary definition of current exit price is the price that would be received to sell an asset or paid to transfer or settle a liability in an orderly transaction between market participants at the measurement date.
These preliminary definitions are subject to change in the light of the results of the standard-by-standard review and the decisions that will be made during the forthcoming deliberations on the project.
The staff's analysis of the standard-by-standard review will be made available publicly when the Board deliberates the outcome of the review during the third quarter of 2008.
In June 2008 the Board clarified the scope of the fair value measurement project. The Board reaffirmed its preliminary views for the following issues, as articulated in the Fair Value Measurements discussion paper:
- Single source of guidance (Issue 1 in the discussion paper): The Board’s preliminary view was that having a single source of guidance would be an improvement over the disparate guidance in IFRSs. However, the Board has not yet decided whether a single measurement objective should be applied to all fair value measurements. That decision will be made when the Board discusses Issue 2A, the exit price measurement objective.
- Market participant view (Issue 2B): The Board’s preliminary view was that the market participant view in SFAS 157 is generally consistent with the concepts of knowledgeable, willing parties in an arm’s length transaction that are currently in IFRSs. However, the Board asked the staff to consider situations in which there is no observable market for an asset or liability.
- Attributes specific to an asset or liability (Issue 5): The Board’s preliminary view was that it is appropriate to consider attributes specific to the asset or liability that a market participant would consider when pricing the asset or liability. When location is an attribute of the asset or liability, the price in the principal (or most advantageous) market should be adjusted for costs that would be incurred to transport the asset or liability from its current location to the principal (or most advantageous) market. The Board also had a preliminary view that transaction costs are an attribute of the transaction rather than an attribute of the asset or liability. Thus, they should be considered separately from fair value. This is consistent with current IFRSs. The Board will address the question of ‘which transaction costs to include’ when it discusses bid-ask spreads.
- The fair value hierarchy (Issue 8): Because IFRSs do not have a consistent hierarchy that applies to all fair value measurements, the Board favours a single hierarchy, such as the one in SFAS 157, to reduce complexity and increase comparability.
- Measuring fair value within the bid-ask spread (Issue 10): The Board’s preliminary view was that fair value measurements should be determined using the price within the bid-ask spread that is most representative of fair value in the circumstances. However, the Board has not decided whether it is appropriate to use mid-market pricing or another pricing convention as a practical expedient for fair value measurements within a bid-ask spread. The Board also has not decided whether this guidance should apply only when bid and ask prices are observable in a market, or whether this concept should apply more broadly to fair value measurements in all levels of the fair value hierarchy (ie Level 1, Level 2 and Level 3 in SFAS 157).
Although the Board reaffirmed its preliminary views on these issues, the staff will consider, in the light of comments made by respondents to the discussion paper, whether the wording in the exposure draft might need to differ from that in SFAS 157 and in the IASB’s discussion paper. The Board will discuss further the other topics in the discussion paper before publishing an exposure draft of an IFRS on fair value measurement.
Is this project part of the Memorandum of Understanding?
Yes, this project forms part of the Memorandum of Understanding between the IASB and the FASB which sets out a Roadmap of Convergence between IFRSs and US GAAP 2006-2008. The intention is to issue common standards, the contents and effective dates of which are to be determined after taking full account of comments received in response to the exposure drafts.
Due process steps completed
Stage 1: Setting the agenda
In September 2005 the Board added the fair value measurement project to its agenda to establish a single source of guidance that would apply to all fair value measurements required or permitted by IFRSs.
Stage 2: Project planning
This project is being conducted by the IASB only. However, the FASB and the IASB have reaffirmed in the Memorandum of Understanding their commitment to the convergence of US GAAP and IFRSs and to their shared objective of developing high quality, common accounting standards for use in the world’s capital markets. Therefore, the Board decided to use the FASB’s fair value measurement standard, SFAS 157, as the starting point for its deliberations.
As noted above, the scope of this project is limited to developing a single standard that provides guidance for measuring fair value when required or permitted in existing IFRSs. The Board does not see the fair value measurement project as a means of expanding the use of fair value in financial reporting.
Stage 3: Development and publication of a discussion paper
Though a discussion paper is not a mandatory step in the IASB Due Process Handbook, the Board decided that a discussion paper would be an effective vehicle to communicate its preliminary views and engage in a discussion with interested parties about the definition and guidance that will be established in the fair value measurement project. The discussion paper was published in November 2006 and comments were due by 4 May 2007.
The discussion paper set out the Board’s preliminary views of the requirements in SFAS 157 and contained a comparison of existing fair value measurement guidance in IFRSs. The discussion paper contemplated replacing the existing definition of fair value and the related measurement guidance in IFRSs with a definition and guidance that reflects the Board’s preliminary views.
Respondents were asked to comment on the Board’s preliminary views as well as on the requirements in SFAS 157. The Board received 136 comment letters in response to the invitation to comment accompanying the discussion paper.
Outreach activities
Board member speaking engagements
IASB members, technical staff and directors are available to speak either at an event on this project or regarding other IASB activities. Further information on speaking engagements is available here. Alternatively, contact Michael Wells (on 44 (0)20 7246 6438 or email mwells@iasb.org). View forthcoming Board member speaking engagements here.