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At its May 2008 meeting, the IASB announced its plans to form an expert advisory panel in response to the recommendations made by the Financial Stability Forum.
Meeting summaries (by date)
Objective
The panel will assist the IASB 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necessary additional guidance on valuation methods for financial instruments and related disclosures when markets are no longer active.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 discussions of the panel members will give the Board insight into whether there is a need for additional guidance in this area.
The discussions of the panel will provide input for the IASB’s work on financial instruments and fair value measurement. The remit of the panel is how to measure the fair value of financial instruments when markets are no longer active. The panel will not discuss whether fair value is an appropriate measurement basis for a particular financial instrument or class of financial instruments.
The IASB is addressing this in its work on financial instruments and has published a discussion paper Reducing Complexity in Reporting Financial Instruments, inviting respondents to comment by 19 September 2008.
Membership
The expert advisory panel comprises experts from preparers and users of financial statements, as well as regulators and auditors.
Participants have been selected based on their practical experience with the valuation of financial instruments in the current market environment.
Representatives from the following organisations are participating in the panel:
- A. C. Sondhi & Associates, LLC
- AIG (American International Group)
- Basel Committee on Banking Supervision
- BNP Paribas
- Capital International Research Inc.
- Citigroup
- Deloitte
- Deutsche Bank
- Ernst & Young
- Financial Stability Forum
- Fitch Ratings
- Goldman Sachs
- HSBC
- International Association of Insurance Supervisors
- International Organization of Securities Commissions (IOSCO)
- Professor Ravi Jagannathan, Northwestern University Kellogg School of Management
- KPMG
- Mizuho Financial Group, Inc.
- Pioneer Investments
- PricewaterhouseCoopers
- Swiss Re
- UBS
- Financial Accounting Standards Board (staff observer)
Meeting summaries
The panel meetings to-date suggest that the requirements and guidance in IAS 39 with regard to fair value measurement generally are clear, and that there is much consistency in the approach, or thought process, used to arrive at a fair value measure. However, some, especially smaller financial institutions and corporates, may need education on possible approaches.
19 August 2008 meeting
On 19 August 2008 the panel met to discuss a draft document summarising the disclosure issues raised at previous meetings.
7 August 2008 meeting
On 7 August 2008 the panel met to discuss disclosures about the measurement of financial instruments in markets that are no longer active. The panel discussed the following issues about disclosures:
- aggregation and granularity of disclosures;
- disclosure of a fair value hierarchy;
- disclosure of valuation techniques;
- disclosure of unobservable inputs used in valuation techniques, including sensitivity analysis, effect on profit or loss and sources of information; and
- disclosures of other information, such as movements in own credit and the control environment for fair value measurement.
31 July 2008 meeting
On 31 July 2008 the panel met to discuss a draft document that contains:
- a summary of the issues encountered in the credit crisis;
- IAS 39’s requirements and guidance on those issues; and
- a summary of how the panellists have dealt with the issues in practice, which focuses on the processes and approaches used when measuring the fair value of financial instruments when there is no longer an active market.
The comments obtained will be incorporated into the document and published on this Website for interested parties to provide feedback.
17 July 2008 meeting
On 17 July 2008 the sub-group of the panel met again to discuss specific examples to illustrate the measurement issues identified at the 13th June meeting and discussed at the 7 July meeting. Nine examples were presented covering the following issues:
- measuring fair value when there are no longer observable market prices
- using transaction prices when the number of actual transactions has decreased
- using data from pricing services, brokers or other sources
- selecting inputs to models and adjusting those inputs
- dealing with forced transactions (forced liquidation or distressed sales)
- measuring changes in non-performance risk (own credit)
The examples related to the following instruments and structures:
- commercial paper and auction rate securities
- asset backed securities
- loans in syndication
- real estate loans
- structured derivatives
The panel members discussed the approaches to these issues and transactions that have been developed over the past several months. These examples will form the basis of a draft document that will be presented to the full panel at its next meeting on 31 July 2008.
7 July 2008 meeting
On 7 July 2008 a sub-group of the panel met to discuss in greater detail the measurement of financial instruments in markets that are no longer active.
The sub-group comprises the preparers and auditors on the panel. The objective of the meeting was to review the practical issues encountered, as identified in the 13th June meeting, and discuss the resolutions that have been found in practice over the past several months.
13 June 2008 meeting
The expert advisory panel met for the first time on 13th June 2008 in London to identify specific valuation and disclosure issues encountered in practice in the current market environment.
The issues relating to measurement included:
- Selection of a valuation technique : The panel discussed how to select an appropriate valuation technique, and when that valuation technique might or should be changed.
- Calibration of valuation model : The panel discussed when and how a valuation model should be calibrated to actual transactions when applying a particular valuation technique.
- Use of third-party price quotes : The panel discussed the use of, and reliance upon, price quotes by third-parties (for example, brokers or pricing services) when transactions have occurred and when quotes were indicative and no transactions were occurring, and what to do when those indicative quotes differ from the value derived from a model.
- Adjustments to valuation models : The panel discussed the types of adjustments that should be made to the model to reflect the value of the instrument being valued, and how such adjustments might be determined. For example, the panel discussed whether and how adjustments to reflect liquidity should be made.
- Meaning of ‘observable’ and ‘significant’ inputs : The panel discussed what ‘observable’ and ‘significant’ meant in the context of inputs to a valuation model. This is important to determine the level in the fair value hierarchy (Level 1, Level 2 or Level 3) of the fair value hierarchy in FASB Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157).
- Distinguishing between active and inactive markets : The panel discussed how to distinguish between an active market and an inactive market, and the importance of being able to determine when fair value might be based on something other than an observed transaction price.
- Forced transactions (forced liquidations and distressed sales) : The panel discussed whether observed market prices could ever clearly identify forced or distressed sales and, if so, the implications of using such prices.
- Measurement of changes in own credit : The panel discussed how to measure changes in own credit
The issues relating to fair value disclosures included:
- Disclosures using the fair value hierarchy : The panel noted that banks outside the US have begun using the fair value hierarchy terminology in SFAS 157, that is ‘Level 1,’ ‘Level 2’ and ‘Level 3’, when discussing disclosures and inputs to valuation techniques. The panel discussed whether any relationships between instruments in different levels of the hierarchy should be disclosed.
- Disclosures of valuation techniques, inputs, sensitivities and ranges : The panel discussed whether disclosures might be improved if the material data inputs used, and the valuation sensitivities of those inputs, were disclosed. The panel also discussed whether sensitivities would be more meaningful if they are presented in the aggregate (eg under an ‘adverse outcome’ scenario) rather than at an individual input level (eg changing one input at a time, holding all others constant).
What are the next steps?
A draft document summarising the panel’s discussions on fair value measurement and the related disclosures is expected to be published in late August 2008 on this Website. Interested parties will be asked to provide comments on the draft document.
The panel plans to meet again on 12 September 2008 to discuss the comments received to-date on the two draft documents.
To ensure that the panel is able to discuss freely the practical issues that have arisen in the credit crisis, these meetings will be held in private sessions. However, a summary of the discussions of the panel, including those in the sub-group meetings, are presented to the IASB in a public meeting and published on this Website.
For further information about the expert advisory panel and its activities, please contact Hilary Eastman at heastman@iasb.org |