IASB September 2008

The Board continued its discussion of fair value measurement, focusing on highest and best use and blockage factors.

Highest and best use

The Board discussed whether a fair value measurement should reflect the highest and best use of an asset. The Board tentatively decided the following:

The fair value of an asset should reflect its highest and best use. The highest and best use is the use by market participants that would maximise the value of the asset or of the group of assets in which the asset would be used. It considers uses of the asset that are physically possible, legally permissible and financially feasible at the measurement date. The Board tentatively decided to include in an exposure draft on fair value measurement a description of each criterion and an explanation of how they apply in a fair value measurement.

The exposure draft should state explicitly that an entity does not need to perform an exhaustive search to find other potential uses on which to base the valuation if there is no evidence to suggest that the current use of the asset is not its highest and best use.

When an entity measures an asset at fair value and currently uses the asset together with another asset in a use that differs from their highest and best use, the entity may need to split the fair value into two components: (a) the fair value of the asset assuming its current use and (b) a ‘change of use option’ reflecting the entity’s ability to switch the asset to its highest and best use.

Blockage factors

The Board discussed whether a fair value measurement should include an adjustment for the size of an entity’s holding relative to trading volume (a blockage factor). The Board confirmed its preliminary view, expressed in the discussion papers on Fair Value Measurements and Reducing Complexity in Reporting Financial Instruments, that the measurement objective should be to measure fair value at the individual instrument level. The Board tentatively decided:

• to exclude blockage factors from a fair value measurement at all levels of the fair value hierarchy.
• that a fair value measurement should exclude other discounts or premia (such as a control premium) that apply to a holding of financial instruments and do not apply to the individual instrument.

Next steps

The Board will discuss further topics at its meeting in October.