Tentative decisions to-date
October 2007
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.
November 2007
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.
June 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.
July 2008
In July 2008 the Board completed the first phase of the standard-by-standard review of fair value measurements currently required or permitted in IFRSs to assess whether the IASB/IASC intended each fair value measurement basis to be a current exit price. On the basis of that review, the Board discussed the measurement objective for assets and liabilities with a measurement basis currently referred to as ‘fair value’.
The first phase of the standard-by-standard review showed that entry and exit prices are equal when they relate to the same asset or liability on the same date in the same form in the same market. The Board therefore considered whether it is necessary to make a distinction between entry prices and exit prices in IFRSs. It tentatively decided to define fair value as a current exit price.
The Board will discuss at a future meeting which market to consider for this purpose. The wording of the definition of fair value will reflect the fact that an exit price considers a market participant’s ability to generate economic benefit by using an asset or by selling it to a third party.
The second phase of the standard-by-standard review will be a scope assessment for uses of fair value in current IFRSs. In situations for which the Board decides that an exit price definition of fair value is not appropriate (eg perhaps at initial recognition), it could, for example, require an entity to use its transaction price or another measurement basis instead of fair value. The Board will make this decision at a future meeting on the basis of the scope assessment. Liabilities will be addressed at a future meeting.
September 2008
In September 2008 the Board discussed the following:
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.
October 2008
In June 2008 the Board reaffirmed its preliminary view as articulated in the Fair Value Measurements discussion paper that a fair value measurement should be determined using the price within the bid-ask spread that is most representative of fair value in the circumstances. At this meeting, the Board tentatively decided:
- not to preclude the use of mid-market pricing or another pricing convention as a practical expedient for a fair value measurement within a bid-ask spread.
- to specify that the bid-ask spread guidance applies in all levels of the fair value hierarchy.
- not to include guidance on offsetting positions. This is because the bid-ask pricing guidance allows entities to determine, for each position, the price within the bid-ask spread that is most representative of fair value in the circumstances.