Breakout Session: Fair Value Measurement

International Accounting Standards Board IASB@AFRAC 2007

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®International

Accounting Standards Board

Breakout Session:Breakout Session:Fair Value MeasurementFair Value Measurement

Hilary Eastman Hilary Eastman –– IASB Project ManagerIASB Project [email protected]@iasb.org.uk+44 20 7246 6470+44 20 7246 6470

IASB IASB RoadshowRoadshow 2007, Vienna2007, Vienna26 November 200726 November 2007

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DisclaimerDisclaimer

Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenters. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.


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AgendaAgendaThe objective of financial reportingThe objective of financial reporting——how does fair value fit how does fair value fit in?in?Fair value measurements initiated by the IASC and the Fair value measurements initiated by the IASC and the IASBIASBWhy have an IFRS on fair value measurement?Why have an IFRS on fair value measurement?Overview of SFAS 157Overview of SFAS 157Main differences between SFAS 157 and IFRSsMain differences between SFAS 157 and IFRSsDeliberations toDeliberations to--datedateNext steps in the IASB’s fair value measurement projectNext steps in the IASB’s fair value measurement projectAppendix: Discussion paper comment letter summaryAppendix: Discussion paper comment letter summary

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Objective of financial reportingObjective of financial reporting

To provide information that is useful to present and To provide information that is useful to present and potential investors and creditors and others in potential investors and creditors and others in making investment, credit and similar resource making investment, credit and similar resource allocation decisionsallocation decisions


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Objective of financial reportingObjective of financial reportingThe decisionThe decision--usefulness objective is not limited to usefulness objective is not limited to information useful for buy, sell or hold decisionsinformation useful for buy, sell or hold decisionsAlso includes information useful in assessing Also includes information useful in assessing management’s stewardship and accountabilitymanagement’s stewardship and accountability── Helps decide whether to replace or reappoint management, Helps decide whether to replace or reappoint management,

management remuneration, how to vote on management management remuneration, how to vote on management proposals, etc.proposals, etc.

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Qualitative characteristicsQualitative characteristicsRelevanceRelevance── Capable of making a difference to a user’s decisionCapable of making a difference to a user’s decision── Has predictive valueHas predictive value

Faithful representation (reliability)Faithful representation (reliability)── Reflects realReflects real--world economic phenomenaworld economic phenomena── Encompasses verifiability, neutrality and completenessEncompasses verifiability, neutrality and completeness

ComparabilityComparability── Enables users to identify similarities and differencesEnables users to identify similarities and differences── It is undesirable for similar events to look differentIt is undesirable for similar events to look different

UnderstandabilityUnderstandability── Enables knowledgeable users to comprehend the meaning of Enables knowledgeable users to comprehend the meaning of

the measurementthe measurement


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Addressing common Addressing common misunderstandingsmisunderstandings

Conservatism is not a qualitative characteristic of Conservatism is not a qualitative characteristic of accounting informationaccounting informationMatching is not an objective of accounting Matching is not an objective of accounting measurement, it is an outcomemeasurement, it is an outcomeReliability is not limited to verifiability, and it does Reliability is not limited to verifiability, and it does not mean precisionnot mean precision

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Addressing common Addressing common misunderstandingsmisunderstandings

The objective of financial reporting is not to help The objective of financial reporting is not to help management to manage the businessmanagement to manage the businessThe The FrameworkFramework focuses on assets and liabilities focuses on assets and liabilities because they define profit and lossbecause they define profit and lossThe Board does The Board does notnot have an objective to measure have an objective to measure all assets and liabilities at fair valueall assets and liabilities at fair value


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How fair value fits into this How fair value fits into this approachapproach

Meets Meets FrameworkFramework’s qualitative characteristics’s qualitative characteristics── Relevant Relevant –– provides feedback value, timelyprovides feedback value, timely── Faithful representation Faithful representation –– consistent with asset and liability consistent with asset and liability

definitions, neutral definitions, neutral ── Comparable, enhances consistencyComparable, enhances consistency

Offers an internally consistent approach to Offers an internally consistent approach to measurementmeasurementBut other measurements also fit those criteriaBut other measurements also fit those criteria

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How fair value fits into this How fair value fits into this approachapproach

Fair value is not perfectFair value is not perfect── It currently lacks a clear definition It currently lacks a clear definition ── There are concerns about verifiabilityThere are concerns about verifiability── There is scope for managerial discretion (judgment)There is scope for managerial discretion (judgment)── There seems to be circularity when using fair values for There seems to be circularity when using fair values for

financial reporting when the objective is to provide financial reporting when the objective is to provide information to users to, among other things, assess valueinformation to users to, among other things, assess value


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Fair value measurementsFair value measurementsestablished by the IASCestablished by the IASC

Revaluation model for Revaluation model for intangible assets and intangible assets and PP&EPP&ENonNon--monetary monetary government grantsgovernment grantsInvestment propertyInvestment property

Some financial instruments Some financial instruments (AFS, trading, derivatives)(AFS, trading, derivatives)Pension and postPension and post--retirement retirement plan assetsplan assetsImpairment (higher of fair value Impairment (higher of fair value less costs to sell or value in less costs to sell or value in use)use)Agricultural assetsAgricultural assets

Recurring Recurring measurementmeasurement

Finance leases (lessee)Finance leases (lessee)Financial instrumentsFinancial instrumentsBusiness combinations (IAS 22)Business combinations (IAS 22)

Initial Initial recognitionrecognition

OptionalOptionalRequiredRequired

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Fair value measurementsFair value measurementsestablished by the IASBestablished by the IASB

Fair value option for Fair value option for financial instrumentsfinancial instruments

NonNon--current assets held for current assets held for salesale

Recurring Recurring measurementmeasurement

Fair value as deemed cost Fair value as deemed cost upon transition to IFRSsupon transition to IFRSs

ShareShare--based payments (fair based payments (fair value based)value based)Expansion of business Expansion of business combination model (IFRS 3/ combination model (IFRS 3/ IFRS 3R)IFRS 3R)Insurance liabilities acquired Insurance liabilities acquired in a business combinationin a business combination

Initial Initial recognitionrecognition

OptionalOptionalRequiredRequired


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Where is the Board Where is the Board considering current values?considering current values?

Revenue recognition (customer Revenue recognition (customer consideration model)consideration model)Liabilities under IAS 37 (current Liabilities under IAS 37 (current settlement amount)settlement amount)Insurance contracts (current exit Insurance contracts (current exit value)value)

Revenue recognitionRevenue recognitionAll financial instruments at fair value All financial instruments at fair value through profit and lossthrough profit and loss

Other Current ValuesOther Current ValuesFair ValueFair Value


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Why have an IFRS on Why have an IFRS on fair value measurement?fair value measurement?

Clarify the fair value measurement objective in Clarify the fair value measurement objective in current IFRSscurrent IFRSsDevelop a single source of guidance for all fair Develop a single source of guidance for all fair value measurements value measurements ── Eliminate dispersed and inconsistent fair value measurement Eliminate dispersed and inconsistent fair value measurement

guidance from IFRSsguidance from IFRSs── Individual standards might retain specific guidanceIndividual standards might retain specific guidance

Improve and Improve and harmoniseharmonise the disclosures for fair the disclosures for fair value measurementsvalue measurements

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The starting pointThe starting pointThe FASB was nearing completion of SFAS 157 The FASB was nearing completion of SFAS 157 when the IASB began working on a fair value when the IASB began working on a fair value measurement standardmeasurement standardBecause of the Memorandum of Understanding, Because of the Memorandum of Understanding, the IASB decided that the most appropriate the IASB decided that the most appropriate starting point was to begin deliberations using starting point was to begin deliberations using SFAS 157SFAS 157

SFAS 157 was used to initiate comments from constituents—it is not the ‘final solution’.


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SFAS 157SFAS 157OverviewOverview

Defines fair value for US GAAPDefines fair value for US GAAPEstablishes the approach for measuring fair value Establishes the approach for measuring fair value for financial reportingfor financial reportingEnhances disclosures about fair valueEnhances disclosures about fair valueApplies when other standards require or permit Applies when other standards require or permit fair valuefair valueEffective for fiscal years beginning after 15 Effective for fiscal years beginning after 15 November 2007November 2007── FASB discussing possible deferral of effective date at its FASB discussing possible deferral of effective date at its

meeting 14 November 2007meeting 14 November 2007

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SFAS 157SFAS 157Definition of fair valueDefinition of fair value

The price that would be received to sell an asset The price that would be received to sell an asset or paid to transfer a liability in an orderly or paid to transfer a liability in an orderly transaction between market participants at the transaction between market participants at the measurement datemeasurement dateAssumes a hypothetical exchange transactionAssumes a hypothetical exchange transaction


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SFAS 157SFAS 157Reference marketReference market

The market in which The market in which the entitythe entity would sell the asset would sell the asset or transfer the liabilityor transfer the liability── The The principal marketprincipal market is the market with the greatest volume is the market with the greatest volume

and level of activity for the asset or liabilityand level of activity for the asset or liability── The The most advantageous marketmost advantageous market maximises the amount that maximises the amount that

would be received for the asset or minimises the amount that would be received for the asset or minimises the amount that would be paid to transfer the liability (considering transactionwould be paid to transfer the liability (considering transactioncosts)costs)

The reference market is only relevant if the entity The reference market is only relevant if the entity has access to more than one markethas access to more than one market

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SFAS 157SFAS 157Market participantsMarket participants

Buyers and sellers in the exit market (other entities with Buyers and sellers in the exit market (other entities with whom the entity would transact) who are:whom the entity would transact) who are:── Independent of the entityIndependent of the entity── Knowledgeable about the asset or liabilityKnowledgeable about the asset or liability── Able to transactAble to transact── Willing to transactWilling to transact

A fair value measurement should be based on the A fair value measurement should be based on the assumptions market participants would use in pricing the assumptions market participants would use in pricing the asset or liability, including assumptions about risk, highest asset or liability, including assumptions about risk, highest and best use (for assets) and nonand best use (for assets) and non--performance risk (for performance risk (for liabilities)liabilities)It is not necessary to identify specific market participantsIt is not necessary to identify specific market participants


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SFAS 157SFAS 157Highest and best use (assets)Highest and best use (assets)

The highest and best use of an asset establishes The highest and best use of an asset establishes the valuation premise:the valuation premise:── InIn--use: if the asset would provide maximum value to market use: if the asset would provide maximum value to market

participants through its use in combination with other assets participants through its use in combination with other assets as a group (as installed or otherwise configured)as a group (as installed or otherwise configured)

• Assumes the group of complementary assets is available to the market participants

── InIn--exchange: if the asset would provide maximum value to exchange: if the asset would provide maximum value to market participants through its use on a standmarket participants through its use on a stand--alone basisalone basis

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SFAS 157SFAS 157NonNon--performance risk (liabilities)performance risk (liabilities)

The risk that the obligation will not be fulfilledThe risk that the obligation will not be fulfilledIncludes, but is not limited to, credit riskIncludes, but is not limited to, credit riskAssumed to be the same before and after the Assumed to be the same before and after the transfer of the liabilitytransfer of the liability── The liability continues after the transfer, it is not settled wiThe liability continues after the transfer, it is not settled with th

the counterpartythe counterparty


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SFAS 157SFAS 157Fair value at initial recognitionFair value at initial recognition

A transaction price represents the price paid to buy an A transaction price represents the price paid to buy an asset or received to assume a liability (an entry price)asset or received to assume a liability (an entry price)A fair value is the price that would be received to sell the A fair value is the price that would be received to sell the asset or paid to transfer a liability (an exit price)asset or paid to transfer a liability (an exit price)The transaction price might not represent fair value if:The transaction price might not represent fair value if:── The transaction is between related partiesThe transaction is between related parties── The transaction occurs under duress or the seller is forcedThe transaction occurs under duress or the seller is forced── The unit of account represented by the transaction price is diffThe unit of account represented by the transaction price is different erent

from the unit of account for the asset or liability measured at from the unit of account for the asset or liability measured at fair fair valuevalue

── The market in which the transaction occurs is different from theThe market in which the transaction occurs is different from themarket in which the reporting entity would sell the asset or tramarket in which the reporting entity would sell the asset or transfer nsfer the liabilitythe liability

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SFAS 157SFAS 157Valuation techniquesValuation techniques

Market approachMarket approach── Uses prices and other information generated by market Uses prices and other information generated by market

transactions involving identical or comparable assets or transactions involving identical or comparable assets or liabilities (including a business)liabilities (including a business)

Income approachIncome approach── Uses valuation techniques to convert market expectations of Uses valuation techniques to convert market expectations of

future amounts (eg cash flows or earnings) to a single present future amounts (eg cash flows or earnings) to a single present amount (discounted)amount (discounted)

Cost approachCost approach── Based on the amount that currently would be required to Based on the amount that currently would be required to

replace the service capacity of the asset (current replacement replace the service capacity of the asset (current replacement cost)cost)


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SFAS 157SFAS 157Fair value hierarchyFair value hierarchy

Prioritises inputs to the valuation techniquesPrioritises inputs to the valuation techniques── Level 1Level 1

• Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access

• Blockage factors are prohibited on large positions of a single financial instrument

── Level 2Level 2• Inputs other than quoted prices that are observable for the asset or

liability── Level 3Level 3

• Unobservable inputs for the asset or liability• Reflects the reporting entity’s assumptions about the assumptions that

market participants would use in pricing the asset or liability

Inputs are based on the price within the bidInputs are based on the price within the bid--ask spread that ask spread that is most representative of fair value in the circumstancesis most representative of fair value in the circumstances

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SFAS 157SFAS 157DisclosuresDisclosures

Recurring basisRecurring basis•• The fair value measurement The fair value measurement

at the reporting dateat the reporting date•• The level within the hierarchy The level within the hierarchy

in which they fallin which they fall•• A rollA roll--forward of level 3 forward of level 3

measurementsmeasurements•• Total Total unrealisedunrealised gains or gains or

losses in the level 3 rolllosses in the level 3 roll--forward included in earnings forward included in earnings attributable assets and attributable assets and liabilities held at the liabilities held at the reporting datereporting date

•• Disclosure of valuation Disclosure of valuation techniques and a discussion techniques and a discussion of changes to techniques of changes to techniques (annual only)(annual only)

NonNon--recurring basisrecurring basis•• The fair value measurement The fair value measurement

recorded during the period recorded during the period and the reasons for the and the reasons for the measurementmeasurement

•• The level within the hierarchy The level within the hierarchy in which they fallin which they fall

•• For measurements with For measurements with significant level 3 inputs, a significant level 3 inputs, a description of the inputs and description of the inputs and the information used to the information used to develop the inputsdevelop the inputs

•• Disclosure of valuation Disclosure of valuation techniques and a discussion techniques and a discussion of changes to techniques of changes to techniques (annual only)(annual only)


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Main differences between Main differences between SFAS 157 and IFRSsSFAS 157 and IFRSs

Definition of fair value (an explicit Definition of fair value (an explicit exit priceexit priceversus a neutral versus a neutral exchange amountexchange amount))DayDay--one gains and lossesone gains and lossesWhen inputs are based on bid and ask pricesWhen inputs are based on bid and ask pricesDetermining on which market a fair value Determining on which market a fair value measurement should be basedmeasurement should be based

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Comment letter summaryComment letter summaryGeneral commentsGeneral comments

Many agree that a project on fair value Many agree that a project on fair value measurement is neededmeasurement is needed── Single source of guidanceSingle source of guidance── A step toward convergenceA step toward convergence

Some have concerns about the ability of the IASB Some have concerns about the ability of the IASB to diverge from SFAS 157to diverge from SFAS 157── ‘This is an example of the IASB adopting US GAAP’‘This is an example of the IASB adopting US GAAP’

Many find it difficult to discuss Many find it difficult to discuss howhow to define fair to define fair value without knowing value without knowing whenwhen it will be usedit will be used


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Comment letter summaryComment letter summaryIssue 1. Guidance in IFRSsIssue 1. Guidance in IFRSs

Many think fair value is used more extensively in Many think fair value is used more extensively in IFRSs than in US GAAPIFRSs than in US GAAP── Can a principlesCan a principles--based standard provide sufficient guidance?based standard provide sufficient guidance?

Some suggest tailoring the guidance to the Some suggest tailoring the guidance to the specific circumstances in which fair value is used specific circumstances in which fair value is used (eg have guidance in each standard)(eg have guidance in each standard)Many prefer the guidance in IFRSs to that in SFAS Many prefer the guidance in IFRSs to that in SFAS 157 because each standard addresses its relevant 157 because each standard addresses its relevant issuesissues── eg IFRS 2, IFRS 3, IAS 36, IAS 39, IAS 40, IAS 41eg IFRS 2, IFRS 3, IAS 36, IAS 39, IAS 40, IAS 41

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Comment letter summaryComment letter summaryIssue 2A. Exit price objectiveIssue 2A. Exit price objective

Many agree with the definition of an exit priceMany agree with the definition of an exit price── But they think it describes only one aspect of fair valueBut they think it describes only one aspect of fair value── ‘Exit price is a “one size fits all” concept’‘Exit price is a “one size fits all” concept’

Many think the exit price concept in SFAS 157 Many think the exit price concept in SFAS 157 assumes that an active, liquid market exists for all assumes that an active, liquid market exists for all assets and liabilities measured at fair valueassets and liabilities measured at fair value── If it did, the hierarchy would consist of one levelIf it did, the hierarchy would consist of one level——LevelLevel 11

Many think an entry price is just as relevant as an Many think an entry price is just as relevant as an exit price and that the main differences between exit price and that the main differences between the two are different markets and transaction the two are different markets and transaction costscosts


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Many think ‘fair value’ is a family of measurement Many think ‘fair value’ is a family of measurement attributes and should be replaced with terms more attributes and should be replaced with terms more descriptive of the measurement basis, for descriptive of the measurement basis, for example:example:── Current entry priceCurrent entry price── Current exit priceCurrent exit price

Others think ‘fair value should be retained Others think ‘fair value should be retained because:because:── They see little, if any, difference between the twoThey see little, if any, difference between the two── ‘Fair value’ is widely used and understood‘Fair value’ is widely used and understood── IFRSs and US GAAP need to use the same termsIFRSs and US GAAP need to use the same terms

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Some respondents provide examples of Some respondents provide examples of differences between SFAS 157 and IFRSs:differences between SFAS 157 and IFRSs:── IFRS 2, IFRS 3, IAS 16, IAS 17, IAS 18 and IAS 38 seem to refer IFRS 2, IFRS 3, IAS 16, IAS 17, IAS 18 and IAS 38 seem to refer

to an entry price rather than an exit priceto an entry price rather than an exit price── IAS 40 and IAS 41 refer to the market in which the entity IAS 40 and IAS 41 refer to the market in which the entity

transacts or expects to transact rather than the principal transacts or expects to transact rather than the principal marketmarket

── IAS 39 refers to the most advantageous market rather than the IAS 39 refers to the most advantageous market rather than the principal marketprincipal market


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Comment letter summaryComment letter summaryIssue 2B. Market participant viewIssue 2B. Market participant view

Many agree that the market participants view in Many agree that the market participants view in SFAS 157 is consistent with the concepts of SFAS 157 is consistent with the concepts of ‘knowledgeable, willing parties’ in an ‘arm’s ‘knowledgeable, willing parties’ in an ‘arm’s length transaction’ in IFRSslength transaction’ in IFRSs── However, some find the term ‘market participant’ misleading However, some find the term ‘market participant’ misleading

when there is no marketwhen there is no market

Some question how the market participant view Some question how the market participant view can be relevant when there is little or no market can be relevant when there is little or no market activity and they must rely on ‘hypothetical market activity and they must rely on ‘hypothetical market participant assumptions’participant assumptions’They wonder how to identify market participantsThey wonder how to identify market participants

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Comment letter summaryComment letter summaryIssue 2C. Transfer vs settlementIssue 2C. Transfer vs settlement

Many question the relevance of measuring Many question the relevance of measuring liabilities at fair value and prefer a settlement liabilities at fair value and prefer a settlement price over a transfer price when:price over a transfer price when:── there is no active market on which to base the transfer pricethere is no active market on which to base the transfer price── the entity has no intention of transferring the liability; andthe entity has no intention of transferring the liability; and── the entity has no ability to transfer the liabilitythe entity has no ability to transfer the liability

They think the measurement objective for They think the measurement objective for liabilities in IFRSs is based on a settlement price, liabilities in IFRSs is based on a settlement price, not a transfer pricenot a transfer price── They differ in whether they think it is a current settlement They differ in whether they think it is a current settlement

price or a future settlement priceprice or a future settlement price


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Comment letter summaryComment letter summaryIssue 3. Initial recognitionIssue 3. Initial recognition

Some think the transaction price is the best Some think the transaction price is the best evidence of fair value unless there is evidence to evidence of fair value unless there is evidence to the contrarythe contraryOther respondents think it is not always the best Other respondents think it is not always the best evidence of fair value because entities transact in evidence of fair value because entities transact in order to make a profitorder to make a profitSome note that deferring day one gains and Some note that deferring day one gains and losses simply defers them to another periodlosses simply defers them to another period── What is the difference between a day one gain or loss and a What is the difference between a day one gain or loss and a

day two gain or loss?day two gain or loss?

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Comment letter summaryComment letter summaryIssue 4. Reference marketIssue 4. Reference market

Many think the principal market should be used, Many think the principal market should be used, and in its absence, the most advantageous marketand in its absence, the most advantageous marketSome prefer the approach in IAS 41 Some prefer the approach in IAS 41 AgricultureAgriculture, , which allows an entity to use ‘the market expected which allows an entity to use ‘the market expected to be used’to be used’── Some think the principal market Some think the principal market isis the market the entity the market the entity

expects to use expects to use

Some ask for clarity on what constitutes a market Some ask for clarity on what constitutes a market and what to do when there is no observable and what to do when there is no observable marketmarket


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Comment letter summaryComment letter summaryIssue 5. AttributesIssue 5. Attributes

Many agree that a fair value measurement should Many agree that a fair value measurement should consider attributes specific to the asset or liabilityconsider attributes specific to the asset or liability── ‘Otherwise, a different item is being valued’‘Otherwise, a different item is being valued’

Many are unsure how to determine which Many are unsure how to determine which attributes a market participant would consider in attributes a market participant would consider in pricing an itempricing an itemMany agree that transaction costs are an attribute Many agree that transaction costs are an attribute of the transaction and not of the asset or liabilityof the transaction and not of the asset or liability── Some request guidance on what is a transaction costSome request guidance on what is a transaction cost

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Comment letter summaryComment letter summaryIssue 6. Valuation of liabilitiesIssue 6. Valuation of liabilities

Some question whether the quoted price for a Some question whether the quoted price for a financial liability can in fact be used to measure financial liability can in fact be used to measure the transfer price because it is the price in an the transfer price because it is the price in an asset trading marketasset trading marketSome think it is appropriate to reflect the risk of Some think it is appropriate to reflect the risk of nonnon--performance (including credit risk) in a fair performance (including credit risk) in a fair value measurement because liabilities are priced value measurement because liabilities are priced that waythat way── However, many are concerned about the counterHowever, many are concerned about the counter--intuitive intuitive

results that occur when there is a change in credit standingresults that occur when there is a change in credit standing

Need guidance on what nonNeed guidance on what non--performance risk isperformance risk is


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Comment letter summaryComment letter summaryIssue 7. InIssue 7. In--use vs value in useuse vs value in use

Nearly all think the distinction between the inNearly all think the distinction between the in--use use valuation premise and value in use in IAS 36 valuation premise and value in use in IAS 36 Impairment of AssetsImpairment of Assets is clearis clear── Many respondents use the term ‘value in use’ to mean a Many respondents use the term ‘value in use’ to mean a

current market value based on the entity’s use of the asset or current market value based on the entity’s use of the asset or liability, not as the purely entityliability, not as the purely entity--specific notion in IAS 36specific notion in IAS 36

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Comment letter summaryComment letter summaryIssue 8. Fair value hierarchyIssue 8. Fair value hierarchy

Many agree with the threeMany agree with the three--level hierarchylevel hierarchy── Like that it Like that it prioritisesprioritises market inputsmarket inputs

Practical concerns:Practical concerns:── Identifying an active marketIdentifying an active market── Distinguishing between observable and unobservable inputsDistinguishing between observable and unobservable inputs── Applying ‘the entity’s own assumptions about assumptions Applying ‘the entity’s own assumptions about assumptions

that market participants would use’ in level 3that market participants would use’ in level 3── The interaction between the hierarchy, principal market and The interaction between the hierarchy, principal market and

highest and best usehighest and best use── The interaction between the hierarchy and valuation The interaction between the hierarchy and valuation

techniquestechniques


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Comment letter summaryComment letter summaryIssue 9. Blocks of fin. instrumentsIssue 9. Blocks of fin. instruments

Very few agree with the prohibition of a blockage Very few agree with the prohibition of a blockage discountdiscount── Does not reflect the price an entity could realise upon sale Does not reflect the price an entity could realise upon sale

and is inconsistent with an exit priceand is inconsistent with an exit price── It is a rule, not a principleIt is a rule, not a principle

Those who agree with the prohibition do so Those who agree with the prohibition do so because of the perceived subjectivity in its because of the perceived subjectivity in its applicationapplicationRegardless of whether they agree with the Regardless of whether they agree with the prohibition, they think the provision should apply prohibition, they think the provision should apply to all levels of the hierarchy (not just level 1)to all levels of the hierarchy (not just level 1)

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Comment letter summaryComment letter summaryIssue 10. BidIssue 10. Bid--ask spreadask spread

Many think a fair value measurement should be Many think a fair value measurement should be based on the price within the bidbased on the price within the bid--ask spread that ask spread that is most representative of fair valueis most representative of fair value── Some wonder how this is consistent with an exit priceSome wonder how this is consistent with an exit price

Many disagree with a pricing convention unless Many disagree with a pricing convention unless the difference in fair value is immaterialthe difference in fair value is immaterial── A pricing convention is a rule, not a principleA pricing convention is a rule, not a principle

Many think the guidance should apply to all levels Many think the guidance should apply to all levels of the hierarchy, although they wonder how it can of the hierarchy, although they wonder how it can be applied outside level 1be applied outside level 1


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Comment letter summaryComment letter summaryIssue 11. DisclosuresIssue 11. Disclosures

Some think it is too soon to address disclosures Some think it is too soon to address disclosures because too many items need to be deliberatedbecause too many items need to be deliberatedMany suggest Many suggest harmonisingharmonising the disclosures in the disclosures in SFAS 157 with those in IFRS 7 SFAS 157 with those in IFRS 7 Financial Financial Instruments: DisclosuresInstruments: DisclosuresSome think there will be large amounts of Some think there will be large amounts of disclosures for entities in emerging marketsdisclosures for entities in emerging markets── They will have very few level 1 inputsThey will have very few level 1 inputs

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Comment letter summaryComment letter summaryIssue 12. Application guidanceIssue 12. Application guidance

Many suggest providing additional examples:Many suggest providing additional examples:── NonNon--financial assets (eg PP&E, intangible assets)financial assets (eg PP&E, intangible assets)── Financial liabilities (eg how to estimate a transfer price)Financial liabilities (eg how to estimate a transfer price)── NonNon--financial liabilities (eg pension obligations and financial liabilities (eg pension obligations and

performance obligations)performance obligations)

They also suggest providing more examples They also suggest providing more examples showing the application of level 2 and level 3 showing the application of level 2 and level 3 inputsinputs


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Comment letter summaryComment letter summaryIssue 13. Other mattersIssue 13. Other matters

The discussion paper does not contain the The discussion paper does not contain the Board’s views on:Board’s views on:── Transitional provisionsTransitional provisions── Early adoptionEarly adoption── Reliability thresholdsReliability thresholds── Practicability exceptionsPracticability exceptions

The accounting should be aligned with the The accounting should be aligned with the circumstances of the business or transactioncircumstances of the business or transactionThe Board should take this opportunity to learn The Board should take this opportunity to learn from the implementation of SFAS 157 in the USfrom the implementation of SFAS 157 in the US

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Deliberations toDeliberations to--datedatePreliminary definitionsPreliminary definitions

Current entry price Current entry price ── The price that would be paid to buy an asset or received to The price that would be paid to buy an asset or received to

incur a liability in an orderly transaction between market incur a liability in an orderly transaction between market participants at the measurement date participants at the measurement date

Current exit priceCurrent exit price── The price that would be received to sell an asset or paid to The price that would be received to sell an asset or paid to

transfer or settle a liability in an orderly transaction betweentransfer or settle a liability in an orderly transaction betweenmarket participants at the measurement date market participants at the measurement date

• If a liability is transferred, it is assumed to exist beyond themeasurement date

• If a liability is settled, it is assumed to cease to exist at the measurement date

These definitions are for the standard-by-standard review and are subject to change.


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Next stepsNext stepsAssess whether each use of ‘fair value’ in current IFRSs Assess whether each use of ‘fair value’ in current IFRSs has the same measurement objective as the proposed has the same measurement objective as the proposed definitiondefinition── If it is not, the Board will consider developing guidance for thIf it is not, the Board will consider developing guidance for those ose

other measurement basesother measurement bases

Ongoing deliberations of the issues in the discussion Ongoing deliberations of the issues in the discussion paper paper ── December 2007: The Market Participant ViewDecember 2007: The Market Participant View

Roundtable discussions will be held in 1H 2008Roundtable discussions will be held in 1H 2008Hold convergence discussions with the FASB if necessaryHold convergence discussions with the FASB if necessaryIssue an exposure draft of an IFRS that consolidates (and Issue an exposure draft of an IFRS that consolidates (and replaces) existing guidancereplaces) existing guidance

Documents

Breakout Session: Fair Value Measurement