Exposure Draft on Fair Value Measurement

The International Accounting Standards Board (IASB) has issued an exposure draft entitled Fair Value Measurement, which proposes guidance on how fair value should be measured where it is required by existing Standards. The exposure draft does not propose to extend the use of fair value measurements. However, it would add disclosure requirements about how fair values were determined. If adopted, the proposals would replace fair value measurement guidance contained within individual IFRSs with a single, unified definition of fair value, as well as further authoritative guidance on the application of fair value measurement in inactive markets.

Key proposals in the exposure draft include:

• Fair Value definition – The IASB proposes an exit price definition of Fair Value: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.
• Most advantageous market – Fair Value measurement of an asset or liability assumes sale or transfer in the most advantageous market for the asset or liability available to the entity.
• Measurement assumptions – Fair Value measurement of an asset or liability should use the assumptions that market participants would use in pricing the asset or liability.
• Highest and best use of an asset – Fair Value measurement of an asset assumes that the asset will be sold to a market participant who will use it at its highest and best use.
• Assume transfer of a liability – Fair Value measurement of a liability assumes that the liability is transferred to a market participant at the measurement date.
• Day one gains/losses – In four cases identified in the exposure draft, Fair Value measurement at initial recognition might differ from the transaction price. An entity would recognise any resulting gain or loss unless the relevant IFRS for the asset or liability requires otherwise.
• Valuation techniques – The exposure draft proposes guidance on valuation techniques, including specific guidance on markets that are no longer active. Valuation techniques must be consistent with with the ‘market approach’, ‘income approach’ or ‘cost approach’. An entity would choose the valuation technique most appropriate in the circumstances and for which sufficient data are available to measure fair value.
• Hierarchy of inputs to valuation – The exposure draft proposes a fair value hierarchy that prioritises into three levels the inputs to valuation techniques used to measure fair value:
  • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
  • Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
  • Level 3 inputs are inputs for the asset or liability that are not based on observable market data (unobservable inputs).
• Disclosures – The exposure draft proposes various disclosures about how assets and liabilities were measured at fair value -  information that enables users of its financial statements to assess the methods and inputs used to develop those measurements and, for fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period”.

Download the  Exposure Draft from the IASB website.

Comments on the exposure draft should be submitted to the IASB by 28 September 2009.

Further information on the proposals presented in the exposure draft can be found in the Deloitte IAS Plus Newsletter:  Exposure Draft Proposes Expanded Guidance on Fair Value Measurement 

Also in this issue:

• IASB Plans for Fast-tracked Replacement for IAS 39 
• IFRIC Agenda Statement on ‘significant or prolonged’ 
• Prepayments of a Minimum Funding Requirement – Proposed Amendments to NZ IFRIC 14 
• FRSB Proposes to Narrow the Scope of NZ IFRS 8 Operating Segments 
• FRSB Proposes to Amend the Scope of NZ IAS 34 Interim Financial Reporting 
• Recent Developments for PBE’s

Deloitte IFRS publications

• IFRSs in Your Pocket 2009 – Guide that includes information about the IASB and IFRS, such as summaries of each IASB Standard and Interpretation and the status of all current IASB projects.

Other Deloitte publications of interest

• Issue #3 of the Insurance Accounting Newsletter – Monthly newsletter focusing on the joint IASB and FASB project to develop a new global financial reporting standard for Insurance. Issue #3 covers the key tentative decisions made by the IASB at its 22 April 2009 meeting.
• Issue #4 of the Insurance Accounting Newsletter – Monthly newsletter focusing on the joint IASB and FASB project to develop a new global financial reporting standard for Insurance. Issue #4 focuses on the estimate of insurance cash flows. The IASB plans to publish an exposure draft for comment in the second half of 2009 and a final Standard in 2011. This newsletter provides an update on progress being made by the IASB and FASB in their joint project.
• Managing in volatile times

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