International Accounting Standards Board Financial ... - IFRS

International Accounting Standards Board Financial Accounting Standards Board

This presentation has been prepared by the staff of the IASB and the FASB to help constituents

understand the requirements in IFRS 13 Fair Value Measurement and Topic 820 in the FASB Accounting

Standards Codification®. The views expressed in this presentation are those of the presenters, not

necessarily those of the IFRS Foundation, the IASB, the Financial Accounting Foundation, or the FASB.

Official positions of the IASB and the FASB are reached only after extensive due process and

deliberations.

Fair Value Measurement

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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Presenters

IASB

Elke König

IASB Member

Hilary Eastman

Senior Technical

Manager

FASB

Marc Siegel

FASB Member

Ben Couch

Valuation Practice

Fellow


Agenda

• Project overview and background

• Fair value measurement model

• Main changes in US GAAP

• Main changes in IFRSs

• Q&A


Project overview and background

IFRS 13 and Topic 820:

Provide a common definition of fair value

Require the same disclosures about fair values (with

some minor differences)

Are a single source of measurement guidance

Do not introduce new fair values

Do not change the measurement objective in other

IFRSs/Topics


Project overview and background continued

Existing fair value

measurement guidance in

various standards

Topic 820 (codified SFAS

157)

Objective:Common (identical) fair value measurement and disclosure

requirements

IFRSs US GAAP


Fair value measurement modelDefinition of fair value

Fair value is 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.

What is the measurement objective?

An exit

priceA current

priceMarket-

based view

Not a liquidation

price or forced

sale


Fair value measurement model Highest and best use

• Highest and best use is the use of an asset by market

participants that maximises the value of the asset

– Physically possible

– Legally permissible

– Financially feasible

• Highest and best use is usually (but not always) the

current use

– Defensive value

• Does not apply to financial instruments or liabilities


Fair value measurement model The valuation premise

• An asset either provides maximum value

through its use:

– in combination with other assets and liabilities as

a group (formerly „in use‟)

– on a stand-alone basis (formerly „in exchange‟)

• Does not apply to financial instruments or liabilities


Fair value measurement model The exit transaction

• The exit transaction takes place in the principal market:

– the market with the greatest volume and level of activity for

the asset or liability

• If no principal market, it takes place in the most

advantageous market:

– the market that maximises the amount that would be received

to sell the asset and minimises the amount that would be paid

to transfer the liability


Fair value measurement model The exit transaction continued

• The determination of the most advantageous market

takes into account transaction and transport costs

• Fair value:

– does not include transaction costs

– includes transport costs

– the costs incurred to transport the asset from its current location to the

principal (or most advantageous) market


Fair value measurement model Market participants

• Market participants are:

– independent of each other

– knowledgeable and sufficiently informed about the

asset or liability and the transaction

– able to enter into a transaction for the asset or liability

– willing to enter into a transaction for the asset or liability

(not forced)


Fair value measurement model Fair value hierarchy

Is there a quoted price for an

identical asset or liability?

(Level 1 input)

Are there any observable

inputs other than quoted

prices for an identical asset

or liability?

Use the Level 1 input =

Level 1 measurement

Use of Level 2 inputs with no

significant unobservable inputs =

Level 2 measurement

Significant use of

unobservable inputs =

Level 3 measurement

NoYes

Yes No

Must use without

adjustment


Fair value measurement modelOther guidance

Topic Description

Liabilities (and own

equity)

• Fair value of liability = fair value of corresponding asset

• If no corresponding asset = price to fulfil obligation

Financial instruments

within a portfolio

• May reflect offsetting market risks or credit risk

• Need evidence that financial instruments are managed on a

net risk exposure basis

Premiums and discounts • Block discounts prohibited

• Other premiums and discounts must be consistent with unit of

account

Inactive markets • Indicators of a decline in market activity

• Indicators that a transaction is not orderly

Valuation techniques and

inputs

• Market, income and cost approaches can be used

• Need to use market participant assumptions


Fair value disclosures

More information required for Level 3 fair value

measurements:

• Quantitative disclosure of the unobservable inputs

and assumptions used

• Description of the valuation process in place

• Discussion of the sensitivity of the fair value to

changes in unobservable inputs and inter-

relationships between those inputs that magnify or

mitigate the effect on the measurement


Application to non-public entities

US GAAP IFRSs

Measurement principles apply

equally to public and non-

public entities, but some

disclosures not required for

nonpublic entities

IFRS for Small and Medium-

sized Entities addresses fair

value measurement and

disclosures for entities

without public accountability


Effective Dates and Transition

2011 2012 2013

May 2011

Common IFRS and U.S. GAAP fair value

measurement standards

ASU No. 2011-04

IFRS 13

December 15, 2011

ASU No. 2011-04 effective

Public entities

• Interim and annual periods

• Prospective transition with disclosure of

changes and quantitative effect

• Earlier application not permitted

Nonpublic entities

• Annual periods

• Prospective transition with disclosure of

changes and quantitative effect

• Earlier application permitted for interim

periods after December 15

January 1, 2013

IFRS 13 effective

Prospective transition

Earlier application permitted


Changes to US GAAP

• Premiums and discounts

• Financial instruments in a portfolio

• Instruments in shareholders‟ equity

• Disclosures


Changes to IFRSs

• Definition of fair value as exit price

• Description of market participants

• Principal (or most advantageous) market

• Highest and best use

• Bid-ask spread

• Three-level fair value hierarchy

• Disclosures


Summary

• Fair value now means the same thing in IFRSs and

US GAAP

• Increased consistency and comparability

– Single source of guidance that is internally consistent

• More guidance for measuring fair value in Level 3

– Especially in inactive markets

• Increased transparency

– More information required for Level 3 measurements,

including assumptions made and processes used


Conclusion

Additional information about the fair value

measurement project is available at www.ifrs.org and

www.fasb.org

http://www.ifrs.org/

http://www.fasb.org/


Q&A

Expressions of individual views

by members of the IASB, the

FASB and their staff are

encouraged.

The views expressed in this

presentation are those of the

presenters. Official positions of

the IASB and the FASB on

accounting matters are

determined only after extensive

due process and deliberation.


Q&A

.What are the remaining differences between the IFRS and US GAAP fair

value measurement standards?


Q&A

.Does IFRS 13 change the fair value hierarchy in IAS 36 (paragraphs 25 and

26 of IAS 36) for impairment testing?


Q&A

.How do the proposed offsetting rules and the gross presentation under IAS

32 fit with the measurement of the net risk position?


Q&A

.How does the application of the effect of "own credit" reconcile with a market-

based measure of fair value?


Q&A

.Will IFRS 13 now completely replace IAS 36 ?


Q&A

.Given the FV definition is market participant's based, what is the difference

between the liquidity valuation adjustment to account for the volume of the

market and the block discount?


Q&A

.

Examples of blockage factors, please


Q&A

.Depending on the conclusions drawn on the offsetting project, is there is a

risk that IFRS 13 might need updating?


Q&A

.Topic 820 and IFRS 13 have different thresholds for recognising day one gains

and losses. When will that be aligned?


Q&A

.When measuring a liability from the asset holder's perspective, which level

would it be in?

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