On August 19, 2010, the International Accounting Standards Board (IASB) published a staff draft of an upcoming International Financial Reporting Standard (IFRS) on fair value measurement. The IASB draft is still subject to revision before the board issues a fair value measurement standard which will likely be identical to the Financial Accounting Standards Board (FASB) standard on fair value measurement. FASB issued an exposure draft of its fair value measurement standard in June 2010.
The proposed changes to the current U.S. generally accepted accounting principles (GAAP) standards on fair value measurement are broad and are designed to ensure that "fair value" has the same meaning in U.S. GAAP and IFRS as it relates to fair value measurement and disclosure requirements.
Though there are a number of changes, we have summarized the most prominent of the changes below:
- Instruments classified in stockholders' equity: the proposed standards require a reporting entity to measure its equity instruments at fair value, which will be determined from the measurement perspective of a market participant holding the instruments as assets. Current U.S. GAAP does not address how to measure the fair value of instruments classified in stockholders' equity.
- Blockage discounts: the proposed standards will not allow blockage discounts to be used in fair value measurements of securities. (A blockage discount is usually assigned when institutional investors want to unload a large number of securities but are limited by market volume so they sell the securities to another institutional investor at a discount.) Current U.S. GAAP disallows the use of blockage factors for Level 1 measurements (assets that have readily observable prices) but there is no guidance for application of Level 2 (assets that do not have regular market pricing, but whose fair value can be determined based on other market data) or Level 3 measurements (assets whose fair value cannot be determined by using Level 1 or 2 measures). Historically, blockage discounts in Level 2 measurements that use quoted prices has been allowed.
Disclosures: the proposed standards require an entity to disclose additional information about fair value measurements including:
– The categorization, by level in the fair value hierarchy, of items not measured at fair value in the statement of financial position for which fair value disclosure is required
– The entity’s use of an asset in a way that differs from the asset’s highest and best use when the asset is measured at fair value in the balance sheet based on its highest and best use
– The results of a sensitivity analysis of the uncertainty inherent in fair value measurements categorized in Level 3 of the fair value hierarchy. An entity would be required to disclose the effect on a Level 3 fair value measurement of changing one or more unobservable inputs that could have reasonably been used to measure fair value in the circumstances.
The intended results of the respective staff and exposure drafts are an IFRS/U.S. GAAP common fair value measurement standard expecting to be issued in early 2011.
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