On 28 May 2009 the International Accounting Standard’s Board (IASB) published for public comment an an exposure draft of draft guidance on fair value measurement.

The proposed guidance deals with how fair value should be measured where it is required by existing standards. It does not extend its use in any way.

If adopted, the proposals would replace fair value measurement guidance contained within individual International Financial Reporting Standards (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.

Related documents

AIntroducing the exposure draft, Sir David Tweedie, Chairman of the IASB, said:

This exposure draft is an important milestone in our response to the global financial crisis. The proposed guidance proposes clear and consistent guidance for the measurement of fair value and also addresses valuation issues that arise in markets that have become inactive. This guidance is consistent with the report of the Expert Advisory Panel and with US GAAP and would achieve overall convergence with US GAAP.

The comments received on the exposure draft will aid the Board in developing an IFRS of fair value measurement guidance, which it plans to publish in 2010.

Comment letter deadline

The exposure draft is open for comment until 28 September 2009.

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Overview of the Proposals in the Fair Value Measurement ED
FV definition. The IASB proposes an exit price definition of FV: "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. FV 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. FV 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. FV 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. FV 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 ED, FV 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 ED 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 ED 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 ED 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".

Overview of the Proposals in the Fair Value Measurement ED

FV definition. The IASB proposes an exit price definition of FV: "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. FV 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. FV 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. FV 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. FV 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 ED, FV 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 ED 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 ED 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 ED 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".