The Financial Accounting Standards Board and the International Accounting Standards Board have published new requirements for fair value measurement and disclosure.
The new requirements represent one of the major convergence projects of the two boards, a project that was accelerated in response to the 2008 financial crisis. In the aftermath of the crisis, banking interests and a number of lawmakers blamed mark-to-market accounting for exacerbating the effects of the crisis on bank balance sheets. The new guidance applies to both U.S. GAAP and International Financial Reporting Standards.
The guidance, set forth in an update to Topic 820 in FASB’s Accounting Standards Codification (formerly known as SFAS 157) and in IFRS 13, “Fair Value Measurement,” completes a major project of the boards’ joint work to improve IFRS and U.S. GAAP and achieve convergence of the two sets of standards.
Completion of the project is the culmination of more than five years’ work to improve and align fair value measurement and disclosure requirements. The requirements, which are largely identical across IFRS and U.S. GAAP, have benefited from extensive due process and public consultation, including input from a Fair Value Expert Advisory Panel and FASB’s Valuation Resource Group.
The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS or U.S. GAAP, FASB and the IASB emphasized.
For U.S. GAAP, the update will supersede most of the guidance in Topic 820, although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. The update also reflects FASB’s consideration of the different characteristics of public and non-public entities and the needs of users of their financial statements. Non-public entities will be exempt from a number of the new disclosure requirements.
“This update represents another positive step toward the shared goal of globally converged accounting standards,” FASB chairman Leslie F Seidman said in a statement. “Having a consistent meaning of the term ‘fair value’ will improve the consistency of financial information around the world. We are also responding to the request for enhanced disclosures about the assumptions used in fair value measurements.”
IFRS 13, “Fair Value Measurement,” will improve consistency and reduce complexity by providing, for the first time, a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS.
“The finalization of this project marks the completion of a major convergence project and is a fundamentally important element of our joint response to the global financial crisis,” said IASB chairman Sir David Tweedie. “The result is clearer and more consistent guidance on measuring fair value, where its use is already required.”
An IASB podcast, as well as a project summary and feedback statement explaining how the IASB responded to feedback received during the consultation process, are both available from the IASB Web site. A “FASB in Focus” summary of the project and podcast are available from the FASB Web site. The boards intend to hold a joint webcast introducing IFRS 13 and the update to Topic 820. Further details will be published on both Web sites shortly.
“It’s a major positive step forward to demonstrate that convergence on a very key topic is possible and achievable,” said David Larsen, managing director at investment advisory firm Duff & Phelps, who has been following the standard-setting process.
“From a U.S. GAAP perspective, there are not too many changes,” Larsen noted. “There’s a little bit of change to the disclosures, and some possible questions that may arise related to the unit of accounts in the venture capital and private equity space. But it provides for the first time consistent guidance under IFRS for fair value measurements.”
Larsen noted that the new guidance only explains how to measure fair value if other accounting standards require fair value. The two boards are continuing to work on converging the financial instruments standards, which will set forth the types of financial assets that need to be measured at fair value or amortized cost. However, while the definition of fair value will now be the same under IFRS and U.S. GAAP, Larsen believes the question remains about whether companies will achieve the same accounting results under the two sets of standards.
“When I measure fair value in the United States, will I get to the same answer when I measure it in the United Kingdom, because of the different regulatory environments?” Larsen wondered. “In the U.S. you have the Public Company Accounting Oversight Board and in the U.K. you have the Financial Services Authority. When you get convergence in accounting principles, will it result in convergence in accounting results?”
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