IASB Tries to Simplify Fair Value Measurement

The International Accounting Standards Board has published draft guidance to try to settle the controversial issue of fair value measurement and calm some of the recent political pressure.

If adopted, the proposals in the exposure draft would replace the fair value measurement guidance contained in various International Financial Reporting Standards with a single, unified definition of fair value, along with further guidance on applying fair value measurement in inactive markets. The proposals deal with how fair value should be measured when it is already required by existing standards, but do not extend its use in any way.

“This exposure draft is an important milestone in our response to the global financial crisis,” said IASB Chairman Sir David Tweedie. “It proposes clear and consistent guidance for the measurement of fair value and also addresses valuation issues arising in markets that have become inactive.”

To ensure consistency between IFRS and U.S. GAAP, the proposals incorporate recent guidance on fair value measurement published by FASB and are consistent with a report of the IASB’s Expert Advisory Panel published in October 2008 on fair value measurement in illiquid markets.

The fair value project forms part of a long-term program by the IASB and FASB to achieve convergence of IFRS and U.S. GAAP, and is also consistent with requests from G-20 leaders to align fair value measurement in IFRS and U.S. GAAP, the IASB noted.

The IASB’s starting point in developing the exposure draft was the recently amended U.S. standard, SFAS 157, “Fair Value Measurements.” The proposed definition of fair value is identical to the definition in SFAS 157 and the supporting guidance is also largely consistent with U.S. GAAP.

Both FASB and the IASB have come under political pressure in recentmonths to loosen the standards for fair value and mark-to-marketaccounting, particularly for valuing illiquid assets such asmortgage-backed securities, amid claims that the rules have exacerbatedthe effects of the economic crisis. The European Commission and someEuropean governments have complained that the recently amended U.S.standards provide more leeway than the international standards, and they have threatened to carve out their own rules unless the IASB amended them.

The exposure draft proposes defining fair value as “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,” or the exit price. It also proposes that a fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in the most advantageous market to which the entity has access, and that an entity should determine fair value using the assumptions that market participants would use in pricing the asset or liability.

Comments on the exposure draft are due Sept. 28. The board plans to hold public roundtable meetings after the comment deadline with selected respondents.