The International Accounting Standards Board (IASB) has set out proposals for a new standard on fair value measurement, but what does it mean for UK accountants? Gina Dyer reports.

If adopted, the new standard would replace existing fair value measurement guidance contained in individual international financial reporting standards (IFRS) with a single, unified definition of fair value. It would also offer further guidance on the application of 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 the IASB says they do not extend its use in any way.

AccountingWEB.co.uk spoke exclusively to Peter Clark, director of research at IASB to find out what the new proposals could mean for UK accountants. “It will give more clarity about what’s required and offer more consistent guidance. The guidance and standards we have today are a bit of a patchwork, so the new guidance will narrow the scope for misinterpretations, misunderstandings or uncertainty”.

The new proposals represent a signficant step towards global convergence, according to Andrew Lennard, research director at the Accounting Standards Board (ASB). "They are important because fair value is a concept which has quite widespread use in IASB standards and to a lesser extent in FASB standards. People will be reassured to know that everyone is heading the same general direction", he said.

Consistency
In an effort to create consistency between IFRS and US generally accepted accounting principles (GAAP), the proposals incorporate the US financial accounting standards board (FASB) guidance on fair value measurement.

The project is part of a long-term programme by the IASB and FASB to close the gap between IFRS and GAAP and unify global accounting standards.

Introducing 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. It proposes clear and consistent guidance for the measurement of fair value and also addresses valuation issues arising in markets that have become inactive. The proposed guidance ensures consistency with US GAAP on issues related to fair value measurement and would achieve overall convergence with US GAAP”.

Overview of the proposals*

• 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".

US/ EU divide
In a recent statement the Financial Reporting Council (FRC) said it had ‘significant concerns’ that the EU might adopt its own version of IFRS rather than the standards published by the IASB.

Responding to the question of whether the new proposals marked a step towards the US method, Clark argued: “I wouldn’t describe it like that. What the FASB has done recently is give more detailed guidance in some areas, and so we’re also offering detailed guidance”.

"We all share one vision of a single set of global accounting standards, and the right body to produce that should be the IASB", said Lennard.

In the long-term, the aim is for the two standards to converge, but how soon is this likely to come about? “We need to see what kind of response the exposure draft gets before we issue it as a final standard. We’re aiming to put out the final standard in the first half of next year”, said Clark.

The proposals are set out in the exposure draft Fair Value Measurement which is open for comment until 28 September 2009.

The draft is available for download on the IASB website. Click here [1] to be directed to the download page.

*Summary of measures provided by: Deloitte IAS Plus [2]