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IASB Update on Fair Value Indicates Clarity on Data Requirements is Incoming

The International Accounting Standards Board (IASB) has provided an update on its project to develop common fair value measurement and disclosure requirements for International Financial Reporting Standards (IFRS), which indicates that much more clarity on how this data should be disclosed is soon to be available. However, the discussions on the subject are currently far from complete and the accounting rules bodies will have to jointly consider the proposals on the table before the full data requirements are made available.

Firms are being forced to provide more pricing transparency and many vendors are pitching their services around providing this transparency into the underlying models used for fair value measurement (see Bloomberg’s recent launch for one such example). However, given the shifting boundaries of these requirements, the area will continue to prove difficult until the accounting bodies themselves provide more clarity on the subject.

To this end, the recently published project summary provides the background of the IASB’s fair value measurement project and explains how the IASB plans to finalise an IFRS on fair value measurement, including details of recent proposals made by the US Financial Accounting Standards Board (FASB) in its exposure draft. The result of this project is to be an IFRS on fair value measurement that is globally applied, thus eliminating any differences between accounting rules in the US and the rest of the world. The IASB indicates that it expects to issue the finalised IFRS document during the first quarter of next year.

“The forthcoming IFRS on fair value measurement would be a single source of fair value measurement guidance that would clarify the definition of fair value, provide a clear framework for measuring fair value and enhance the disclosures about fair value measurements,” says the IASB in its paper.

The paper also notes that the objective is to specify how an entity should measure fair value and disclose this data, rather than to specify when the fair value measurement should be used. This is based on the FASB and the IASB’s respective exposure drafts on fair value, which were published last month and are available for comment until 7 September. The accounting rules body will also be providing fair value measurement guidance, in particular to help emerging and transition economies to adopt the finalised IFRS standards.

The proposed final definition for fair value as an exit price is: “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.” This clarifies a number of existing issues with the current definition of fair value in the market by specifying that it is the selling of the asset (rather than buying) that is under consideration and it is the measurement date (rather than any other date) on which fair value should be determined.

The paper indicates that should the new version of IFRS be accepted (and that is a big if at this point, given the discussions ahead), there would be different disclosure requirements for those currently under US GAAP and IFRS 7. This would include the breaking down of the current distinction between recurring and non-recurring fair value measurements, for example.

Of course, given the fact that the rest of this year will be taken up by debates about fair value and wrangling over the current “tentative” proposals in the IASB document, new data requirements remain hard to determine for the near future. For now, firms’ valuations teams will have to face a somewhat uncertain future, as the ground continues to shift beneath them.

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