Financial Reporting
Fair Value Measurement
By Brian Murphy, OmniPro
Jun 16, 2009 - 9:22:31 AM

On 28 May 2009 the International Accounting Standards Board (IASB) published for public comment an exposure draft of draft guidance on fair value measurement.

If adopted, the proposals would replace fair value measurement guidance contained in 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. The proposals deal with how fair value should be measured when it is already required by existing standards. They do not extend its use in any way.

The exposure draft’s definition of fair value being that “fair value 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” has been taken directly from the US standard, SFAS 157 Fair Value Measurements as amended.

Indeed all the supporting guidance is largely consistent with US GAAP including the recent guidance on fair value measurement published by the US Financial Accounting Standards Board (FASB) and the report of the IASB's Expert Advisory Panel published in October 2008 on fair value measurement in illiquid markets.   

Besides the definition as set out above further key features of the standard include the following;

In the absence of an actual transaction at the measurement date, a fair value measurement assumes a hypothetical transaction in the most advantageous market for the asset or liability.

A fair value measurement requires an entity to determine:
·    The particular asset or liability that is the subject of the measurement (consistently with its unit of account)
·    For an asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use)
·    The most advantageous market for the asset or liability
·    The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use in pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorized.

The exposure draft standard also goes further than previous standards in identifying the methods and basis of measuring fair value for various different assets and liabilities and also considers a number of valuation techniques that could be used.   

The complete document in relation to the Fair Value Measurement may be reviewed in full by following this link to the IASB website:
Fair Value Measurement


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