Fair Value Measurement

International Accounting Standards Board Financial Accounting Standards Board

This presentation has been prepared by the staff of the IASB and the FASB to help constituents understand the requirements in IFRS 13 Fair Value Measurement and Topic 820 in the FASB Accounting Standards Codification®. The views expressed in this presentation are those of the presenters, not necessarily those of the IFRS Foundation, the IASB, the Financial Accounting Foundation, or the FASB. Official positions of the IASB and the FASB are reached only after extensive due process and deliberations. Housekeeping items

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IASB FASB Elke König Marc Siegel IASB Member FASB Member Hilary Eastman Ben Couch Senior Technical Valuation Practice Manager Fellow

• Project overview and background • Fair value measurement model • Main changes in US GAAP • Main changes in IFRSs • Q&A

IFRS 13 and Topic 820:  Provide a common definition of fair value  Require the same disclosures about fair values (with some minor differences)  Are a single source of measurement guidance  Do not introduce new fair values  Do not change the measurement objective in other IFRSs/Topics

IFRSs US GAAP

Existing fair value Topic 820 (codified SFAS measurement guidance in 157) various standards

Objective: Common (identical) fair value measurement and disclosure requirements

What is the measurement objective?

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.

An exit price Market- A current based view price Not a liquidation price or forced sale

• Highest and best use is the use of an asset by market participants that maximises the value of the asset – Physically possible – Legally permissible – Financially feasible • Highest and best use is usually (but not always) the current use – Defensive value • Does not apply to financial instruments or liabilities

• An asset either provides maximum value through its use: – in combination with other assets and liabilities as a group (formerly „in use‟) – on a stand-alone basis (formerly „in exchange‟) • Does not apply to financial instruments or liabilities

• The exit transaction takes place in the principal market: – the market with the greatest volume and level of activity for the asset or liability • If no principal market, it takes place in the most advantageous market: – the market that maximises the amount that would be received to sell the asset and minimises the amount that would be paid to transfer the liability

• The determination of the most advantageous market takes into account transaction and transport costs • Fair value: – does not include transaction costs – includes transport costs – the costs incurred to transport the asset from its current location to the principal (or most advantageous) market

• Market participants are: – independent of each other – knowledgeable and sufficiently informed about the asset or liability and the transaction – able to enter into a transaction for the asset or liability – willing to enter into a transaction for the asset or liability (not forced)

Is there a quoted price for an Yes identical asset or liability? No (Level 1 input)

Are there any observable Use the Level 1 input = inputs other than quoted Level 1 measurement prices for an identical asset Must use without or liability? adjustment Yes No

Use of Level 2 inputs with no Significant use of significant unobservable inputs = unobservable inputs = Level 2 measurement Level 3 measurement

Topic Description

Liabilities (and own • Fair value of liability = fair value of corresponding asset equity) • If no corresponding asset = price to fulfil obligation

Financial instruments • May reflect offsetting market risks or credit risk within a portfolio • Need evidence that financial instruments are managed on a net risk exposure basis

Premiums and discounts • Block discounts prohibited • Other premiums and discounts must be consistent with unit of account

Inactive markets • Indicators of a decline in market activity • Indicators that a transaction is not orderly

Valuation techniques and • Market, income and cost approaches can be used inputs • Need to use market participant assumptions

More information required for Level 3 fair value measurements: • Quantitative disclosure of the unobservable inputs and assumptions used • Description of the valuation process in place • Discussion of the sensitivity of the fair value to changes in unobservable inputs and inter- relationships between those inputs that magnify or mitigate the effect on the measurement

US GAAP IFRSs

Measurement principles apply IFRS for Small and Medium- equally to public and non- sized Entities addresses fair public entities, but some value measurement and disclosures not required for disclosures for entities nonpublic entities without public accountability

2011 2012 2013

May 2011 January 1, 2013 Common IFRS and U.S. GAAP fair value IFRS 13 effective measurement standards Prospective transition ASU No. 2011-04 Earlier application permitted IFRS 13

December 15, 2011 ASU No. 2011-04 effective Public entities • Interim and annual periods • Prospective transition with disclosure of changes and quantitative effect • Earlier application not permitted Nonpublic entities • Annual periods • Prospective transition with disclosure of changes and quantitative effect • Earlier application permitted for interim periods after December 15

• Premiums and discounts • Financial instruments in a portfolio • Instruments in shareholders‟ equity • Disclosures

• Definition of fair value as exit price • Description of market participants • Principal (or most advantageous) market • Highest and best use • Bid-ask spread • Three-level fair value hierarchy • Disclosures

• Fair value now means the same thing in IFRSs and US GAAP • Increased consistency and comparability – Single source of guidance that is internally consistent • More guidance for measuring fair value in Level 3 – Especially in inactive markets • Increased transparency – More information required for Level 3 measurements, including assumptions made and processes used

Additional information about the fair value measurement project is available at www.ifrs.org and www.fasb.org

Expressions of individual views by members of the IASB, the FASB and their staff are encouraged.

The views expressed in this presentation are those of the presenters. Official positions of the IASB and the FASB on accounting matters are determined only after extensive due process and deliberation.

. What are the remaining differences between the IFRS and US GAAP fair value measurement standards?

. Does IFRS 13 change the fair value hierarchy in IAS 36 (paragraphs 25 and 26 of IAS 36) for impairment testing?

. How do the proposed offsetting rules and the gross presentation under IAS 32 fit with the measurement of the net risk position?

. How does the application of the effect of "own credit" reconcile with a market- based measure of fair value?

. Will IFRS 13 now completely replace IAS 36 ?

. Given the FV definition is market participant's based, what is the difference between the liquidity valuation adjustment to account for the volume of the market and the block discount?

. Examples of blockage factors, please

. Depending on the conclusions drawn on the offsetting project, is there is a risk that IFRS 13 might need updating?

. Topic 820 and IFRS 13 have different thresholds for recognising day one gains and losses. When will that be aligned?

. When measuring a liability from the asset holder's perspective, which level would it be in?