The use of fair value in financial reporting is of great interest to preparers, auditors, users and regulators. International Financial Reporting Standards (IFRSs) already require some assets, liabilities and equity instruments to be measured at fair value in some circumstances (see box). The guidance on measuring fair value has been added to IFRSs piecemeal over many years as the International Accounting Standards Board (IASB) or its predecessor decided that fair value was the appropriate measurement attribute in given circumstances.
As a result the guidance is dispersed across many standards and it is not always consistent. Furthermore, the guidance is incomplete, in that it provides neither a clear measurement objective nor a robust measurement framework. This adds unnecessary complexity to IFRSs and contributes to diversity in practice.
To address this issue, the IASB added a project on fair value measurements to its agenda in September 2005. Through this project the IASB aims to replace the patchwork of fair value measurement guidance in IFRSs with a single source of guidance that would apply whenever a standard requires an asset, liability or equity instrument to be measured at fair value.
Because this project aims only to develop a framework for measuring fair value, it will neither introduce nor require any new fair value measurements.
The IASB also aims to clarify the measurement objective of fair value by:
• developing a more concise definition of fair value that clearly expresses a single measurement objective; and
• establishing a framework for measuring fair value that reflects the measurement objective.
Last, the IASB aims to improve disclosures of fair value measurements while harmonising any new disclosures with those already required. Achieving these objectives will simplify IFRSs, improve the consistency and comparability of fair value measurements in financial reports and enhance the usefulness of disclosures for users of financial reports.
The project is also included in the February 2006 memorandum of understanding between the IASB and the US Financial Accounting Standards Board (FASB).
The memorandum sets out a roadmap of convergence between IFRSs and US GAAP and reaffirms the IASB's and FASB's shared objective of developing high-quality, common accounting standards for use in the world's capital markets. At the time the memorandum of understanding was published, the FASB was nearing completion of its fair value measurements project, which shared common objectives with the IASB's project. The FASB's project culminated with the publication of Statement of Financial Accounting Standards No 157, (SFAS 157), in September 2006.
Recognising the need for better guidance on measuring fair value in IFRSs and for convergence with US GAAP, the IASB decided to use SFAS 157 as the starting point for its deliberations. As such, the IASB published a discussion paper on 30 November 2006 that comprises:
• SFAS 157, its application guidance and basis for conclusions;
• excerpts of fair value measurement guidance in IFRSs; and
• an invitation to comment, which sets out the IASB's preliminary views on the principal issues contained in SFAS 157 and compares the provisions of SFAS 157 with the guidance in IFRSs.
In considering the provisions of SFAS 157 and developing its preliminary views, the IASB and its staff worked with a broad range of constituents, including user groups, financial institutions, auditors and preparers.
Input received from these constituents was helpful in forming the IASB's preliminary views. The discussion paper provides an opportunity for the IASB to obtain views from a larger group of interested parties. This feedback is critical to the standard-setting process, and the IASB is therefore keen to receive views on the ideas set out in the paper.Conceptual framework
The IASB is separately seeking comments on the broader issue of the measurement basis for assets and liabilities in financial reporting, as part of its conceptual framework project. The measurement phase of the conceptual framework project will identify and discuss various measurement attributes used in financial reporting, which will include fair value.
Because of this, some question if it is necessary to have a separate project on fair value measurements, and suggest it might be better to define fair value and develop measurement guidance as part of the measurement phase of the conceptual framework project. Some also argue that it is not possible to discuss how to define and measure fair value without discussing when fair value should or should not be used.
They argue that the conceptual framework project might provide a better forum for defining and discussing fair value, as it also provides a forum for discussing when fair value might or might not be the appropriate measurement attribute.
Others have requested additional guidance on the measurement of fair value when already required in IFRSs. They argue that the inconsistencies in and incompleteness of existing guidance contribute to diversity in practice and create a need for guidance irrespective of any decisions the IASB may make in its conceptual framework project. In response, the IASB views the project on fair value measurements as an opportunity to clarify and improve guidance for fair value measurements already required by IFRSs.
However, the views developed in the fair value measurements project will be incorporated into the discussions of measurement in the conceptual framework project. A concise definition and complementary measurement framework will serve as a foundation on which discussions in the conceptual framework project and other projects about whether fair value is the appropriate measurement attribute can be based.
The IASB therefore believes that the fair value measurements project is an essential ground-clearing step in the wider debate on measurement.
A copy of the discussion paper Fair Value Measurements is available on the IASB's website at www.iasb.org. Comments on the discussion paper are to be submitted by 4 May 2007. After the comment period, the IASB plans to hold roundtable meetings with a selection of respondents to the paper.
The responses and the roundtable meetings, will be valuable to the IASB in developing an exposure draft of an IFRS on fair value measurement guidance, which it aims to publish in early 2008. The ensuing standard is likely to be issued in 2009.
Jon Nelson is manager of the IASB's project on fair value measurements.
'The use of fair value in IFRS' by Accountancy contributor David Cairns (Accounting in Europe, Vol 3, 2006, published by the European Accounting Association) provides an overview of where fair value is permitted or required in IFRSs. The article also discusses the evolution and history of fair value in IFRSs.
It is interesting to note that the majority of fair value measurements required in IFRSs were established by the IASB's predecessor, the International Accounting Standards Committee.
To date, the IASB has required additional fair value measurements only for share-based payments under, initial recognition of assets acquired and liabilities assumed in a business combination under and non-current assets held for sale and discontinued operations under .
The IASB has also introduced options that permit, but do not require, fair value for financial instruments under, using fair value as deemed cost when first adopting IFRSs under and insurance contracts under .