January 18, 2010 FASB/IASB Joint Board Meeting
Fair value measurement. The Boards discussed the following topics:
1. Definition of fair value
2. Measuring fair value when markets become less active
3. Fair value at initial recognition
4. Recognition of day one gains or losses
5. Measuring liabilities at fair value
6. Nonperformance risk
7. Restrictions on the transfer of a liability
8. Measuring own equity instruments at fair value.
Definition of fair value
The Boards tentatively decided:
1. To retain the term fair value
2. To define fair value as an exit price. The Boards will discuss where that definition should be used in a future meeting when they address the scope of a converged fair value measurement standard.
Measuring fair value when markets become less active
The Boards tentatively decided that the guidance for measuring fair value in markets that have become less active:
1. Pertains to when there has been a significant decline in the volume and level of activity for the asset or liability
2. Focuses on whether an observed transaction price is orderly, not on the level of activity in a market.
The Boards also tentatively decided that an entity should consider observable transaction prices unless there is evidence that the transaction is not orderly. If an entity does not have sufficient information to determine whether a transaction is orderly, it performs further analysis to measure fair value.
Fair value at initial recognition
The Boards tentatively decided that the transaction price might not represent the fair value of an asset or liability at initial recognition if, for example, any of the following conditions exist:
1. The transaction is between related parties.
2. The transaction takes place under duress or the seller is forced to accept the price in the transaction.
3. The unit of account represented by the transaction is different from the unit of account for the asset or liability measured at fair value.
4. The market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability.
Recognition of day one gains or losses
The IASB tentatively decided not to address the recognition of day one gains or losses as part of the fair value measurement project. The Boards will discuss the recognition of day one gains or losses at a future meeting.
Measuring liabilities at fair value
The Boards tentatively decided:
1. That in the absence of a quoted price in an active market representing the transfer of a liability, an entity measures the fair value of a liability as follows:
a. Using the quoted price of the identical liability when traded as an asset (that is, a Level 1 measurement), if that price is available
b. If that price is not available, using quoted prices for similar liabilities or similar liabilities when traded as assets (that is, a Level 2 measurement)
c. If observable inputs are not available, using another valuation technique such as:
(1) An income approach (for example, a present value technique) or
(2) A market approach (for example, using the amount that a market participant would pay to transfer the identical liability or receive to enter into the identical liability).
2. To describe the compensation a market participant would demand for taking on an obligation in the application of a present value technique.
3. To clarify that the transfer of a liability assumes that a market participant transferee has the knowledge and ability to fulfill the identical obligation.
4. That an entity must determine whether the fair value of a liability when traded as an asset (the corresponding asset) represents the fair value of the liability. If an entity determines that the fair value of the corresponding asset does not represent the fair value of the liability, it must make adjustments to the fair value of the asset to the extent that its fair value does not represent the fair value of the liability.
5. That the fair value of a corresponding asset represents the fair value of the liability whether or not that asset is traded on an exchange.
6. That the fair value of the corresponding asset should be measured using the methodology market participants would use.
7. That a quoted price for a corresponding asset in an active market is also a Level 1 fair value measurement for the liability when no adjustments to that quoted price are required.
Nonperformance risk
The Boards tentatively decided:
1. That the fair value of a liability includes the effect of nonperformance risk
2. To clarify what, in addition to credit risk, nonperformance risk represents.
Restrictions on the transfer of a liability
The Boards tentatively decided that the fair value of a liability should not be adjusted further for the effect of a restriction on its transfer if the restriction is already included in the other inputs to the fair value measurement.
Measuring own equity instruments at fair value
The Boards tentatively decided to include guidance for measuring the fair value of an entity's own equity instruments in a converged fair value measurement standard.
Revenue recognition. The Boards considered the disclosure requirements for the proposed revenue recognition model and tentatively decided:
1. To specify a high-level disclosure objective similar to the objectives in FASB Accounting Standards Codification™ Section 605-25-50, Revenue Recognition—Multiple-Element Arrangements—Disclosure, and IFRS 7, Financial Instruments: Disclosures
2. To require an entity to disclose:
a. The nature of contracts that it enters into with customers and the related accounting policies
b. The principal judgments used in accounting for contracts with customers
c. A reconciliation of the beginning and ending net contract position(s)
d. The total amount of outstanding performance obligations and the expected timing of their satisfaction
e. Information about onerous contracts, including the extent and amount of such contracts and the reasons for them becoming onerous.
Next steps
The Boards will continue their discussion of disclosures and consider scope and transition at the forthcoming meetings.
Financial instruments with the characteristics of equity. The Boards decided not to adopt any of the approaches they have previously considered. Instead, they directed the staff to analyze a possible amendment to IAS 32, Financial Instruments: Presentation. The effects of that possible amendment have not yet been specified but the following are some possibilities:
1. A requirement to classify as equity shares puttable only if specified certain events occur, such as the death or retirement of the holder
2. A requirement to separate some puttable shares into equity and liability components
3. A slight relaxation of the provision that to qualify as equity, a financial instrument involving exchanges of equity instruments for cash must require an exchange of a fixed number of shares for a fixed amount of cash.