Thursday, May 12, 2011

FASB, IASB Publish Converged Fair Value Measurement Standards

Earlier today, FASB and the IASB published converged standards on fair value measurement and disclosure, with FASB's issuance of Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which updates the FASB Codification on fair value measurement (previously predominantly from FAS 157, Fair Value Measurement), and the IASB's issuance of IFRS 13, Fair Value Measurement.

Effective Date
As noted in the FASB in Focus providing highlights of the accounting standards update: "The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments in this Update early, but no earlier than for interim periods beginning after December 15, 2011."

Following are some highlights from FASB ASU 2011-04, from the FASB in Focus:

"The concepts of highest and best use and valuation premise in a fair value measurement should be applied only when measuring the fair value of nonfinancial

"Similar to comparable guidance for liabilities, the fair value of an instrument classified within a reporting entity’s shareholders’ equity should be measured from the perspective of a market participant that holds that instrument as an asset.

"For fair value measurements categorized within Level 3 of the fair value hierarchy, a reporting entity is required to disclose quantitative information about the unobservable inputs used in the measurements.

"The amendments that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include the following:
▪▪Provided that certain criteria are met, a reporting entity that holds a group of financial assets and financial liabilities that exposes it to market risks and counterparty credit risk may apply an exception to the requirements in Topic 820, which permits the fair value of those financial instruments to be measured on the basis of the reporting entity’s net risk exposure.
▪▪Premiums or discounts may be applied in a fair value measurement to the extent that they are consistent with the unit of account and market participants would consider them in a transaction for the asset or liability. However, adjustments commonly referred to as blockage factors are not permitted in fair value measurements.
▪▪A reporting entity must disclose the following information about fair value measurements:
--For fair value measurements categorized within Level 3 of the fair value hierarchy:
• The valuation processes used by the reporting entity.
• A narrative description
of the sensitivity of the fair value measurement to changes in unobservable
inputs and the interrelationships between those unobservable inputs, if any.

--The use of a nonfinancial asset if it differs from the highest and best use assumed in the fair value measurement.
--For items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed, the level of the fair value hierarchy in which that measurement is categorized. "

Nonpublic entities

As stated in the FASB in Focus: "The Board concluded that certain disclosure requirements in this Update should not be required for nonpublic reporting entities, such as the requirement to disclose any transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers."

Remaining Differences Between IFRS and U.S. GAAP In Converged Standard
Those looking for a detailed mapping between the provisions of IFRS 13 and FASB's Codification as updated by ASU 2011-04 can refer to the Table of Concordance posted by the boards.

Some of the remaining differences between the newly converged standards, as described in the FASB in Focus, include: "There are some different disclosure requirements about fair value measurements.

"The most significant difference is that IFRSs require a quantitative sensitivity analysis for financial instruments that are measured at fair value and categorized within Level 3 of the fair value hierarchy. U.S. GAAP does not require a quantitative sensitivity analysis disclosure.

"There are different requirements about whether, and in what circumstances, an entity with an investment in an investment company may use the reported net asset value as a measure of fair value."

Additional Information

FASB and IASB have published some very helpful information, accessible on their websites, to assist constituents in learning about the changes to the current FASB, IASB standards. These include: IASB-FASB joint press releasel; FASB podcast featuring FASB Director of Communications Neal McGarity and FASB Board Member Russ Golden; IASB podcast featuring IASB Director of Communications Mark Byatt, IASB Board Member Warren McGregor, and IASB Project Manager Hilary Eastman (NOTE: podcast is currently accessible from this webpage); FASB in Focus (May 12, 2011); IASB Project Summary and Feedback Statement (May, 2011)

IFRS 10, 11, 12 Issued On Off-Balance Sheet, Joint Arrangements
In other action, the IASB published three additional IFRS standards today: IFRS 10, 11 and 12 amending their current standards with respect to off-balance sheet and joint arrangements. As noted in the IASB's press release: "The completion of this review brings the accounting treatment for off balance sheet activities in International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) broadly into alignment, and concludes an important element of the IASB’s comprehensive response to the financial crisis.

•IFRS 10 Consolidated Financial Statements builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.

•IFRS 11 Joint Arrangements provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities.

•IFRS 12 Disclosure of Interests in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.

Keeping Up With Change!
How can you keep up with the latest FASB developments? Check out the FASB Update sessions taking place in May and June, cosponsored by Executive Enterprises Institute and FEI.

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1 comment:

cottasofia said...

The proposed Update sets forth amendments that the Boards believe would improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S.

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