Fair Value Measurement - Financial Accounting Standards

Report
Fair Value
Measurement
Ben Couch, Valuation Practice Fellow, FASB
The views expressed in this presentation are those of the presenters,
not necessarily those of the FASB.
Agenda
• Project timeline and background
• Fair value measurement overview
• Disclosure
• Application to nonpublic entities
• Effective date and transition
2
Project Timeline
2003
2004
2005
2006
Jun 2003
Jun 2004
Sep 2005
Sep 2006
FVM project added to
FASB’s agenda
FASB exposure draft
published
FVM project added to
IASB’s agenda
FASB issued
SFAS 157
Sep 2004
FASB round table
meetings
Nov 2006
IASB discussion
paper published
(using SFAS 157 as
starting point)
2007
Project Timeline continued
2008
2009
2010
2011
Oct 2008
May 2009
Jun 2010
May 2011
IASB Expert Advisory Panel
report
FASB FSP FAS 157-4
published
FASB exposure draft
published
Measuring and disclosing the fair
value of financial instruments in
markets that are no longer active
Determining Fair Value When the
Volume and Level of Activity for the
Asset or Liability Have Significantly
Decreased and Identifying
Transactions That Are Not Orderly
Amendments for Common Fair Value
Measurement and Disclosure
Requirements in U.S. GAAP and
IFRSs
Common IFRS and U.S.
GAAP fair value
measurement standards
FASB FSP FAS 157-3
published
Determining the Fair Value of a
Financial Asset when the Market for
that Asset is Not Active
May 2009
IASB Exposure draft
published
Fair Value Measurement
Nov-Dec 2009
IASB Round table meetings
IASB exposure draft
published
Measurement Uncertainty Analysis
Disclosure for Fair Value
Measurements
ASU No. 2011-04
IFRS 13
H2 2011
IFRS Foundation educational
material
Consistent fair value measurements
IFRSs
US GAAP
Fair value measurement
guidance in various standards
May 2009 exposure draft Fair
Value Measurement
Topic 820 (codified SFAS
157)
Objective:
Common (identical) fair value measurement and
disclosure standards
5
Fair Value Measurement Overview
Main changes in U.S. GAAP
Topic
Resolution
Premiums and discounts
Premiums and discounts relevant to market participants
for the unit of account may be used if Level 1 inputs
unavailable. No block discounts (entity-specific, unit of
account issues).
Fair value for financial instruments with
offsetting risks
Financial instruments can be valued on a net basis.
Fair value of instruments classified in
shareholders’ equity
Requirement to value from the perspective of a market
participant holding instrument as an asset.
Disclosures
•
•
•
•
•
Quantitative inputs for Level 3
Narrative sensitivity analysis
Valuation processes
Current use if different from highest and best use
Level in fair value hierarchy for fair value measurements
disclosed but not reported
• All transfers into/out of Levels 1 and 2
Fair Value Measurement Overview continued
Differences between Topic 820 and IFRS 13
Topic
Reason for difference
NAV practical expedient
Different accounting for investment companies in local
country GAAP means IASB cannot yet allow a practical
expedient.
Deposit liabilities
Different requirements in IFRS and US GAAP for
measuring fair value of deposit liabilities
• IFRS 13 contains measurement guidance
• Topics 825 and 942 contain measurement guidance
Disclosures
• IFRS does not allow net presentation of derivatives
• IFRS requires quantitative sensitivity analysis for
financial instruments
• In IFRS nonpublic entities are covered by SME standard
Premiums and Discounts
• Must be consistent with characteristics of asset or
liability and the unit of account
– No block discounts
Is a Level 1
input available?
Available
Not available
 Market
Would market participants
incorporate premium or
discount in transaction?
Does fair value include
premium or discount?
n/a
FV = Level 1 price x quantity
held
Yes
Yes
No
No
participants act in their economic best interest in a transaction for the unit of account.
Financial Instruments
• Exception for financial assets and liabilities with
offsetting positions in market risk or counterparty
credit risk
– Entity must have documented risk management strategy
– Only for portfolios of instruments measured at FV
– Accounting policy decision
Financial Instruments continued
• Market risks:
– Must be substantially the same
– Duration of instruments leading to exposure to market
risk must be substantially the same
• Counterparty credit risk:
– Must have arrangement to mitigate credit risk in place
Liabilities and Shareholders’ Equity
Is there an observable market
price to transfer the
instrument?
Yes
Fair value = observable
market price of
instrument
Does somebody hold the
corresponding asset?
Yes
Fair value = observable
market price of asset
Yes
No
Fair value = another
valuation technique
No
Fair value = fair value of the
corresponding asset
Is there an observable
market price for the
instrument traded as an
asset?
No
Fair value = another
valuation technique
Disclosure
• More information required for Level 3 fair value
measurements:
– A quantitative disclosure of the unobservable inputs and
assumptions used in the measurement
– A description of the valuation control process in place
– A discussion of the sensitivity of the fair value to
changes in unobservable inputs and any interrelationships between those inputs that magnify or
mitigate the effect on the measurement
Disclosure continued
• Example
Quantitative information about fair value measurements using significant unobservable inputs (Level 3)
($ in millions)
Description
Equity securities:
Healthcare industry
Fair value
at
12/31/X9
53
Valuation technique(s)
Discounted cash flow
Market comparable companies
Unobservable input
weighted average cost of capital
long-term revenue growth rate
long-term pre-tax operating margin
discount for lack of marketability
control premium
EBITDA multiple
revenue multiple
discount for lack of marketability
control premium
Range (weighted
average)
7% - 16% (12.1%)
2% - 5% (4.2%)
3% - 20% (10.3%)
5% - 20% (17%)
10% - 30% (20%)
10 - 13 (11.3)
1.5 - 2.0 (1.7)
5% - 20% (17%)
10% - 30% (20%)
Disclosure continued
• Current use of a nonfinancial asset when it differs
from the highest and best use considered in its fair
value measurement and reasons why
– Required whether fair value is recognized or only
disclosed
• All transfers between Level 1 and Level 2 of the fair
value hierarchy (no significance threshold)
Disclosure continued
• For fair value measurements that are only
disclosed, the level in which the fair value
measurement would be categorized within the fair
value hierarchy
– Other disclosure requirements for fair value
measurements would not apply
Application of Topic 820 to Nonpublic
Entities
• Measurement principles apply equally to public and
nonpublic entities, but some disclosures not
required for nonpublic entities
– Transfers between Level 1 and Level 2
– Sensitivity of Level 3 fair value measurements to
changes in unobservable inputs
– Level in which a fair value measurement would be
categorized within the fair value hierarchy when asset or
liability not measured at fair value in statement of
financial position, but disclosure of fair value is required
Effective Dates and Transition
2011
2012
2013
May 2011
January 1, 2013
Common IFRS and U.S. GAAP fair value
measurement standards
IFRS 13 effective
ASU No. 2011-04
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
• Early application not permitted
Nonpublic entities
• Annual periods
• Prospective transition with disclosure of
changes and quantitative effect
• Early application permitted for interim
periods after December 15
Prospective transition
Early application permitted
Q&A
Expressions of individual views
by members of the FASB and
its staff are encouraged.
The views expressed in this
presentation are those of the
presenter. Official positions of
the FASB on accounting
matters are determined only
after extensive due process
and deliberation.

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