The Financial Accounting Standards Board (FASB) has issued an Exposure Draft of a proposed Accounting Standards Update (ASU),Fair Value Measurements and Disclosures (Topic 820): Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
The purpose of this proposed ASU is to develop common requirements for measuring fair value and for disclosing information about fair value measurements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS).
This proposed ASU is the result of joint efforts of the FASB and the International Accounting Standards Board (IASB) to ensure that fair value will have the same meaning in U.S. GAAP and IFRS and that their respective fair value measurement and disclosure requirements will be the same (except for minor differences in wording and style).
The amendments in this proposed ASU would apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in shareholders’ equity in the financial statements. The proposed amendments that would clarify the FASB’s intent about the application of existing fair value measurement guidance include the following:
- Highest and best use and valuation premise –The proposed amendments would specify that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets or of liabilities.
- Measuring the fair value of an instrument classified in shareholders’ equity – The proposed amendments would provide guidance for measuring the fair value of an instrument classified in shareholders’ equity, such as equity interests issued as consideration in a business combination.
The proposed amendments that would change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include the following:
- Measuring the fair value of financial instruments that are managed within a portfolio – A reporting entity that holds a group of financial assets and financial liabilities is exposed to market risks (that is, interest rate risk, currency risk, or other price risk) and to the credit risk of each of the counterparties. The proposed amendments would permit an exception to the requirements in Topic 820 for measuring fair value when a reporting entity manages its net exposure, rather than its gross exposure, to those risks.
- Application of blockage factors and other premiums and discounts in a fair value measurement – Blockage factors would be prohibited at any level of the fair value hierarchy (as opposed to current U.S. GAAP, which prohibits them at Level 1).
- Additional disclosures about fair value measurements – The proposed amendments would expand the disclosures on fair value measurements to include more information about:
o The measurement uncertainty inherent in fair value measurements categorized within Level 3 of the fair value hierarchy. The IASB is publishing a proposal, Measurement Uncertainty Analysis Disclosure for Fair Value Measurements, which is the same as this proposed disclosure requirement. See related article in the “International” section.
o A reporting entity’s use of an asset in a way that differs from the asset’s highest and best use when that asset is recognized at fair value in the statement of financial position on the basis of its highest and best use.
o The categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed.
The Exposure Draft is available for comment until September 7, 2010 at www.fasb.org. |