All's Fair in Love and Value when it Comes to FASB and the IASB



Can FASB and the IASB play nice when it comes to fair value? That's the ultimate question, and one that the accounting industry will ideally answer before the U.S. transitions away from GAAP and towards IFRS. Blah blah blah blah blah, chugging ever onward...

Via PwC's IFRS blog:

The FASB and IASB documents have different emphases (for example, the FSP focuses on indicators of inactive markets; the EAP requires management to consider all available information and to apply judgement) and a few subtle differences (for example, on transactions that are not orderly), but these aren’t expected to result in differences in practice.

Guidance from the FSP and the EAP has been included in the IASB’s long-awaited exposure draft on fair value measurement, published last month. It addresses the question of how to measure fair value but not when. So it is perhaps not the most controversial topic of the moment.

The proposed standard is based on the US equivalent, SFAS 157, ‘Fair Value Measurements’. The definitions of fair value are identical – that is, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (the ‘exit price’ approach) – but there are some important differences. The IASB has proposed not to permit recognition of day-one gains for those financial instruments whose values are impacted significantly by unobservable inputs (so called Level 3 financial instruments).

This looks to be a sensible move in response to recent market conditions, but nonetheless it is an interesting departure from the US position. The IASB has also proposed a different unit of account for financial instruments measured on the basis of anything other than unadjusted prices in an active market (so called Level 2 and 3 instruments – that is, at the level of an individual instrument rather than a portfolio). This appears contrary to the approach typically adopted by banks of valuing certain risks in their derivatives portfolios (such as credit risk) across the whole portfolio rather than by individual instrument. There are other subtle changes that could also result in differences in practice.

Somehow I get the sneaking suspicion that following in the IASB's footsteps can do nothing but harm as far as FASB is concerned, but that never stopped them before.