The IASB requested views on the latest positions from the FASB in the following documents:
FSP 157 – 4 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.
FSP FAS 107 – 1 and APB 28-1 Interim Disclosures about Fair Value of Financial Instruments
FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other than temporary impairments
You probably recall that these pronouncements were brought out by the FASB in response to some arm twisting of FASB Chair Bob Herz in a US Congressional Hearing.
The IASB is interested in your views and has an open comment period to April 20, 2009. The fourteen page request for views document can be downloaded here. In view of the controversial nature of this project there have been relatively few letters received at the IASB. Perhaps there will be a last minute flurry of responses?
The FASB press release can be obtained at their website. There is an article on the issues at the CFO.com site. The FASB’s plain language summary can be found on the Ohio CPA site.
Apparently it is not a given that the IASB will rubber stamp the FASB documents and adopt them into IFRS. Although the FASB has sought to ease the effects of the fair value rules can it be that they have gone too far and was the short exposure period of the FASB proposals just too short?
What’s the Canadian position on this? In short we are waiting for the IASB to make it’s views known. The US is our major trading partner but as readers of this blog are probably aware Canada has made a commitment to adopt IFRS for “publicly accountable” entities for fiscal years beginning on or after January 1, 2011.(The Canadian AcSB continues to confirm this decision). We await the results of the IASB meeting on April 23 and 24 next week according to a quote in a recent quote in the Globe and Mail, Canada’s National newspaper. If you want to read the article that was in the April 8, 2009 edition you will have to purchase it from the Globe and Mail here. The whole idea is that we do not want to act too hastily. There is some debate as to whether the FASB decisions will have much affect. For example, from the Globe article the Chairman of the Bank of America said that the bank’s assets have been hit hard and already written down “pretty severely”. The rules may be too late to help the worst situations?
In my personal opinion (not to be associated with any company or organization I may be involved with) I think that more work needs to be done to sort out the fair value question. The current crisis was caused in great part by over-zealous seekers of profit and bonuses with extreme risk and unacceptable risk. We have to learn our lessons here. Do not blame the score keeper. We should hold the score keeper to account and make sure he/she is acting in a fair unbiased way. There is no doubt that there has been a conservative bias in many valuations. Let’s continue to work on this to make valuations more balanced and make sure we have a robust valuation situation. I do not agree with those who say fair value caused the problem. Where were these people when values were increasing? You provide the answer. I’m sure Regulators are taking careful note and we will have a better system going forward. Do not throw out the “fair value” baby with the bath water! We all need to take a deep breath and just consider this issue calmly.
Please check out the IASB project update to see how the IASB is progressing with it’s own fair value project. The project is part of the convergence efforts between USGAAP and IFRS. The IASB does caution that their final standard my differ from the FASB’s in requirements and wording. An Exposure draft on fair value accounting is expected very soon from the IASB.
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The Fair Value debate usually misses the point. We currently have a mixed Basis of Measurement (whichever reporting standards you use) – some balance sheet items at Historic Cost, some at Fair Value and some at other Bases. So we routinely add apples to oranges and appear not to worry about it.
The big question, therefore, is which ONE Basis should we use. The IASB has considered many but two stick out as prime candidates – Fair Value and Value in Use.
Much of the public debate centres on which of these to apply to financial instruments. Again missing the point. The biggest element of the combined balance sheets of all companies is Fixed Assets (including Goodwill and Intangibles). Financial Instruments are important to some companies but not most. So whichever Basis we pick has to suit all assets and liabilities – and in practice it is the approach to Fixed Assets that determines it since the two leading candidates give roughly the same answer for all current assets and liabilities (including financial instruments).
So what do the two prime candidates really mean?
Fair Value means Winding Up Value. What you would get for your company if you placed it in the hands of a receiver and he tried NOW to dispose of it, or its various businesses, as going concerns where appropriate.
Value in Use – essentially the NPV of future cash flows – means Investment Value. What you would get over the LONG TERM if you bought this company.
Fair Value is practically impossible to estimate for Fixed Assets. There is no market to guide you, there is no management information inside the company that is relevant.
Value in Use is possible to estimate – because managements do it all the time internally – but it is a subjective estimate and people will worry that managements would manipulate it.
But it is Value in Use – Investment Value – that shareholders want to see. They’d like it to be verified and reliable but that’s what they want. Not Fair Value which is not much use to anyone.
And note again it is only in Fixed Assets that these two bases differ – for financial instruments and all other current assets and liabilities they give roughly the same answer.
We are in severe danger of adopting the wrong answer simply because people, including the standard setters, can’t get their minds round the issue.