The objective of the Discussion Paper (DP) is stated to be “establishing a single source of guidance for all fair value measurements required by IFRSs”. However the paper then goes on to follow the US standard SFAS 157 and broadly speaking tries to establish a single definition of fair value. A single source of guidance could be a useful reference document while a single definition of fair value would be most unwelcome and could lead to misleading values appearing in accounts.
The determination of a fair value depends on the context and use to which that value will be put. We do not see the need to standardise the definition of fair value and to apply a single definition in inappropriate circumstances.
If fair values are to be used in a meaningful way in accounting the definition should depend on the purpose for which it is being used. That said it could be helpful to establish a hierarchy of preferred methodologies. As a company moves down the list to find the most appropriate definition it would need to justify itself to its auditors.
There appears to be an aim to set down a definition that will remove subjectivity and produce more reliable measurements, and to achieve this the IASB has settled on market based measures. However we do not think that this will necessarily achieve the objectivity desired since it requires an assumption that a liquid market exists and that there are willing buyers and sellers. Very often this will not be the case.
Your introduction explains that this tendency towards market participant exit values is driven by a desire to eliminate US reconciliation statements for non US companies registered in the US. While we welcome the objective of eliminating the need for reconciliations we question whether it is right to move headlong towards the US formulation of fair value.
What seems to be missing from the DP is any discussion of any overriding objective or principle and indeed whether it is possible to generalise to find an objective applicable in all circumstances. The DP follows SFAS 157 and chooses a market based value taken from the perspective of a market participant rather then the alternative of looking at values from the point of view of the entity. We hope that in your further roundtable meetings ou can explore whether the purpose of using fair values is to find a net realisable value of an asset or liability or rather to find an entity specific value in use sort of valuation.
We can identify three traditional principal valuation bases depending on the use required:
It may be appropriate for any guidance to indicate which basis is appropriate for which standard and then to offer a hierarchy of preferences or methodologies within each category.
We realise that this DP is not proposing any new circumstances or standards where fair values will be required. However we have noted that the use of fair values is becoming more widespread even to the extent that some users suspect that the IASB is heading towards measuring company performance as the difference in the full fair value of the opening and closing balance sheets rather than by reference to recording the transactions undertaken by the entity during the year. Fair values definitely have their place in corporate finance for assessing acquisition or disposal values of companies or businesses but we deprecate their extensive use in financial accounting. We see accounts as measuring the activity and performance of an entity rather than its market value. However for the purposes of this response we will refrain from questioning their use in existing standards.
Many of the specific questions concern market based measurements. Our comments on market methodologies in the following responses are based on the assumption that the circumstances require a market based method. As noted above we do not believe a market based method is universally applicable.
