Applying fair value in inactive markets

The International Accounting Standards Board has provided an update on its work to consider the application of fair value when markets become inactive.

In May 2008 and at the request of the Financial Stability Forum, the IASB established an Expert Advisory Panel to consider the application of fair value when markets become inactive. The panel has since met on seven occasions, the latest of which was on Friday, October 10.

Among the issues discussed at its October 10 meeting, the panel agreed to emphasize that the objective of a fair value measurement is the price at which an orderly transaction would take place between market participants on the measurement date, not the price that would be achieved in a forced liquidation or distress sale. The panel reaffirmed that such transactions should not be considered in a fair value measurement, while also noting that even in times of market dislocation, not all market activity arises from forced liquidations or distress sales.

The panel also agreed to emphasize existing guidance within International Financial Reporting Standards that using the entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available.

The panel also reviewed the feedback received from interested parties on the draft document and started the process for completing its guidance. The final document of the panel will include the guidance in the US Financial Accounting Standards Board Staff Position issued on October 10 on determining the fair value of a financial asset when the market for that asset is not active.

The IASB reaffirms its belief that fair value measurement guidance under IFRSs and US generally accepted accounting principles is already consistent. The IASB and the FASB will continue to co-operate to ensure that applying fair value in inactive markets is dealt with consistently. They also intend to issue common guidance on any accounting questions arising from the US Emergency Economic Stabilization Act of 2008.