31 August 2009

Sir David Tweedie
Chairman
International Accounting Standards Board
30 Cannon Street
London EC 4M 6XH
UNITED KINGDOM
commentletters@iasb.org.uk

Dear Sir David

ED/2009/5 Fair Value Measurement

The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with a purpose of advancing Australia’s financial competitiveness. The G100 comments on ‘Fair Value Measurement’ are attached.

The G100 supports the proposal to have a single point of reference and guidance on the application of fair value measurements and the objective of achieving convergence with the requirements of the FASB. In this regard it is important that the IASB and the FASB resolve the differences in their approaches in order to meet this objective.

The G100 does not support the universal application of an exit value approach to determining fair values because it does not give sufficient weight to the intentions of management and directors. The G100 considers that what constitutes an appropriate measure of fair value will depend on the circumstances in which the fair value is being determined. We believe that the financial statements of the reporting entity should reflect the perspective of the entity as a going concern rather than that of a hypothetical market participant.

Our responses to the questions raised in the Exposure Draft are included in the Appendix.

Yours sincerely

Tony Reeves
National President

Appendix - Group of 100 responses to questions

ED/2009/5 Fair Value Measurement

Q1	The ED proposes defining fair value as ‘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’ (an exit price) (see para 1 of the draft IFRS and paras BC15-BC18 of the Basis for Conclusions [BC]). This definition is relevant only when fair value is used in IFRSs. Is this definition appropriate? Why or why not? If not, what would be a better definition and why? No. The G100 does not believe that an exit price based measure of fair value is appropriate for all classes of assets. While such a measure may be appropriate for financial instruments we do not believe that an exit price based measure provides useful information for certain classes of non-financial assets such as property, plant and equipment where an entity-specific measure may be more appropriate. If a purpose of the project is not to make changes to or extend the application of fair value (i.e. how to measure fair value) the G100 does not see a need to modify the existing definition. Modifying the definition is likely to lead to changes in the application of fair value.
Q2	In three contexts, IFRSs use the term ‘fair value’ in a way that does not reflect the Board’s intended measurement objective in those contexts. In two of those contexts, the exposure draft proposes to replace the term ‘fair value’ (the measurement of share-based payment transactions in IFRS 2 ‘Share-based Payment’ and reacquired rights in IFRS 3 ‘Business Combinations’) (See para BC29 of the BC). The third context is the requirement in para 49 of IAS 39 ‘Financial Instruments: Recognition and Measurement’ that the fair value of a financial liability with a demand feature is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid (see para 2 of the draft IFRS and para BC29 of the BC). The ED proposes not to replace that use of the term ‘fair value’ but instead proposes to exclude that requirement from the scope of the IFRS. Is the proposed approach to these three issues appropriate? Why or why not? Should the Board consider similar approaches in any other contexts? If so, in which context and why? Yes. The G100 agrees that where the term ‘fair value’ is used in other IFRSs with a different meaning the term should be replaced with another description which more accurately reflects the context in which it is used. As indicated in our response to Q1 we have concerns about the use of a market-based measure when an entity-specific measure would provide more useful and relevant information.
Q3	The ED proposes that a fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in the most advantageous market to which the entity has access (see paras 8-12 of the draft IFRS and paras BC37-BC41. Is this approach appropriate? Why or why not? Yes. The G100 agrees with the proposed approach on the grounds that it is consistent with the way in which management would approach a transaction in the ordinary course of business.
Q4	The ED proposes that an entity should determine fair value using the assumptions that market participants would use in pricing the asset or liability (see paras 13-14 of the draft IFRS and paras BC42-BC45). Is the description of market participants adequately described in the context of the definition? Why or why not? If the price definition is proceeded with, the description of market participants and the assumptions they would make is adequate. However, it is not appropriate when entity-specific factors are taken into account which we believe should occur in respect of non-financial assets.
Q5	The ED proposes that: the fair value of an asset should consider a market participant’s ability to generate economic benefit by using the asset or by selling it to another market participant who will use the asset in its highest and best use (see paras 17-19 of the draft IFRS and para BC60). the highest and best use of an asset establishes the valuation premise, which may be either ‘in use’ or ‘in exchange’ (see paras 22-23 of the draft IFRS and paras BC56 and BC57). the notions of highest and best use and valuation premise are not used for financial assets and are not relevant for liabilities (see para 24 of the draft IFRS and paras BC51 and BC52). Are these proposals appropriate? Why or why not? The G100 has concerns about an approach which takes into account the highest and best use for the asset. We agree with the view that because they do not have other uses financial assets are exceptions to the ‘in use’ valuation premise. However, in respect of non-financial items an entity-specific measure would capture the way in which the entity is using the item which, for a variety of reasons, may not be its highest and best use. We believe that information based on how the entity is using the item provides more useful information to users and agree with the presumption that the current use is the highest and best use.
Q6	When an entity uses an asset together with other assets in a way that differs from the highest and best use of the asset, the ED proposes that the entity should separate the fair value of the asset group into two components: (a) the value of the assets assuming their current use and (b) the amount by which that value differs from the fair value of the assets (ie their incremental value). The entity should recognize the incremental value together with the asset to which it relates (see paras 20 and 21 of the draft IFRS and paras BC54-BC55). Is the proposed guidance sufficient and appropriate? If not, why? No. The G100 disagrees with the proposal to identify the different components of the fair value of an asset where it is used in a way that differs from the highest and best use. The provision of this information in effect requires the use of two valuations on different bases which would increase compliance costs unnecessarily for little information benefit.
Q7	The ED proposes that: a fair value measurement assumes that the liability is transferred to a market participant at the measurement date (see para 25 of the draft IFRS and paras BC67-C68). if there is an active market for transactions between parties who hold a financial instrument as an asset, the observed price in that market represents the fair value of the issuer’s liability. An entity adjusts the observed price for the asset for features that are present in the asset but not present in the liability or vice versa (see para 27 of the draft IFRS and para BC72). there is not corresponding asset for liability (eg for a decommissioning liability assumed in a business combination), an entity estimates the price that market participants would demand to assume the liability using present value techniques or other valuation techniques. One of the main inputs to those techniques is an estimate of the cash flows that the entity would incur in fulfilling the obligation, adjusted for any differences between those case flows and the cash flows that other market participants would incur (see para 28 of the draft IFRS). Are these proposals appropriate? Why or why not? Are you aware of any circumstances n which the fair value of a liability held by one party is not represented by the fair value of the financial instrument held as an asset by another party? The G100 agrees that the fair value of a liability should be based on its transfer (fulfillment) value. The G100 questions the presumption of symmetry between the fair value of an asset and the fair value of a liability because it does not take account of the fact that market participants may hold different views (as holder of the asset and the acquirer of a liability). The G100 agrees that present value and similar techniques should be used to estimate the fair value of the liability in these circumstances.
Q8	The ED proposes that: the fair value of a liability reflects non-performance risk, ie the risk that an entity will not fulfil the obligation (see paras 29-30 of the draft IFRS and paras BC73-BC74). the fair value of a liability is not affected by a restriction on an entity’s ability to transfer the liability (see para 31 of the draft IFRS and para BC75). Are these proposals appropriate? Why or why not? a. The G100 does not agree that the effect of changes in own credit risk should be included in the measure of fair value and recognized in the entity’s financial statements. However, we acknowledge that where financial liabilities are required to be measured at fair value the associated credit risk is included in the market measure of the corresponding asset. b. Yes. The existence of any restrictions would presumably be taken into account by market participants when determining the fair value of the liability.
Q9	The ED lists four cases in which the fair value of an asset or liability at initial recognition might differ from the transaction price. An entity would recognize any resulting gain or loss unless the relevant IFRS for the asset or liability requires otherwise. For example, as already required by IAS39, on initial recognition of a financial instrument, an entity would recognize the difference between the transaction price and the fair value as a gain or loss only if that fair value is evidenced by observable market prices or, when using a valuation technique, solely by observable market data (see paras 36-37 of the draft IFRS, paras D27 and D32 of Appendix D and paras BC76-BC79). Is this proposal appropriate? In which situation(s) would it not be appropriate and why? Recognizing day 1 gains and losses is a complex issue and is a topic the IASB could well re-examine.
Q10	The ED proposes guidance on valuation techniques, including specific guidance on markets that are no longer active (see paras 38-55 of the draft IFRS and paras B5-B18 of Appendix B, paras BC80-BC97 and paras IE10-IE21 and IE28-IE38 of the draft illustrative examples). Is this proposed guidance appropriate and sufficient? Why or why not? The G100 considers that the guidance provided will be useful to preparers when applying the requirements. The alignment of the guidance with that provided by the FASB in respect of illiquid markets will contribute to greater consistency in this area.
Q11	The ED proposes disclosure requirements to enable users of financial statements to assess the methods and inputs used to develop fair value measurements and, for fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period (see paras 56-61 of the draft IFRS and paras BC98-BC106). Are these proposals appropriate? Why or why not? The G100 is concerned about the volume, complexity and detail of disclosures required in accounting standards and does not consider that the case for the extensive disclosures in respect of fair value measurements has been established. The G100 believes that a set of disclosure principles to be applied by standard-setters should be developed to ensure a robust process for determining disclosure requirements. While we acknowledge that the recent global financial crisis has demonstrated that relevant information about how an entity has determined fair values is relevant we consider the proposed disclosures will be onerous. For example, the requirement to present detailed reconciliations (para 57[e]) are unlikely to meet a cost benefit test for providing useful information. Also see response to Q13.
Q12	The ED differs from Statement of Financial Accounting Standards No 157 ‘Fair Value Measurements’ (SFAS 157) in some respects (see para BC110). The Board believes that these differences result in improvements over SFAS 157. Do you agree that the approach that the ED proposes for those issues is more appropriate that the approach in SFAS 157? Why or why not? Are there other differences that have not been identified and could result in significant differences in practice? The G100 generally considers the changes provide improvements to SFAS 157. However, such ‘improvements’ move away from a convergence objective unless the FASB also sees those items as ‘improvements’ and incorporates them in its standard.
Q13	Do you have any other comments on the proposals in the ED? The G100 is particularly concerned about the proposed increase in disclosures required in interim financial reports. Complying with the proposal to amend IAS 34 ‘Interim Financial Reports’ will impose significant burdens on all entities and will be particularly onerous for financial institutions. These disclosures extend significantly the current disclosures required in an interim financial report with little evidence of the usefulness of such information to shareholders and other users.

g100
9/09