US and international accounting watchdogs come together to define fair value.
On Thursday the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released their converged guidance on fair value measurement. The new standard, IFRS 13 on Fair Value Measurement, further aligns US generally accepted accounting principles (GAAP) with the international accounting framework.
For US GAAP, the update will supersede most of the guidance in Topic 820, “although many of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.”
The amendments, “the culmination of more than five years’ work to improve and align fair value measurement and disclosure requirements,” ensures that the term “fair value” has the same meaning in US GAAP and IFRS and that their respective fair-value measurement and disclosure requirements, but for some wording, are the same.
However, the requirements “do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP,” IASB said in a statement.
In a press release, FASB highlighted some differences that remain between US GAAP and IFRSs:
- There are some different disclosure requirements about fair value measurements. The most significant difference is that IFRSs require a quantitative sensitivity analysis for financial instruments that are measured at fair value and categorized within Level 3 of the fair value hierarchy. US GAAP does not require a quantitative sensitivity analysis disclosure.
- There are different requirements about whether, and in what circumstances, an entity with an investment in an investment company may use the reported net asset value as a measure of fair value.
These statements are in line with a recent Deloitte presentation at the NeuGroup’s Bank Treasurers’ Peer Group. Deloitte said convergence “does not necessarily result in identical standards” and that the focus is on “converging general principles, not every detail.”
The amendments in this Update are to be applied prospectively. For public companies, the amendments are effective during “interim and annual” periods starting after December 15, 2011. Early application by public companies will not be permitted.