Fair Value Measurement: IFRS vs. U.S. GAAP

This article is the twenty-second in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we provide an overview of some of the most significant differences between IFRS and U.S. generally accepted accounting principles (GAAP) with regard to fair value measurement. Actual differences in the accounting treatment between the two frameworks depend on specific circumstances.

In November 2006 the International Accounting Standards Board (IASB) published for public comment a discussion paper setting out its preliminary views on providing consistency in the measurement of fair value when existing International Financial Reporting Standards (IFRS) require or permit its use. The starting point in developing the discussion paper was the equivalent U.S. GAAP standard, FASB Statement No. 157, Fair Value Measurements. In May 2009, the IASB released an Exposure Draft regarding the fair value measurement project. The proposed definition of fair value in the Exposure Draft is identical to the definition in Statement No. 157, and the supporting guidance is largely consistent with U.S. GAAP. However, some significant differences still remain. Following is a brief summary of some of the key decisions exposed:

	IFRS Exposure Draft vs. Statement No. 157	Existing IFRS
Definition of fair value	The IASB tentatively decided to define fair value as it is defined in Statement No. 157.	The current IFRS definition is based on wording that is different than that in Statement No. 157; however, it is considered to be broadly similar.
Exit price	The IASB tentatively decided to characterize fair value as an “exit price” as in Statement No. 157.	Currently, the definition in IFRS is neither explicitly an “exit price” nor an “entry price.”
Transaction price and fair value at initial recognition	The IASB tentatively decided that “day one” differences are recognized in accordance with existing IFRS criteria. Under Statement No. 157 the exit price always prevails over the transaction price at all levels (Levels 1, 2, and 3). As a result, there still will be divergence in practice.	Under existing IFRS, a model-based estimate of fair value can be used instead of the transaction price if it is based entirely on observable market inputs (Levels 1 and 2).
Reference market	The IASB tentatively decided that for fair value measurement purposes, transactions take place in the most advantageous market (the market in which the reporting entity would normally enter into a transaction for the asset or liability). Statement No. 157 focuses on the principal market, and in cases where there is no principal market, the reference market is the most advantageous market. As a result, there is not full convergence between the two frameworks.	Current IFRS do not contain consistent guidance. For example, in IAS 39, Financial Instruments: Recognition and Measurement, the reference market is the most advantageous active market to which the entity has immediate access, and in IAS 41, Agriculture, if an entity has access to different markets, the entity uses the most relevant one.
Blockage factor	The IASB tentatively decided to exclude blockage factors from a fair value measurement at all levels of the fair value hierarchy. Under Statement No. 157, blockage factor adjustments are expressly prohibited only at Level 1.	Blockage factor adjustment is prohibited at all levels of the fair value hierarchy.
Illiquid markets	In April 2009 the FASB issued FASB Staff Position (FSP) No. FAS 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. The IASB tentatively decided to include the guidance from the FSP in its Exposure Draft.	At present, the guidance in FSP No. FAS 157-4 is consistent with existing guidance on IFRS contained in the IASB’s Expert Advisory Panel report, Measuring and disclosing the fair value of financial instruments in markets that are no longer active.