Going Forward
The IASB is currently working on several long-term projects that will further clarify guidance on fair value measurements. First, the IASB is working to establish a single source of guidance for all fair value measurements required or permitted by existing IFRSs, so as to reduce complexity, and improve consistency in their application. This project is similar in intent to SFAS 157, although it might differ in its requirements and wording. Publication of the exposure draft is expected in the second quarter of 2009, and the effective date to publish the standard is projected to be in 2010.
Second, the IASB is currently working to simplify and improve IAS 39. The board recognizes the need to improve the reporting of financial instruments, and to reduce the complexity of that reporting. In March 2008, the IASB published a discussion paper, Reducing Complexity in Reporting Financial Instruments. Going forward, the IASB plans to issue an IFRS to simplify financial instrument reporting, although no specific timeline has been set.
Third, the financial crisis has raised concerns that users need further information on how firms estimate the fair value of their financial instruments when there are only limited market data to support those estimates. In October 2008, the IASB published an exposure draft, Improving Disclosures about Financial Instruments, that proposes amendments to IFRS 7 (Financial Instruments: Disclosures). The exposure draft proposes disclosure requirements that are similar to the disclosure requirements in SFAS 157, such as having the three-level, fair value hierarchy. Depending on the comments received, the board will deliberate whether to proceed with amending IFRS 7.
Similarly, the FASB has also announced the addition of new FASB agenda projects intended to improve both the application guidance used to determine fair values, and the disclosure of fair value estimates. These projects were added partly in response to recommendations contained in the December 2008 Securities and Exchange Commission’s (SEC) report on mark-to-market accounting. The SEC report recommended against suspension of fair value accounting standards, and reaffirmed that investors generally believe fair value accounting increases financial reporting transparency. The FASB anticipates that the project on application guidance will be completed by the end of the second quarter of 2009, and the project on improving disclosures in time for 2009 year-end financial reporting.
Conclusion
The trend toward fair value accounting appears to be irreversible. Fair value accounting requires recognition of balance sheet amounts at fair value, and changes in fair values to have an impact on the income statement, or via stockholder equity. Managers should be aware of the various measurement issues involved in valuing the financial instruments in their companies, especially when subjective fair value estimates are involved.
Figure 1. HSBC Finance Corporation 10-Q filing for period ended September 30, 2008. (Source: “Notes to accounts—Fair value measurements,” www.hsbcusa.com/hsbc_finance/financial_reports.html)
Figure 2. Extract from “Notes on the financial statements: Analysis of financial assets and liabilities by measurement basis.” (Source: HSBC Bank plc, Annual Report 2008, www.hsbc.com/1/2/financialresults)
Figure 3. Extract from “Report of the directors: Impact of market turmoil.” (Source: HSBC Bank plc, Annual Report 2008, www.hsbc.com/1/2/financialresults)
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