The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have commissioned a survey concerning the trend toward requiring or allowing more financial instruments to be measured at fair value. The FASB/IASB survey seeks to address whether current reporting standards provide enough information for investors and creditors to analyze companies that report any financial instruments at fair value. The cover letter states that the survey should be returned by April 14, 2006.
The two Boards are seeking useful information on financial instruments from those advising others or making investment or credit decisions, according to the FASB/IASB survey cover letter. Accounting requirements for fair value reporting are currently mixed across the two Boards. IASB and FASB accounting standards require some financial instruments, such as traded securities and derivatives, to be reported at fair value.
Existing IASB standards allow companies the option of reporting other financial instruments at fair value. The FASB has issued an Exposure Draft of a Statement allowing a similar option with US generally accepted accounting practices (GAAP). The FASB/IASB survey cover letter reports the two Boards are basically broadening the term “financial instrument” to include:
- Debt securities
- Equity securities
- Accounts payable or receivable
- Other amounts payable or receivable.
One situation is that existing accounting standards require little disclosure explaining any changes in the fair values of financial instruments, according to the FASB/IASB survey cover letter. An investor, or other user of this information, may require more detail to understand these changes and evaluate any future changes.
According to the FASB/IASB survey questionnaire, the five survey questions were:
- The current use of fair value information about financial instruments.
- Understanding reasons why fair values changed during a period.
- Reporting interest income and expense for financial instruments measured at fair value.
- Understanding the exposure to future changes in fair values of financial instruments.
- Relative importance of different types of information.
An asset’s estimated fair value is defined as its value when exchanged between knowledgeable, willing parties, according to Finance-magazine.com. Although associated with financial instruments most often, International Financial Reporting Standards also allow fair value evaluations of property, plant and equipment, agricultural assets, assets held for sale, and other nonfinancial items.
In future years, the IASB is expected to press towards the greater use of fair values in financial statement measurements, especially as measurements methodologies. Finance-magazine.com reports that comments to a recent report by the United Nations Conference on Trade and Development brought out several economic concerns, including the fact that global capital markets have different levels of liquidity. The fact that efficient markets with low transactions are rare, was voiced as a technical concern. Standard setters also make assumptions and market inefficiencies are more common and do not give credence to arguments for using this assumption.
Many groups embrace this comprehensive, global discussion because the benefits and use of each measurement attribute will be considered. Finance-magazine.com reports in a recent letter to the IASB, the European Financial Reporting Advisory Group (EFRAG) made comments regarding the IASB’s number of present, longer-duration projects. EFRAG recommended that the publishing of any project findings, especially those examining the measurement of liabilities and business combinations, should be delayed until these new proposals have been completely evaluated.