In recent years, the use of fair value in measuring balance-sheet items has been very controversial. At the same time, the fair value provisions in U.S. Generally Accepted Accounting Principles (GAAP) have differed significantly from those in International Financial Reporting Standards (IFRS), attracting opposition as well as support in both cases. Recently, however, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) approved changes to U.S. GAAP and IFRS so as to converge on nearly identical fair value measurement and disclosure provisions. In this month's column, I'll summarize what has changed in each set of standards.
Background and Overview
Traditionally, there have been numerous differences between IFRS and U.S. GAAP with regard to fair value. Each set of standards has had different provisions regarding:
* The definition of fair value,
* Methods for measuring fair value,
* The specific balance-sheet items that are required or permitted to be measured at fair value, and
* The disclosures that a reporting entity must make with regard to its fair value measurements.
After working independently for several years to improve their respective fair value standards, the IASB and the FASB began coordinating their efforts in October 2009. The Boards' intent was to enhance the comparability of fair value measurements presented and disclosed in financial statements, regardless of whether the statements are prepared in accordance with IFRS or U.S. GAAP. To this end, the Boards focused on developing a common definition of fair value, a common methodology for measuring fair value, and common requirements for disclosures about fair value measurements.
On May 12, 2011, the IASB and the FASB issued separate pronouncements reflecting the changes to IFRS and U.S. GAAP that they had agreed to as a result of their joint fair value project. The IASB issued IFRS 13, Fair Value Measurement. The FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (as an abbreviated reference to its standards in the plural, the IASB prefers IFRSs, although the extra s is often omitted in actual use).
As a result of the changes, "fair value" has the same meaning in both IFRS and U.S. GAAP. Additionally, the methodology for measuring fair value is nearly identical under both sets of standards, and fair value disclosure requirements are largely the same.
Changes to IFRS
On the whole, the recent changes to the fair value provisions of IFRS are more substantial than the related changes to U.S. GAAP. As a result, the converged standards are more similar to prior U.S. GAAP than they are to prior IFRS.
IFRS 13 amends existing fair value provisions within the IASB's standards, introduces new requirements, and compiles all fair value measurement and disclosure guidance in a single standard. The new standard doesn't change which balance-sheet items must be or may be measured at fair value.
The new standard alters the definition of fair value to be used when other standards require or permit fair value measurements. The new definition in IFRS 13 is identical to the existing definition of fair value in U.S. GAAP: "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." From an IFRS perspective, this definition newly specifies that fair value measurements are to be based on the exit prices associated with balance-sheet items.
IFRS 13 prescribes the same three-level hierarchy of fair value measurement methods found in existing U. …