Fair Value Measurements (education session)
Representatives of the International Valuation Standards Committee (IVSC) presented an education session to the Board on four valuation issues. No decisions were made at this education session.
The four issues presented by the IVSC delegation were:
- What is the difference between 'price' and 'value'?
- Is there a valuation difference between an entry and an exit price?
- Highest and best use
- What makes the market?
What is the difference between 'price' and 'value'?
The representatives made clear that in their view 'price' is the amount agreed on in a transaction while 'value' is the outcome of a valuation. In practice, most valuations assume a transaction but, depending on the purpose of the valuation exercise, a value could also be entity-specific. It was made clear that in many cases price and value would result in (nearly) the same number. It was also noted that the IVSC standards use three types of valuation with two of them taking a market view and one of them being an entity-specific approach - which could possibly result in different amounts for the same valuation object.
Some Board members were confused by the terminology used by the presenters and it was agreed that this could be the cause for much confusion within the constituency and that any communication by the Board must clearly articulate what they mean. One Board member noted that 'value' must always be accompanied by an adjective as people understand different things in different situations. Other Board members were confused about where the difference in amounts results from. The IVSC representatives explained that there are many reasons (for example, synergies).
Is there a valuation difference between an entry and an exit price?
The delegation moved then on to the second question. The representatives explained that the profession holds the view that for non-entity-specific values entry and exit price for the same market should be the same. Often a perceived difference results because entry price is determined on a different market than the exist price. The Board had a lengthy discussion on that issue with a view on the guidance in US GAAP.
Highest and best use
The highest and best use is terminology from the US GAAP standard SFAS 157 Fair Value Measurements that assumes an entity would also use its asset the best way it can. It was highlighted that the SFAS 157 definition is very similar to the IVSC one. It was noted that this is not a different type or basis of value and that it is inherent in any basis that requires the estimate of an open market transaction. Some Board members expressed their doubt that this always could be assumed for liabilities.
What makes the market?
The representatives explained that there is an opinion that fair values could only be made where active markets exist. They made it clear that in their view this is not the case. The valuation profession assumes as long as there is enough evidence to establish a valuation it is assumed that a market exist even if the degree of reliability is lower than that for a market with frequent transactions. They would not necessarily link value and liquidity. The Board showed interest in the valuation for some of the instruments where markets have contracted recently and had some debate on that point with the representatives.
The Chairman closed the session by asking the IVSC representatives if they have experts on valuing liabilities that could participate in the planned IASB technical experts group. The representatives confirmed that such experts would be available to participate in the group.