The International Banking Federation has urged standard setters to implement a mixed measurement model in place of full fair value accounting. The FASB and IASB were advised that a mixed measurement model provides investors with better information for evaluating financial instruments. The mixed model requires fair value measurement for assets and liabilities managed on a fair value basis. But at the same time it recognizes that not all financial instruments are managed on a fair value basis, or are even capable of reliable fair value measurement.
The Federation represents the view of the international banking community on the relative merits of fair value and mixed measurement when used as the primary measurement basis for the preparation of annual reports and other financial statements. In a conceptual paper, the Federation evaluated both fair value and mixed measurement against the qualitative characteristics that make information useful. On that basis, the banking group concluded that a fair value measurement is appropriate for financial instruments held for trading purposes or otherwise managed on a fair value basis.
A full fair value measurement model would, however, overstate the extent to which instruments are held for trading or managed on a fair value basis within the business. It would also exaggerate the extent to which deep and liquid markets exist. In addition, the Federation noted that the reality of a fair value model is extremely complex and intricate. Performance reporting cannot be achieved if the framework for financial reporting remains rigid and sticks to either an amortized cost model or a fair value one.
The Federation’s report comes against the backdrop of a recent IASB discussion paper on reducing complexity in financial statements. In that paper, the IASB said that fair value is the only measure appropriate for all types of financial instruments as it embarks on a major revision of IAS 39, the standard for measuring the value of financial instruments. The overall goal of the Board’s initiative is to reduce the current complexity by using a single measurement method for all financial instruments.
In the view of the Federation, the IASB has predetermined the outcome of the debate by offering a choice between full fair value today and full fair value tomorrow. This is at odds with the banking industry’s view that a mixed measurement model is essential for the faithful representation of an entity’s business model and how it generates earnings. Rather than concentrating on taking steps to implement a full fair value model, the IASB was urged to reduce complexity by simplifying the existing measurement requirements for financial instruments. The support of the international banking community is conditioned on the development of a measurement principle reflecting the reality of how business operates.
IASB and FASB standards for fair value measurement are different. The FASB has issued SFAS 157, which establishes general principles for determining the fair value of all types of assets and liabilities. It defines fair value as an exit price and addresses many but not all measurement issues specific to financial instruments. The IASB’s requirements for the fair value measurement of financial instruments are in IAS 39. The IASB published SFAS 157 as a discussion paper in November 2006 and has begun deliberating on the comments received. The boards will need to make decisions about some measurement issues related specifically to financial instruments as part of the broader convergence process.