Fair Value Measurement Ben Couch, Valuation Practice Fellow, FASB

Agenda Project timeline and background Fair value measurement overview Disclosure Application to nonpublic entities Effective date and transition

Project Timeline FASB issued SFAS 157 IASB discussion paper published Sep 2006 FASB issued SFAS 157 Nov 2006 IASB discussion paper published (using SFAS 157 as starting point) 2006 2007 Jun 2003 FVM project added to FASB’s agenda 2003 2004 2005 Sep 2005 FVM project added to IASB’s agenda Jun 2004 FASB exposure draft published Sep 2004 FASB round table meetings

Project Timeline continued 2008 2009 2010 2011 Oct 2008 IASB Expert Advisory Panel report Measuring and disclosing the fair value of financial instruments in markets that are no longer active FASB FSP FAS 157-3 published Determining the Fair Value of a Financial Asset when the Market for that Asset is Not Active May 2009 FASB FSP FAS 157-4 published Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly IASB Exposure draft published Fair Value Measurement Nov-Dec 2009 IASB Round table meetings Jun 2010 FASB exposure draft published Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs IASB exposure draft published Measurement Uncertainty Analysis Disclosure for Fair Value Measurements May 2011 Common IFRS and U.S. GAAP fair value measurement standards ASU No. 2011-04 IFRS 13 H2 2011 IFRS Foundation educational material

Consistent fair value measurements IFRSs US GAAP Fair value measurement guidance in various standards Topic 820 (codified SFAS 157) May 2009 exposure draft Fair Value Measurement Objective: Common (identical) fair value measurement and disclosure standards

Fair Value Measurement Overview Main changes in U.S. GAAP Topic Resolution Premiums and discounts Premiums and discounts relevant to market participants for the unit of account may be used if Level 1 inputs unavailable. No block discounts (entity-specific, unit of account issues). Fair value for financial instruments with offsetting risks Financial instruments can be valued on a net basis. Fair value of instruments classified in shareholders’ equity Requirement to value from the perspective of a market participant holding instrument as an asset. Disclosures Quantitative inputs for Level 3 Narrative sensitivity analysis Valuation processes Current use if different from highest and best use Level in fair value hierarchy for fair value measurements disclosed but not reported All transfers into/out of Levels 1 and 2

Fair Value Measurement Overview continued Differences between Topic 820 and IFRS 13 Topic Reason for difference NAV practical expedient Different accounting for investment companies in local country GAAP means IASB cannot yet allow a practical expedient. Deposit liabilities Different requirements in IFRS and US GAAP for measuring fair value of deposit liabilities IFRS 13 contains measurement guidance Topics 825 and 942 contain measurement guidance Disclosures IFRS does not allow net presentation of derivatives IFRS requires quantitative sensitivity analysis for financial instruments In IFRS nonpublic entities are covered by SME standard

Premiums and Discounts Must be consistent with characteristics of asset or liability and the unit of account No block discounts Is a Level 1 input available? Would market participants incorporate premium or discount in transaction? Does fair value include premium or discount? Available n/a FV = Level 1 price x quantity held Not available Yes No  Market participants act in their economic best interest in a transaction for the unit of account.

Financial Instruments Exception for financial assets and liabilities with offsetting positions in market risk or counterparty credit risk Entity must have documented risk management strategy Only for portfolios of instruments measured at FV Accounting policy decision

Financial Instruments continued Market risks: Must be substantially the same Duration of instruments leading to exposure to market risk must be substantially the same Counterparty credit risk: Must have arrangement to mitigate credit risk in place

Liabilities and Shareholders’ Equity Is there an observable market price to transfer the instrument? Yes No Fair value = observable market price of instrument Does somebody hold the corresponding asset? Yes No Fair value = observable market price of asset Fair value = fair value of the corresponding asset Fair value = another valuation technique Yes Is there an observable market price for the instrument traded as an asset? No Fair value = another valuation technique

Disclosure More information required for Level 3 fair value measurements: A quantitative disclosure of the unobservable inputs and assumptions used in the measurement A description of the valuation control process in place A discussion of the sensitivity of the fair value to changes in unobservable inputs and any inter- relationships between those inputs that magnify or mitigate the effect on the measurement

Disclosure continued Example

Disclosure continued Current use of a nonfinancial asset when it differs from the highest and best use considered in its fair value measurement and reasons why Required whether fair value is recognized or only disclosed All transfers between Level 1 and Level 2 of the fair value hierarchy (no significance threshold)

Disclosure continued For fair value measurements that are only disclosed, the level in which the fair value measurement would be categorized within the fair value hierarchy Other disclosure requirements for fair value measurements would not apply

Application of Topic 820 to Nonpublic Entities Measurement principles apply equally to public and nonpublic entities, but some disclosures not required for nonpublic entities Transfers between Level 1 and Level 2 Sensitivity of Level 3 fair value measurements to changes in unobservable inputs Level in which a fair value measurement would be categorized within the fair value hierarchy when asset or liability not measured at fair value in statement of financial position, but disclosure of fair value is required

Effective Dates and Transition 2011 2012 2013 May 2011 Common IFRS and U.S. GAAP fair value measurement standards ASU No. 2011-04 IFRS 13 December 15, 2011 ASU No. 2011-04 effective Public entities Interim and annual periods Prospective transition with disclosure of changes and quantitative effect Early application not permitted Nonpublic entities Annual periods Early application permitted for interim periods after December 15 January 1, 2013 IFRS 13 effective Prospective transition Early application permitted

Q&A Expressions of individual views by members of the FASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the FASB on accounting matters are determined only after extensive due process and deliberation. 18