The Board discussed various aspects of its response to the credit crisis:
- Inactive markets (valuing financial instruments when markets are no longer active)
- Consolidation round-table
- Disclosure: off-balance sheet entities
- Disclosure: liquidity risk
- Disclosure: fair value of financial instruments
In response to recommendations of the Financial Stability Forum in its report Enhancing Market and Institutional Resilience, the Board set up and consulted an expert advisory panel. The panel met six times from June to August 2008 to discuss measurement and disclosure issues encountered. As a result of those discussions, the staff
prepared a draft report summarising practices that experts use for measuring and disclosing financial instruments when markets are no longer active.
The draft report provides information and educational guidance for measuring and disclosing fair values and does not propose new requirements for entities applying IFRSs. However, the Board noted that the panel�s discussions will be useful for future standards, including the forthcoming fair value measurement standard, and had already provided helpful input for possible amendments to IFRS 7 Financial Instruments: Disclosures (see below).
The draft report is on the IASB Website at http://www.iasb.org/expert-advisory-panel. The staff will consider any comments on the draft report received by 3 October 2008. The staff will finalise the report after the next panel meeting in October 2008 and post it on the IASB Website.
To receive views from external parties, the Board held a round-table meeting to discuss a working draft of an exposure draft on consolidation. For more information about the draft and the round-tables, please refer to http://www.iasb.org/Current+Projects/IASB+Projects/Consolidation/Consolidation.htm
Disclosure: off-balance sheet entities
The Board discussed possible disclosure requirements for off-balance sheet entities and tentatively decided to propose disclosure requirements about:
- the application of the consolidation policy and the financial effect of the consolidation decision when significant judgement has been applied
- the nature of an entity�s involvement with off-balance sheet entities and associated risks. The Board asked the staff to investigate how such entities should be defined, noting that concerns in this area relate mainly to the use of separate entities to manage securitisations and other structured financing arrangements and investments.
Disclosures about these off-balance sheet entities would depend on whether a financial instrument exposes the reporting entity to risks caused by the off-balance sheet entity. Such instruments could include guarantees and agreements to provide liquidity support.
- If such a financial instrument exists, IFRS 7 applies. The Board discussed possible enhancements to the disclosures either in IFRS 7, or the new consolidation standard, to deal with particular concerns about the risks arising in these circumstances.
- If no such financial instrument exists, IFRS 7 does not apply. The Board considered the possible need for additional disclosures about off-balance sheet entities sponsored by the reporting entity, and about cases in which the reporting entity had supported such entities with no contractual obligation to do so.
Disclosure: liquidity risk
The Board discussed possible changes to the liquidity risk disclosure requirements in IFRS 7 in the light of staff discussions with some interested parties.
The Board tentatively decided that those requirements should apply to financial liabilities that are settled in cash or another financial asset. Furthermore, the Board tentatively decided on the following approach for liquidity risk disclosures:
For derivative financial liabilities, an entity should disclose a quantitative maturity analysis based on how the entity manages the liquidity risk associated with such instruments. Additional disclosures would be required for particular types of derivatives.
For non-derivative financial liabilities (including hybrid financial liabilities), an entity should disclose a quantitative maturity analysis based on the instruments� earliest contractual maturities. If the entity does not manage liquidity risk for some items based on those contractual maturities, the entity should also disclose a quantitative maturity analysis based on how it manages the liquidity risk for those items.
Disclosure: fair value of financial instruments
The Board discussed the disclosures about the fair value of financial instruments. The Board tentatively decided to amend IFRS 7:
- to require entities to classify and disclose fair value measurements using a fair value hierarchy that is consistent with the hierarchy in IAS 39 Financial Instruments: Recognition and Measurement. This existing hierarchy contains the following three levels:
(a) Level 1: fair values measured using quoted prices in an active market for identical assets or liabilities
(b) Level 2: fair values measured using valuation techniques for which all inputs significant to the measurement are based on observable market data
(c) Level 3: fair values measured using valuation techniques for which any input significant to the measurement is not based on observable market data.
- to require entities to present quantitative disclosures about fair value measurements in a tabular format unless another format is more appropriate to the circumstances.
- for fair value measurement using significant unobservable inputs (Level 3), to require a reconciliation from period to period along with a narrative description about any transfers between levels of the hierarchy and the reasons for those transfers.
- for fair values that are disclosed but not recognised, to require an indication of the level of the hierarchy in which the instrument is classified.
The Board noted that paragraph 15 of IAS 34 Interim Financial Reporting states that an entity should disclose �At an interim date, an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period�. The Board tentatively decided not to propose amendments to IAS 34.
The Board will hold an additional public meeting on Thursday 2 October to continue its discussion of consolidation and enhanced disclosures about off balance sheet entities, liquidity risk and fair value measurement. The Board plans to publish exposure drafts on these subjects by the end of this year.
To learn more about the Board�s response to the credit crisis, please refer to the credit crisis page on the Website http://www.iasb.org/Financial+crisis/Response+to+the+credit+crisis.htm