Measuring the fair value of financial instruments within a portfolio
The boards tentatively decided to permit an exception to fair value measurement principles by permitting entities to use mid prices as a basis for establishing fair values for offsetting market risk positions (eg interest rate risk, currency risk or other price risk) and to apply the price within the bid-ask spread that is most representative of fair value to the net open risk position. To use this exception, an entity must:
- manage its financial instruments on the basis of the net open risk positions in accordance with the entity's documented risk management strategy; and
- manage the net open risk position in a consistent manner from period to period.
- the market risks that are being offset must be substantially the same;
- the financial instruments must share common characteristics; and
- the financial instruments must be measured at fair value on a recurring basis.
The boards also tentatively decided to clarify that entities are permitted to consider offsetting counterparty credit risk positions when measuring the fair value of financial instruments when there is a legally enforceable right of offset with the counterparty in the event of default (eg a master netting agreement).