IASB
Division Bank and Insurance
Austrian Federal Economic Chamber
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1045 Vienna
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Extension
Date
BSBV 2/2009
Dr. Rudorfer/Na
3137
21st of Sept., 2009
Fair value measurement ED/2009/5
The Bank and Insurance Division of the Austrian Federal Economic Chamber representing the
entire Austrian Bank and Insurance Industry would like to comment on the ED/2009/5 Fair value
measurement as follows:
We agree with the intention of the IASB, to give one definition for fair value which is applicable
for all IFRS´s in order to establish a consistent terminology. But as described in detail in our
answer to the several questions below we are not sure if this goal is achievable with the
measures of the proposed amendment.
On the one hand the changed definition of fair value seems to be reasonable as far as financial
instruments have to be taken into account; nevertheless we do not see a need or possibility to
use this fair value for the recognition and measurement of all financial instruments without
taking into account an entities intent and ability to transfer the financial instruments. We see
problems of using this definition for non-financial instruments, e.g. leasing, and for some types
of transactions, e.g. business combinations or construction contracts.
What is of crucial importance for the proper understanding of our answers below is the fact, that
we discussed the ED with the underlying assumption, that this is a definition of fair value and
our answers to the ED should not – under no circumstances - be understood as an approval for a
broader use of fair value in the recognition of assets or liabilities in the statement of financial
position or in the statement of comprehensive income.
Comments to the questions
Question 1
The exposure draft proposes defining fair value as ‘the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
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measurement date’ (an exit price) (see paragraph 1 of the draft IFRS and paragraphs BC15–BC18
of the Basis for Conclusions). This definition is relevant only when fair value is used in IFRSs. Is
this definition appropriate? Why or why not? If not, what would be a better definition and why?

The question is, what is meant by “fair value on its sale or use”: As far as this definitions
is used for financial instruments, which are more or less easy to be sold, it seems to be
applicable in the most cases – at least for assets. However we see the problem, that an
entity does not always have the will and ability to sell – at least some of its – assets or
repurchase its liabilities; e.g. we find that in a definition of “fair value” the possibility
for the entity to sell its assets or to repurchase its liabilities has to be taken into
account. This possibility can be disproved by other legal restraints, eg by legal or
regulatory terms, by contractual arrangements or by the need to hold them for the
funding of employee benefits.
Thus from our point of view this concept of fair value is a double-hypothetical value,
which contains a) the possibility of the entity to sell its assets or repurchase its liabilities
and b) sometimes the hypothetical calculation of a value in a hypothetical transaction
based on market parameters of other transactions and the intention of other market
participants.
The existence of a single fair value
Additionally we see other problems in the existence of a single fair value:
a) What is the unit of account, meaning the instrument to be valued? As we learned
in the ongoing financial crisis it may be possible to find a counterparty for a
(sometimes relatively small) part of identical financial instruments, e.g. shares,
but not for all of your position at risk. As mentioned correctly in para 49f,
multiplying the market price with the number of shares would not be give a true
and fair view on the fair value of positions at risk in the statement of financial
position as well as in the statement of comprehensive income. But we see a need,
in some circumstances, to split the measurement of financial instruments: If an
entity holds an easily tradeable unit, which is hold with the intention for trading,
it should be measured by multiplying the market price in an active market with
the number of shares; whereas additional shares, which the same entity holds for
other reasons, should be measured in accordance with para. 49f of the proposed
amendment.
b) Most transaction take place because the expectations of the two partners about
the fair value are different: The acquirer has higher expectations as the vendor,
sometimes because of future use within his entity. Why under these circumstances
a hypothetical future exit price should equal the fair value for the acquirer seems
not to be logical.
c) The value of using an asset may be higher than the one achievable in an orderly
sale transaction. The right of use an asset for a lessee may exceed the price
achievable in an orderly sale transaction. Same may be true for assets within
construction contracts as specified in IAS 11 => Bitte insbesondere um weitere
Beispiele aus IAS 19 (Krischanitz) bzw. aus der Industrie (Schröder, Sorger)
d) In a business transaction assets, liabilities and contingent liabilities are acquired
for the future use in the reporting unit. Using an exit price for the initial
measurement of all of these assets, regardless if they are acquired for realizing
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their value through future use or for selling them, does not seem to be give a true
and fair view of the reporting entity.
e) As far as equity interests, which are measured at cost under the existing IAS 39,
because their fair value is not reliably measurable, have to be taken into account,
an additional question arises: When the fair value has not been measured reliably
in the past as “arm´s length transaction”, it does not seem to be plausible, that it
is reliably measurable now as an exit price: From our point of view an impairment
test is not the same as a fair value measurement.
Most advantageous market / Market participants
As stated in para. 9ff the most advantageous market must not be the same for both the
vendor and the acquirer: Whereas the vendor wants to collect the highest net proceeds
the acquirer wants to minimize the acquisition costs, sometimes influenced by market
access. This is violating the assumption in para. 27, that the observed price for a debt
security hold as an asset also represents the fair value of the issuer´s liability.

We believe that the question should be answered from perspective what financial
instruments should be fair valued. Our opinion is that only financial assets and financial
liabilities which are managed on fair value basis (are held for trading including
derivatives or are otherwise internally managed and evaluated on fair value basis) should
be recognised at fair value.1 For such financial assets and liabilities exit price principle is
suitable. Exit price is also relevant for financial instruments which are designated at fair
value to remove accounting mismatches. If financial instruments designated at fair value
offset fair value changes of instruments managed on fair value basis it is suitable that fair
value is determined by equal principles (exit price) on both sides.

However exit price may not be suitable for financial instruments which are not managed
on fair value basis but the intention is to receive or pay the contractual cash flows
stream over the life of the instrument. Exit price may not express faithfully the cash flow
potential to the entity which the instrument has when it is not transferred before
maturity. Value in use2 notion might be more suitable.

IASB has dealt with the topic of differences between exit price and value in use. From
IASB point of view this is not an issue as reasoned in BC23, BC 24. IASB says that for
assets selling price equals expectations of cash flows arising from the use of assets by
market participant who use it in the same way. Similar reasoning is used for liabilities.
In our opinion the question is about whether bid-ask spread should influence fair value of
financial instruments which are not to be sold or transferred. Bid-ask spreads are
relevant if inputs from dealer markets where bid and ask prices are quoted are used for
determining the fair value. In less liquid markets bid-ask spreads can be wider and they
may have significant impact.3 Even when the ED does not require that bid prices are used
1
As regards the measurement model which we propose we refer to our comment letter which we sent to ED/2009/7.
2
When using the term value in use we do not specifically refer to the definition coming from IAS 36.
3
Paragraph B5(g) in the ED says that wide bid-ask spread or significant increase may be an evidence of not active
markets when quoted prices may not be indicative of fair values. In our comment we do not refer to such situation but to
less liquid markets with wider spreads which are still considered to be active. However even if markets are not active bid
or ask prices may be used as market inputs to valuation techniques and therefore the issue of bid-ask spread remains
relevant in any type of market.
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for assets it requires that the price within bid-ask spread that is the most representative
of fair value in the circumstances shall be used. The requirement for exit price implicitly
requires using the bid price.
In the footnote to the paragraph BC 28 IASB admits that bid-ask spread exists but it is
part of transaction costs which are not included in fair value measurement. Financial
theory indeed considers bid-ask spread as part of transaction cost in addition to other
costs paid for transacting the instruments like fees and commissions. We have to ask,
however, if bid-ask spread is a real transaction cost from accounting point of view.
We focus on the distinction between transaction costs as defined in IAS 39.9 and
described in AG13 (transaction costs in a narrow sense) and transaction costs arising from
bid-ask spread. We do our analysis by using the example of financial assets measured at
fair value through profit or loss as it seems that fair value through OCI category (as
currently used for AFS financial assets) will not survive. Both types of transaction costs
behave in the same way as regards Day 1 profit or loss. Assume that financial asset was
purchased in a dealer market when the quotes were bid 99,5 and ask 100,5 for the ask
price and additional transaction costs incurred were 2. Cost of the purchase 102,5 will be
revalued at the end of the day. If prices remain unchanged and the bid price is used it
will result in the loss 3 (=99,5 – 102,5) which includes both transaction costs in a narrow
sense and bid-ask spread.
From such point of view bid-ask spread is part of transaction costs in the broad sense.
However equal accounting treatment is caused by definition of fair value itself which
uses the exit price notion. If the definition of fair value took into account the way the
instrument will be used in the business of the entity the conclusion would be different.
Transaction costs in a narrow sense are typical both for instruments which are managed
on fair value basis and for those which are unlikely to be transferred before maturity.
The reason is that when acquiring financial instrument they are incurred for all types of
financial instruments. However bid-ask spread transaction costs are incurred only then
the instrument will be transferred subsequently. Therefore they are typical only for
financial instruments managed on fair value basis. Unless transfer occurs the entity incurs
the transaction costs in the amount 2.
So far we have analysed bid-ask spread from the point of view of the transaction costs at
initial recognition. Paragraph 16 of the ED analyses position of transaction costs from the
perspective that financial instruments are sold or transferred subsequently. It says that
transaction costs are the incremental direct costs to sell the asset or transfer the liability
and fair value is not adjusted by them. It continues by saying that transaction costs are
not characteristics of asset or liability, rather they are specific to the transaction. We
believe that this paragraph gives direct arguments to support our opinion. Bid-ask spread
cost are incurred only when the sale or transfer transaction occurs. Therefore they are
not relevant for instruments not managed on fair value basis which are unlikely to be
transacted.

To conclude the answer we think that bid-ask spread matters when determining the fair
value of financial instrument. Therefore the suitability of the exit price definition
depends on what is the scope of financial instruments measurement at fair value. If these
are only financial assets and financial liabilities managed on fair value basis then such
definition is appropriate. However if also financial instruments which are held to produce
contractual cash flow stream until maturity should be fair valued then some kind of value
in use for financial assets and settlement notion for financial liabilities should be used.
(As regards financial liabilities we refer to our answer to the question 7(a)). Such current
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value measures should not include factors specific to the entity but should be solely
based on market conditions.

The starting point when deciding on the relevance of the fair value measurement
methodology should be the business model as the relevance will depend on what is
intended to be measured.
Exit price is only conceptually sound if there is a perfect market. This means among other
things that many participants must be on the market, information must be easily
available and market participants should act rationally. However, in practise market
conditions are often imperfect. Under imperfect market conditions it may be more
rational for the holder of a financial asset to hold the asset and collect the cash proceeds
of the asset than to consider selling the asset. We see the situation, that an entity does
not always have the will and ability to sell assets or repurchase its liabilities. This straight
forward economic observation is reflected by level three of the fair value hierarchy.
Entity specific cash flow expectations from holding the asset are much more relevant and
useful for users than exit prices under such circumstances. For these reasons it is not
accurate to define fair value as an exit price. Most useful information would be provided
if entity specific cash flows are taken into account.
Transaction costs are not characteristics of the asset or liability and are an attribute of
the transaction. While these are excluded from the fair value measurement,
transportation costs are to be included in price where measuring at fair value. However
the difference in definition between transaction costs and transportation costs is unclear
in relation to financial instruments. For financial instruments there might be costs similar
to transportation costs that are highly relevant to include when measuring the fair value
using a “most advantage market methodology.
Also legal constraints in selling an asset or repurchasing a liability have to be taken into
account by measuring liabilities.
Therefore the value should always be measured depending on the use in the entity.
Question 2
In three contexts, IFRSs use the term ‘fair value’ in a way that does not reflect the Board’s
intended measurement objective in those contexts:
(a) In two of those contexts, the exposure draft proposes to replace the term ‘fair value’ (the
measurement of share-based payment transactions in IFRS 2 Share-based Payment and
reacquired rights in IFRS 3 Business Combinations) (see paragraph BC29 of the Basis for
Conclusions).
(b) The third context is the requirement in paragraph 49 of IAS 39 Financial Instruments:
Recognition and Measurement that the fair value of a financial liability with a demand feature
is not less than the amount payable on demand, discounted from the first date that the amount
could be required to be paid (see paragraph 2 of the draft IFRS and paragraph BC29 of the Basis
for Conclusions). The exposure draft proposes not to replace that use of the term ‘fair value’,
but instead proposes to exclude that requirement from the scope of the IFRS.
Is the proposed approach to these three issues appropriate? Why or why not? Should the Board
consider similar approaches in any other contexts? If so, in which context and why?

We agree with replacement of the term fair value in the case of IFRS 2 and IFRS 3.
Similarly the term fair value should not be used for financial liabilities with demand
feature. Fair value label should not be used for something which is not fair value.
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
As far as para. 49 of IAS 39 Financial Instruments: Recognition and Measurement is under
discussion we are of the opinion, that this rule is more a rule for the recognition of these
liabilities than a rule for the measurement of the fair value of these liabilities. a. As we
mentioned in our general remarks we do not see this ED as a draft for changing the
recognition rules of IFRS but as a centralization of – some different – fair value definitions
within several IFRSs. Thus the topic measurement of liabilities with a demand feature
should not be handled by this ED. The measurement topic regulated in IAS 39.49 should
be taken into account by proposed new hedge accounting rules in the upcoming ED
promised for 2010. If this rule, however, is seen as a fair value measurement rule, it
would implement the idea of value in use for financial instruments in the Ed, what we
would find a preferable solution from our point of view.
Question 3
The exposure draft proposes that a fair value measurement assumes that the transaction to sell
the asset or transfer the liability takes place in the most advantageous market to which the
entity has access (see paragraphs 8–12 of the draft IFRS and paragraphs BC37–BC41 of the Basis
for Conclusions).
Is this approach appropriate? Why or why not?

We agree with the notion of the most advantageous market. However we think that one
issue has to be clarified. Paragraph 9 of the ED says that the most advantageous market
shall be considered from the perspective of the reporting entity. Was the intention of
IASB to say that reporting entity has only one most advantageous market for particular
instrument? Probably no because the same paragraph says that different entities (and
businesses within those entities) with different activities enter into transactions on
different markets and the most advantageous market might be different. Indeed, the
most advantageous markets may be different for subsidiaries or businesses within the
same reporting entity. Therefore we think that the most advantageous markets should be
considered from the perspective of businesses of of the entity if relevant. Otherwise
artificial corrections of fair values may be needed and fair value may not be in line with
the real most advantageous market notion.

There might be more than one market for the same instrument in a global entity. We see
practical issues, especially with physical assets.

We see a lot of practical issues, especially with physical asset. Depending on the physical
location of assets within a reporting group different advantageous markets with different
prices may exist und are to be taken into account.
Question 4
The exposure draft proposes that an entity should determine fair value using the assumptions
that market participants would use in pricing the asset or liability (see paragraphs 13 and 14 of
the draft IFRS and paragraphs BC42–BC45 of the Basis for Conclusions).
Is the description of market participants adequately described in the context of the definition?
Why or why not?
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
Yes, we think that market participant are adequately described in the ED. We agree that
the proposed definition expresses the same notion as existing definition which uses the
characteristics “knowledgeable, willing parties in an arm`s length transaction” and
moreover brings more clarity.
However the notion of market participants is typical for definitions of fair value which
are based on exit price.

The market imperfections are underestimated in the ED. We believe that entity specific
views should be seen superior in case of illiquid markets, where it would not be useful to
consider attributes which market participants would consider but which are not relevant
for the entity. It may be often difficult to estimate the assumptions of other market
participants when pricing an asset or liability. Therefore, an entity can only be obliged to
use its own expectations consistently in its financial statements and to disclose them.

As already stated in our answer to Q1 we see problems in measuring of fair value by
“using the assumptions that market participants would use in pricing the asset or the
liability”. E.g. in times with not very liquid markets the measurement of “blocks of
shares” may lead to a big variety of possible outcomes, depending on which basic future
assumptions about future interest rates or DCF is used in the model. Thus, from our point
of view, an entity can only be obliged to use its own expectations consistently in its
financial statements and to disclose them.
Question 5
The exposure draft proposes that:
(a) the fair value of an asset should consider a market participant’s ability to generate
economic benefit by using the asset or by selling it to another market participant who will
use the asset in its highest and best use (see paragraphs 17–19 of the draft IFRS and
paragraph BC60 of the Basis for Conclusions).
(b) the highest and best use of an asset establishes the valuation premise, which may be either
‘in use’ or ‘in exchange’ (see paragraphs 22 and 23 of the draft IFRS and paragraphs BC56
and BC57 of the Basis for Conclusions).
(c) the notions of highest and best use and valuation premise are not used for financial assets
and are not relevant for liabilities (see paragraph 24 of the draft IFRS and paragraphs BC51
and BC52 of the Basis for Conclusions).
Are these proposals appropriate? Why or why not?
a) As far as lit a) have to be taken into account please refer to our answer in to Q 1,
first paragraph. From our point of view legal constraints in selling an asset or
repurchasing a liability has to be taken into account by measuring it in order to avoid
misleading information for the user of the statements.
b) As far as the highest and best use for non financial assets has to be taken into account
we see a heavenly burden for the proper preparation of financial statements (Ich
ersuche die Herren Schröder und Sorger um Beispiele aus der Industrie!!)
c) According the relevance for liabilities please look to our answer to Q1.
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Question 6
When an entity uses an asset together with other assets in a way that differs from the highest
and best use of the asset, the exposure draft proposes that the entity should separate the fair
value of the asset group into two components: (a) the value of the assets assuming their
current use and (b) the amount by which that value differs from the fair value of the assets (ie
their incremental value). The entity should recognise the incremental value together with the
asset to which it relates (see paragraphs 20 and 21 of the draft IFRS and paragraphs BC54 and
BC55 of the Basis for Conclusions).
Is the proposed guidance sufficient and appropriate? If not, why?
1. Regarding the fair value please see our answer to Q 5 lit.
2. We see a heavily burden in the estimation of the “highest or best use”. Even the example in
para. 20 could be misleading, as the demolition of the factory could lead to heavy losses within
the reporting group, if the output of this factory is crucial for the surviving of the group as a
whole. Thus it has to be questioned would supposably lead to different solutions, at which level
– strategic, operational on group level, operational on single entity level or an cash generating
unit level the test for a “highest or best use” has to be executed.
3. As already mentioned in our general remarks we do not see this ED as a expansion of fair
value measurement for recognition purposes in financial statement. Thus we understand para.
21 as a bug when it states, the “an entity shall recognise the incremental value ...”. We are
against any expansion of the use of fair values in the recognition of assets or liabilities in
financial statements without previous discussion.
Question 7
The exposure draft proposes that:
(a) a fair value measurement assumes that the liability is transferred to a market participant at
the measurement date (see paragraph 25 of the draft IFRS and paragraphs BC67 and BC68 of the
Basis for Conclusions).
(b) if there is an active market for transactions between parties who hold a financial
instrument as an asset, the observed price in that market represents the fair value of the
issuer’s liability. An entity adjusts the observed price for the asset for features that are
present in the asset but not present in the liability or vice versa (see paragraph 27 of the draft
IFRS and paragraph BC72 of the Basis for Conclusions).
Are these proposals appropriate? Why or why not? Are you aware of any circumstances in which
the fair value of a liability held by one party is not represented by the fair value of the
financial instrument held as an asset by another party?
a)

As written in the answer to the question 1 we consider the transfer (i.e. exit price)
notion relevant for financial liabilities managed at fair value basis or which are used to
remove accounting mismatches resulting from financial instruments measured on exit
price basis.
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For other financial liabilities the settlement notion better reflects their fair value.
Settlement price in our opinion, unlike exit price, does dot reflect the bid-ask spread
which we consider relevant. Our reasoning why we consider bid-ask spread relevant is
given in the answer to the question 1.

It is only true for trading liabilities. In other cases, the inability of the reporting entity to
repurchase a liability by legal or supervisory restrictions has to be taken into account.
The fact that liabilities are rarely transferred and often are just not transferable in
practise at all demonstrates that the proposed fair value definition does not work for
liabilities as a general principle.

As discussed several times above, from our point of view the inability of the reporting
entity to repurchase a liability by legal or supervisory restrictions has to be taken into
account; as well the same rules as stated in IAS 39.49 – implementing the value in use may be practical for all financial instruments.

We agree with this principle for those financial liabilities for which the exit price is
relevant measure of fair value.

Especially in times of illiquid markets the bis-ask-spread may be very big, thus an
allowance of any price between these two borders may lead to different prices between
holder of an asset and issuer of the liability; besides that the most advantageous market
for buyer and seller need not to be the same, thus leading to differences, too.
Additionally different prices for the same classes of assets held – e.g. a small trading
postion and a big participation position – may occur.

Market participants that might hold an entity’s liability as an asset view on its fair value
may be different from the market participant who will be obliged to settle the liability
due to the non-performance risk. Fair value of the liabilities after initial recognition is
only appropriate when a liability can be extinguish through buying the corresponding
asset or settling the liability at the market price of the corresponding assets.

Please refer to our answer to Q4.
b)
c)
Question 8
The exposure draft proposes that:
(a) the fair value of a liability reflects non-performance risk, ie the risk that an entity will not
fulfil the obligation (see paragraphs 29 and 30 of the draft IFRS and paragraphs BC73 and BC74
of the Basis for Conclusions).
(b) the fair value of a liability is not affected by a restriction on an entity’s ability to transfer
the liability (see paragraph 31 of the draft IFRS and paragraph BC75 of the Basis for
Conclusions).
Are these proposals appropriate? Why or why not?
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a)

We think that financial liabilities which are not held for trading and are not derivatives
should not subsequently reflect credit spread changes in their measurement. Credit
spread should be only included in the initial measurement because it is inherent in the
transaction price. Subsequent credit spread fair value movements would be artificial
because they are very unlikely to be realised for financial liabilities which are kept until
maturity. Profit or loss information cannot be distorted by artificial amounts.

As a theoretical assumption, this might be correct. In practise, a change in credit quality
does not change the obligation of the reporting entity and the amount that is expected to
meet the obligation;

We want to make clear once again that this is true only the fair value, not for the
recognition of own liabilities in the issuing entities financial statement;

We agree that fair value of liability should not be affected by a restriction on an entity’s
ability to transfer the liability

A liability may be affected by a restriction on an entity’s ability to transfer the liability.
Therefore assuming the contrary would produce misleading information.

As mentioned in our answers several times we believe this not to be correct: where.g.
the fair value of an asset – which may be tradeable – can be different to the fair value of
the same financial instrument as a liability in the issuing reporting entities financial
statements, when the repurchase is restricted by legal or supervisory restraints.
b)
Question 9
The exposure draft lists four cases in which the fair value of an asset or liability at initial
recognition might differ from the transaction price. An entity would recognise any resulting
gain or loss unless the relevant IFRS for the asset or liability requires otherwise. For example,
as already required by IAS 39, on initial recognition of a financial instrument, an entity would
recognise the difference between the transaction price and the fair value as a gain or loss only
if that fair value is evidenced by observable market prices or, when using a valuation
technique, solely by observable market data (see paragraphs 36 and 37 of the draft IFRS,
paragraphs D27 and D32 of Appendix D and paragraphs BC76–BC79 of the Basis for Conclusions).
Is this proposal appropriate? In which situation(s) would it not be appropriate and why?
We agree that restrictions on showing immediate gains/losses on initial recognition should be
regulated by relevant standards and not by Fair value measurement standard.
However, it may be useful for the IASB to clarify the modalities for taking into account the Day
One Profit or Loss.
Question 10
The exposure draft proposes guidance on valuation techniques, including specific guidance on
markets that are no longer active (see paragraphs 38–55 of the draft IFRS, paragraphs B5–B18 of
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Appendix B, paragraphs BC80–BC97 of the Basis for Conclusions and paragraphs IE10–IE21 and
IE28–IE38 of the draft illustrative examples).
Is this proposed guidance appropriate and sufficient? Why or why not?
Yes, we agree with the proposed guidance. We only ask for further clarification of what binding
offer is.
Question 11
The exposure draft proposes disclosure requirements to enable users of financial statements to
assess the methods and inputs used to develop fair value measurements and, for fair value
measurements using significant unobservable inputs (Level 3), the effect of the measurements
on profit or loss or other comprehensive income for the period (see paragraphs 56–61 of the
draft IFRS and paragraphs BC98–BC106 of the Basis for Conclusions).
Are these proposals appropriate? Why or why not?

In the first part of the answer we concentrate on explaining the disclosure requirements
which we consider redundant and in the second part on inputs to fair value hierarchy
which we think might be reassessed.
1) Redundant disclosure requirements
Annual reporting
We think fair value hierarchy disclosures as required by the ED go far beyond what is
necessary to be analysed by the users. Fulfilling such requirement by the preparers would
be extremely burdensome.
First of all we think that fair value hierarchy disclosures should relate only to assets and
liabilities which are recognised at fair value in the statement of financial position. The ED
is not clear whether paragraph 57 introducing all detailed fair value hierarchy (FVH)
requirements concerns only fair value measurements which are recognised in the
statement of financial position or also those whose fair value is only disclosed in the
notes. Paragraph 58 specifies that for assets and liabilities whose fair value is only
disclosed only the levels of FVH are disclosed. We put the same question in another way.
Do all the detailed FVH disclosures in paragraph 57 relate to assets and liabilities whose
fair value is only disclosed or only paragraph 58 is relevant for them? If this was the
intention of IASB, and we hope so, then paragraph 57 should include wording like we
currently have in IFRS 7.27B: “For fair value measurements recognised in the statement
of financial position an entity shall disclose for each class of assets and liabilities…”.
We do not agree with FVH disclosures for assets and liabilities whose fair value is only
disclosed in the notes. Possibility to disclose FVH for all financial instruments was
discussed in connection with previous IFRS 7 amendment. The conclusion was (IFRS
7.BC39G) that after reviewing comments received IASB decided not to require disclosure
of FVH for financial instruments that are not measured at fair value in the statement of
financial position. The ED does not discuss what was the reason why IASB changed its
opinion. Such disclosures bring additional burden for preparers and we doubt that they
bring significant information.
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Interim reporting
The ED introduces innumerous requirements for interim reporting
- fair value disclosures for all assets and liabilities
- the levels of FVH for all assets and liabilities – not only for those which are
measured at fair value but also those whose fair value is only disclosed
- other disclosures concerning FVH (transfers between Level 1 and 2, methods and
inputs used, detailed disclosures concerning Level 3)
- for liabilities measured at fair value disclosures concerning changes attributable
to non-performance risk
- disclosures concerning deferred day 1 gains or losses of financial instruments
- disclosures concerning cost measured equity instruments
Our opinion is that interim reporting disclosure requirements should be driven general IAS
34 principle that only changes which are significant compared to the most recent annual
financial statements are presented. The ED proposes that new disclosure requirements in
IAS 34 are added under the paragraph 16 which requires that only material information is
disclosed. This paragraph does not refer to changes which are significant compared to the
most recent annual statements. We understand that the new disclosure requirements will
always be material because they cover almost the whole balance sheet of banks.
We are convinced that providing all of the disclosure requirements which we list above
cannot be substantiated on cost/benefit principle. Their preparation would be extremely
burdensome. What may be required for interim reporting is the table showing the levels
of FVH for those assets and liabilities which are measured at fair value in the statement
of financial position. Even such information would present significant additional burden
and therefore we are strictly against any additional information.
2) Inputs to fair value hierarchy
Level 1 is solely reserved for financial instruments which have a quoted price in an active
market. This definition is suitable for most cash instruments but excludes highly liquid
derivative instruments where price quotations do not make sense (for example interest
rate swaps, where for example the price at inception is zero by definition) or where it is
market convention (e.g. cap/floor market, swaption market, fx option market) not to
quote prices but quantities (e.g. volatilities) which enable market participants to infer
the prices via a standard model (in almost all cases with Black and Scholes).
Generally OTC derivatives are not traded in the secondary market because positions, if
needed, are closed by entering into offsetting derivatives. Therefore valuation is based
on the quotes (of rates, volatilities) reflecting the trades in the primary market. Based on
such quotes valuation curves are constructed. It would be inappropriate to exclude such
highly liquid instruments from Level 1 only because of their characteristics which do not
require existence of secondary market.
From our point of view this Level 1 definition is too narrow and should also allow for the
inclusion of highly liquid instruments which are not necessarily quoted in price terms but
where one can with determine the price without any ambiguity from the quoted
parameters. In the ED interest rate and implied volatilities curves are considered as Level
2 inputs. Such approach disqualifies many highly liquid instruments with minimum
uncertainty in fair value determination from Level 1 category. Their fair values based on
the curves using such quotes are often more transparent than the direct quotes for Level
1 instruments may be.
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If such highly liquid instruments are automatically excluded from Level 1 then Level 2
category will be a mixture of instruments with very diverse quality of inputs. Plain vanilla
interest rate swaps may be mixed with complex options which use multiple observable
inputs such as 1) extrapolated implied volatilities corroborated by observable data, 2)
counterparty credit spread derived from credit default swaps or bonds issued and 3)
interest yield curves. Indeed when we look at fair value hierarchy disclosures which most
of the banks have presented so far on voluntary basis, Level 2 comprises 80-95% of all fair
value measurements and it mixes plain vanilla interest rate swaps with illiquid
instruments like ABS.
Therefore we propose that if the inputs which are used for valuation technique are the
curves resulting from interest rate or volatilities quotes they present Level 1 input.
Certain qualitative characteristics should be required from such inputs – market behind
them should be highly liquid, quotes should have sufficiently narrow time intervals so
that interpolations to the points between quotes are subject to insignificant adjustments.
Such proposal would be in line with existing paragraph IAS 39.AG73 which admits that for
some instruments rates rather than prices are quoted. Such rate quotes should be treated
as equal to direct price quotes.
The concept of observable inputs which is decisive for Level 2 and Level 3 categorisation
creates unlevel playing field for retail and investment banks. Information on transactions
done in OTC market is not publicly available. Therefore data about current transactions
and prices will be available only for those banks which transact with the securities.
Generally these are the investment banks.

The IASB should develop a disclosure framework to review and consolidate the existing
disclosure requirements. There are a number of new disclosures that are being
recommended, which need to be reviewed in light of all of the other already burdensome
disclosure requirements. As far as non financial assets and liabilities have to be taken
into account we fear that the additional requested information is a heavy burden for the
reporting entity and leads to an increasing flood of information which would conflict both
clarity and decision usefulness of general financial reports. There is also an obvious risk
that the disclosures of level 3 items may be become unbalanced.
Question 12
The exposure draft differs from Statement of Financial Accounting Standards No. 157 Fair Value
Measurements (SFAS 157) in some respects (see paragraph BC110 of the Basis for Conclusions).
The Board believes that these differences result in improvements over SFAS 157.
Do you agree that the approach that the exposure draft proposes for those issues is more
appropriate than the approach in SFAS 157? Why or why not? Are there other differences that
have not been identified and could result in significant differences in practice?
No, we believe that in-use valuation premise should be allowed to apply to financial instruments
as it is in SFAS 157. Also the disclosure requirements in standard are more burdensome than
those required by SFAS 157.
Question 13
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Do you have any other comments on the proposals in the exposure draft?

As stated already in our general remarks as well as in our answers to several Questions
please be aware of the fact that this ED only shall bring some clearance for fair value
definition but shall not to expand the application of fair value in the recognition of assets
and liabilities in financial statements.

No.
Yours sincerely,
Dr. Herbert Pichler
Managing Director
Division Bank & Insurance
Austrian Federal Economic Chamber
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