CREDIT SUISSE GROUP
Paradeplatz 8
PO Box 1
8070 Zurich
Switzerland
28 September 2009
Technical Director
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH,
United Kingdom
Sent via email to: commentletters@iasb.org
Credit Suisse Group (“CSG”) welcomes the opportunity to comment on the Exposure
Draft ED/2009/5 Fair Value Measurement (“ED”) issued by the International
Accounting Standards Board (“IASB”). CSG’s consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the United
States (“US GAAP”). However, a number of our subsidiaries are required to apply
International Financial Reporting Standards (“IFRS”) to their stand-alone financial
statements.
We fully support the IASB’s efforts to establish a single source of guidance for all fair
value measurements that will increase consistency and comparability for financial and
nonfinancial assets and liabilities within IFRS. We also fully support the IASB’s
efforts to converge IFRS with the currently effective Topic 820 of the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“the
Codification”), originally issued as Statement of Financial Accounting Standards No.
157, Fair Value Measurements, (“Topic 820”).. We describe in more detail in the
attached appendix our specific concerns with regard to the questions posed within the
ED and the overall divergence from Topic 820.
If you have any questions or would like any additional information on the comments
we have provided herein, please do not hesitate to contact Todd Runyan in Zurich on
+41 44 334 8063 or Eric Smith in New York on +1 212 538-5984.
Sincerely,
Rudolf Bless
Managing Director
Chief Accounting Officer
Olivia Whitaker
Asst. Vice-President
Accounting Policy and Assurance Group
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Paradeplatz 8
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Attachments:
Appendix – Responses to specific questions raised by the IASB
We set out below our comments relating to specific questions outlined in the
invitation to comment.
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 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?
Although CSG agrees with the definition of fair value as an exit price as it is
consistent with Topic 820, we believe the IASB should also consider a “settlement”
notion in addition to “transfer” for the definition of fair value for liabilities.
Under the ED, a fair value measurement assumes the liability is transferred to a
market participant at the measurement date, that the liability continues, and the market
participant would ultimately be required to fulfil the obligation. In many instances, a
transfer would normally not occur in the marketplace and therefore a transfer is a
hypothetical transaction in a hypothetical market lacking observable inputs. Most
entities would extinguish the liability by settling the obligation directly with the
counterparty for which observable inputs could be used in valuation. In the final
issuance of the Fair Value Measurement standard, the FASB removed the concept of a
settlement notion since it was deemed to infer a settlement at contractual / par value
as opposed to the current fair value or exit price. Liabilities in most instances will be
settled with the holder of the debt instrument at a value other than contractual / par
value to take into consideration changes in credit spreads, interest rates, foreign
exchange rates, etc., which should approximate the fair value consistent with the exit
price concept of the standard. Therefore, we believe that the final standard should not
limit an exit price to only transfers, but should also include a settlement notion in the
reporting entity’s reference market.
We have provided additional comment on this topic in our response to Question 7.
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:
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(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 the proposed approach to amend paragraph 49 of IAS 39 as outlined in
the ED.
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 expressed in the ED that the fair value measurement should
assume an exit in the most advantageous market and that this is consistent with the
current guidance in IAS 39.
Additionally, we believe that this guidance is largely consistent with Topic 820
requirements to assume that a transfer occurs in the principal market to which the
reporting entity has access, given the fact that the principal market will often be the
most advantageous market for a financial instrument. However, there could be a
divergence from US GAAP in the measurement of some Level 1 instruments due to
the Securities and Exchange Commission’s Accounting Series Release No. 118 (ASR
118). ASR 118 provides general valuation requirements for registered investment
companies specifically requiring fair value measurements assuming an exit on the
exchange on which the security is principally traded. Although we believe this
special industry guidance would be immaterial in most instances, this could
potentially result in a divergence from US GAAP.
Question 4
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Switzerland
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?
CSG supports the description of market participants as defined in the ED. We believe
that this definition is largely consistent with Topic 820.
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?
CSG supports the description of highest and best use as defined in the ED. We
believe that this definition is largely consistent with Topic 820.
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?
If the highest and best use differs from current use, the ED proposes additional
disclosures for both valuation methodologies. Although we do not object to the
proposed disclosure, we do not feel this dual reporting should be considered
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mandatory, but rather deemed optional if the reporting entity believes that the highest
and best use valuation is misleading to the readers of their financial statements. In
addition, there are no similar disclosure requirements under Topic 820, nor any
similar disclosure requirements being discussed as part of the FASB’s Fair Value
Disclosures Project. As such, we request that the IASB work jointly with the FASB
to ensure consistency in proposed disclosure requirements for this ED.
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).
(c) if there is no corresponding asset for a liability (eg for a decommissioning liability
assumed in a business combination), an entity estimates the price that market
participants would demand to assume the liability using present value techniques or
other valuation techniques. One of the main inputs to those techniques is an estimate
of the cash flows that the entity would incur in fulfilling the obligation, adjusted for
any differences between those cash flows and the cash flows that other market
participants would incur (see paragraph 28 of the draft IFRS).
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?
We believe that the most reliable measurement of fair value for liabilities traded in
orderly transactions in active or inactive markets should be based on quoted prices of
an identical or similar liability or when that liability is traded like an asset. This is
consistent with the FASB’s most recent guidance in Accounting Standards Update
2009-05, Amending Subtopic 820-10, Fair Value Measurement and Disclosures, to
Provide Guidance on the Fair Value Measurement of Liabilities (“ASU 2009-05”).
However, in most circumstances outside of trading liabilities, a quoted price for an
identical liability or asset may not be not available, particularly for debt issued by the
reporting entity. Secondary market trades are usually not readily available on a timely
basis due to the infrequency of transactions. Although historical quotes can be
interpolated from recent self-extinguishments or third party sale transactions, the
identified reference market for the reporting entity’s own debt would rarely be
considered active, consistent, or reflective of the transfer of the entire liability. We
therefore believe that a reporting entity should value the liability using techniques that
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CREDIT SUISSE GROUP
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maximize the use of relevant observable inputs and minimize the use of unobservable
inputs.
As such, ASU 2009-05 also allows a liability to be valued using an income or market
approach, such as a technique that is based on the amount the reporting entity would
receive if the reporting entity was to transfer or enter into the identical liability at the
measurement date. We believe that this is consistent with the principles of Topic 820,
that is, the value reflects where a new investor would price the debt considering the
overall size and remaining term of the instrument. As a result, we believe that this
additional guidance on financial liabilities should be included in the ED as it will
benefit both preparers and users of financial statements to bring consistency to
valuation techniques, resulting in more comparable financial information.
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?
We believe that a liability measured at fair value should always incorporate the
entity’s nonperformance risk inherent in the liability at inception and in all
subsequent reporting periods.
The fair value of a liability should reflect
nonperformance risk on the basis that a market participant would also presume the
discount if purchased as an asset or assumed in a hypothetical transfer of the liability.
The inclusion of nonperformance risk is evident when comparing uncollateralized
versus collateralized instruments assuming all other terms of the instruments are
identical. As such, we believe that a measurement that does not consider the effect of
an entity’s nonperformance risk is not a fair value measurement, i.e., an exit price of
an uncollateralized liability should certainly differ from an exit price of a
collateralized liability.
In addition, we agree with the arguments for incorporating nonperformance risk in the
fair value measurement of a liability to alleviate an accounting mismatch between
asset and liability measurements for the same financial instrument. If an entity’s
assets are measured at fair value, then changes in credit spreads on those assets will
affect their fair value and either the resulting profit or loss or other comprehensive
income. If the measurement of the same financial instrument as a liability does not
incorporate changes in credit spreads, then there is an accounting mismatch and the
amounts of profit or loss or other comprehensive income attributable to that financial
instrument will be distorted.
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CREDIT SUISSE GROUP
Paradeplatz 8
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We acknowledge the counter-intuitive results this brings to an entity’s income
statement, and that users of the financial statements could be misled by those results.
However, this is mitigated by the specific disclosure requirements for quantification
of nonperformance risk, on both a year-to-date and inception-to-date basis, currently
required under ¶10 of IFRS 7 for financial liabilities designated at fair value through
profit and loss.
Since regulators of financial institutions currently exclude the impact of an entity’s
own debt from regulatory capital, we do not believe this should factor into the IASB’s
decision to include nonperformance risk for accounting purposes. Regulatory
oversight should be separately addressed by the various regulators as they consider
the specific situation of an entity. If there is still a concern over the accounting
impact of nonperformance risk within a fair value measurement, it should be
addressed within the IASB’s current exposure draft on financial instrument
classification and measurement.
Additionally, we agree with the proposal that the fair value of the liability would not
be affected by a restriction on an entity’s ability to transfer the liability if the
restriction is either implicitly or explicitly included in the other inputs to the fair value
measurement.
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?
The proposed ED requires financial instruments whose fair value is not evidenced by
observable market data be reflected in the balance sheet at an exit price. However, any
difference between the exit price and transaction price at initial recognition must be
deferred. This is inconsistent with the principles in Topic 820.
In requiring a deferral of any difference, we believe the IASB is implying that a fair
value measurement that incorporates unobservable data is not valid. In other words,
we believe that the guidance provided for the inclusion of unobservable input in fair
value measurement provides for enough rigor and focus on the unobservable input to
support the resulting fair value measurement as valid. In addition, the deferral of any
day-one gain or loss is operationally burdensome and there is no clear guidance as to
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CREDIT SUISSE GROUP
Paradeplatz 8
PO Box 1
8070 Zurich
Switzerland
the subsequent recognition of the deferred amounts through future profit and loss, i.e.,
amortization of the deferred gain or loss over the life of the instrument or as a lump
sum recognition when and if the inputs to the valuation become observable. As such,
we support the recognition of any difference between the exit price and the
transaction price at initial recognition as there are varying reasons why these two
values may be different, e.g., the market in which the entity transacted is not the most
advantageous market for that product, transaction was a forced transaction, or the exit
price is marked at a point in the bid-offer range other than where the transaction
occurred. Additionally, we believe that any potential concerns regarding the use of
unobservable market data in the valuation of a financial instrument are sufficiently
addressed in current as well as proposed disclosure requirements for instruments that
fall within Level 3 of the Fair Value Hierarchy.
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 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?
CSG supports the description valuation techniques as described in the ED.
believe that the guidance is largely consistent with Topic 820.
We
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?
The ED proposes many new disclosures for fair value measurement to be required on
a quarterly basis. While many of the proposed disclosures in the ED are consistent
with the FASB’s current and proposed disclosures included in their Fair Value
Disclosures project, there are some that are not under consideration by the FASB. As
such, we strongly urge the IASB to work jointly with the FASB to ensure converged
disclosure requirements.
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
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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?
CSG does not agree that all departures from Topic 820 result in an improved
accounting outcome. Specifically, we do not agree that divergence in the following
areas is an improvement from Topic 820:




BC110 (a) Scope – Unlike SFAS 157, the proposed IFRS would apply to
leasing arrangements. However, it would not apply to the measurement of
reacquired rights in a business combination or financial liabilities with a
demand feature (Paragraph BC29) CS Comment: As the FASB and IASB are
currently working on a joint standard for Leases, we would request that any
guidance issued requiring a fair value measurement for leases is issued in
conjunction with the fair value measurement guidance as to avoid multiple
implementations on the same instruments.
BC110(b) Reference market – Unlike SFAS 157, which assumes the
transaction to sell the asset or transfer the liability takes place in the principal
market (or, in the absence of a principal market, the most advantageous
market), the exposure draft proposes that an entity should assume that the
transaction takes place in the most advantageous market to which the entity
has access. (Paragraphs BC37-BC41) CS Comment: We agree with the
guidance as proposed in regards to fair value measurements that incorporate
unobservable market data. However, we believe there may be a divergence
from US GAAP for a Level 1 instrument as noted in our response to Question
3 above.
BC110 (c) Highest and best use – Unlike SFAS 157, the exposure draft
proposes presentation requirements for circumstances when an entity uses an
asset together with other assets in a way that differs from the highest and best
use of the asset. (Paragraphs BC54 and BC55). CS Comment: The ED notes
that a fair value measurement considers 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; maximizing the
value. If the highest and best use differs from current use, the ED proposes
additional disclosures. Although there are no similar disclosure requirements
under Topic 820, we do not believe the requirement would have a significant
impact on financial services firm as we believe the requirement would
generally apply to non-financial assets. See detail discussion in Question 6
above.
BC110 (d) Blockage Factors - Unlike SFAS 157, which specifies the unit of
account for financial instruments measured within Level 1 of the fair value
hierarchy, the draft IFRS is silent on the unit of account for financial
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



instruments. IAS 39 specifies the unit of account for financial instruments as
the individual instrument. This applies to all three levels of the fair value
hierarchy. (Paragraphs BC34 and BC35). CS Comment: We agree with the
proposed ED that notes that the unit of account, as specified in IAS 39, is the
individual instrument. However, we believe that this concept applies to
instruments traded in active markets and does not necessarily apply to
valuations of instruments traded in inactive markets or where valuation
techniques use significant unobservable parameters. As such, the valuation of
individual instruments in Levels 2 and 3 of the Fair Value Hierarchy may take
into consideration blockage factors and / or liquidity adjustments as a result
of reduced transparency in pricing. Further, we believe it is incorrect to
assume that when an entity sells its entire holding rather than each instrument
individually, it is doing so at a less advantageous price as noted in paragraph
BC35. The fair value measurement guidance assumes that a market
participant will enter into a transaction at the most advantageous price for the
instrument. As such, we believe the final standard should give consideration
to an exit price that includes factors relevant to the risk of positions in, and the
liquidity of, the entity’s reference market.
BC110(e) Day 1 gains or losses – Unlike SFAS 157, which implicitly requires
the recognition of day 1 gains or losses even if the fair value measurement
uses unobservable inputs, the exposure draft defers to the relevant standards
for the asset or liability (e.g., IAS 39 for financial assets and financial
liabilities) to determine whether to recognize the gain or loss. (Paragraphs
BC76-BC79). CS Comment: Our comments are provided in Question 9
above.
BC110 (f) - Valuation premise and financial instruments. Unlike SFAS 157,
the exposure draft states explicitly that the in-use valuation promise is not
relevant to financial assets. (Paragraph BC57) CS Comment: We agree with
the concept as noted in the ED. Although it is not explicitly noted in Topic
820, we believe similar guidance is applied in practice under US GAAP.
BC110 (g) - Measurement of liabilities. Unlike SFAS 157, which includes
limited guidance on the measurement of liabilities, the exposure draft proposes
a framework for measuring a liability using the same methodology that the
counterparty would use to measure the fair value of a corresponding asset. The
FASB is developing a staff position to clarify the measurement of liabilities at
fair value in accordance with SFAS 157. If finalised, the proposal is expected
to be largely consistent with the proposals in the draft IFRS. (Paragraphs
BC67–BC72) CS Comment: We agree with the current guidance as proposed
in the ED as we believe it is consistent with current guidance as issued by the
FASB in ASU 2009-05. See detailed discussion in Question 7 above.
BC110 (h) - Measurement of equity instruments. Unlike SFAS 157, the
exposure draft discusses how to apply the exit price notion to equity
instruments measured at fair value. CS Comment: We agree with the guidance
as provided in the ED for issued equity instruments, however, as there is no
guidance under US GAAP to use a fair value measurement on instruments
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held in the equity section of the balance sheet, this divergence from US GAAP
should be addressed by the IASB and FASB in their convergence project on
financial instruments .
Question 13
Do you have any other comments on the proposals in the exposure draft?
Although we understand that a final standard is expected to be issued during 2010, we
would request that the standard be effective for annual periods beginning on or after
15 December 2010 with earlier application permitted for financial statements that
have not yet been issued.
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