15 December 2008

EFRAG final comment letter on improving disclosures about financial instruments

Regarding liquidity risk EFRAG calls for a more extensive study in the future. EFRAG agrees with most of the proposals related to fair value measurements, but notes that the proposed definitions raise certain issues.

Ø       The provisions in IAS 39 related to the refutation of transaction price by a valuation technique in determining the fair value, which leads to the recognition of a so-called “day-1” gain or loss. Paragraph AG 76 of IAS 39 states that a transaction price can only be refuted by observable current market transactions in the same instrument or by a valuation technique whose variables include only data from observable markets. By contrast, the proposed level 2 definition includes “quoted prices for similar instruments or other valuation techniques for which all significant inputs are based on observable market data”. Thus, the day-1 gain or loss is recognised when evidenced by a valuation technique whose inputs are only observable market data, while the level 2 category includes valuation techniques whose significant inputs are observable market data.

Ø       Accordingly, EFRAG believes that the line permitting day-1 gain or loss recognition runs through the middle of the level 2 category. We do not think this is appropriate; in our view the two sets of requirements should be aligned, and our suggestion is that this should achieved by moving the day-1 profit line so that it coincides with the border between level 2 and level 3. We therefore propose that the IASB amend IAS 39 by replacing the expression “valuation technique whose variables include only data from observable markets”, in paragraph AG 76 of IAS 39, by the expression “valuation techniques for which all significant inputs are based on observable market data”.

Full paper

© EFRAG - European Financial Reporting Advisory Group