The UK’s Financial Reporting Council published a thematic review of IFRS 13 Fair Value Measurement.

Here’s the executive summary of key findings:

• Fair value measurements should use market participants’ assumptions
  • Fair value measurements should use market participants’ rather than the company’s own assumptions.
  • Whilst the transaction price usually reflects fair value, there may be circumstances where this is not the case, for example, in transactions with related parties. Companies should ensure that appropriate adjustments are made to fair value measurements in such cases.
• Companies should consider the need for specialist third party advice
  • Where a company is required to value a material item, and where no internal expertise exists, we expect companies to consider whether specialist third party input is required. Where such advice has been obtained, we encourage companies to disclose that fact.
• High quality disclosures are key
  • IFRS 13 disclosures should be provided for each class of assets and liabilities, determined on the basis of their nature (for example, debt vs equity investments), characteristics and risks (including climate change). When determining an appropriate level of aggregation or disaggregation, companies should consider which provides the most useful disclosures.
  • We find most issues in the disclosure of recurring Level 3 measurements, for which the significant unobservable inputs should be quantified and a sensitivity analysis given. However, these disclosures are sometimes omitted. Companies should ensure that the minimum disclosures required by the standard are provided.
  • Companies should address the overall disclosure objective of the standard, not only the specific requirements. For example, the following additional information may be relevant to users: the nature of the item being measured at fair value and the characteristics of the item that are considered in the determination of the relevant inputs.
  • Companies should avoid boilerplate and immaterial information.
  • Where climate-related matters materially affect fair value measurement, we expect companies to explain how the impact has been incorporated into the measurement and, if relevant, to quantify any significant estimation uncertainty. Simply stating that the risk has been incorporated into the fair value measurement is insufficient in such cases.
  • Information on fair value measurements should be consistent across the annual report and accounts. Management commentary should complement and further explain fair value measurements as this will enhance users’ understanding.

It’s not too surprising that the FRC has more to say about disclosure problems than about those in the underlying methodology; it’s usually difficult to demonstrate that a particular fair value represents an objective misapplication of the standard. The point about a transaction price that doesn’t represent fair value is interesting though, and indeed perhaps most likely to come up in a related party context. The document provides an example of a company that provided long-term loans to a joint venture at a low interest rate and guaranteed its external debt. In this case the company acknowledged that the interest rate on the loans was below a market rate. Also: “the company determined that the guarantees issued to the external lenders of the joint venture met the definition of financial guarantee contracts within the meaning of IFRS 9. These guarantees had been provided for nil consideration, which did not reflect their fair value as a market participant would have required compensation for providing them.” After remeasuring the fair values of those two items, the company restated the accounts to reduce the receivable assets, recognize the liability in respect of the financial guarantee contracts and increase its investment in the joint venture by the corresponding amount.”

That aside though, the publication is short on specific war stories, having to resort to a minor anecdote about a company that adjusted a right-of-use asset acquired in a business combination to reflect company-specific circumstances rather than differences between the lease terms and market terms; the FRC’s inquiries led to the company remeasuring the asset, with amendments to goodwill, deferred tax, impairment and depreciation. No doubt a valid intervention, but not very exciting stuff.

Anyway, my memory of seeing the 1999 film Simpatico has been long-erased, along with that of the small number of other people who saw it, but I still remember that another audience member, a woman for whom English wasn’t a first language, leaned over at one point to ask me what “bloodstock” referred to. The FRC’s report approvingly provides a new-to-me variation on this term:

• The fair value inputs for salmon broodstock are categorized as level 3. The broodstock contain generations of genetic improvements and cannot be valued purely on the market weight of salmon. The Group does not sell its broodstock commercially so there is no observable input in this respect. Therefore, the calculation of the estimated fair value of salmon broodstock is primarily based upon its main harvest output being salmon eggs, which are priced upon the current seasonally adjusted selling prices for the Group’s salmon eggs….

And so on. And I agree, any entity that finds room in its disclosures for the term “broodstock” deserves some kind of recognition. It’s tougher to do, of course, if you’re in financial services or tech…

The opinions expressed are solely those of the author.