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The IASB decided to include in the revised IAS 39 (published in 2002) expanded guidance about how to determine fair values (the guidance is now in IFRS 9), in particular for financial instruments for which no quoted market price is available (now paragraphs B5.4.6–B5.4.13 of IFRS 9). The IASB decided that it is desirable to provide clear and reasonably detailed guidance about the objective and use of valuation techniques to achieve reliable and comparable fair value estimates when financial instruments are measured at fair value. Use of quoted prices in active markets

BASIS FOR CONCLUSIONS ON IFRS 9 MEASUREMENT:  The IASB considered comments received that disagreed with the proposal in the exposure draft published in 2002 that a quoted price is the appropriate measure of fair value for an instrument quoted in an active market. Some respondents argued that (a) valuation techniques are more appropriate for measuring fair value than a quoted price in an active market (eg for derivatives) and (b) valuation models are consistent with industry best practice, and are justified because of their acceptance for regulatory capital purposes.


However, the IASB confirmed that a quoted price is the appropriate measure off air value for an instrument quoted in an active market, notably because (a) in an active market, the quoted price is the best evidence of fair value, given that fair value is defined in terms of a price agreed by a knowledgeable, willing buyer and a knowledgeable, willing seller; (b) it results in consistent measurement across entities; and (c) fair value (now defined in IFRS 9) does not depend on entity-specific factors. The IASB further clarified that a quoted price includes market-quoted rates as well as prices.


The IASB considered situations in which entities operate in different markets. An example is a trader that originates a derivative with a corporate in an active corporate retail market and offsets the derivative by taking out a derivative with a dealer in an active dealers’ wholesale market. The IASB decided to clarify that the objective of fair value measurement is to arrive at the price at which a transaction would occur at the balance sheet date in the same instrument (ie without modification or repackaging) in the most advantageous active market22 to which an entity has immediate access. Thus, if a dealer enters into a derivative instrument with the corporate, but has immediate access to a more advantageously priced dealers’ market, the entity recognises a profit on initial recognition of the derivative instrument. However, the entity adjusts the price observed in the dealer market for any differences in counterparty credit risk between the derivative instrument with the corporate and that with the dealers’

BASIS FOR CONCLUSIONS ON IFRS 9 MEASUREMENT: This Basis for Conclusions accompanies, but is not part of, IFRS 9. IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement. When revised in 2003 IAS 39 was accompanied by a Basis for Conclusions summarising the considerations of the IASB as constituted at the time, in reaching some of its conclusions in that Standard. That Basis for Conclusions was subsequently updated to reflect amendments to the Standard. For convenience the IASB has incorporated into its Basis for Conclusions on IFRS 9 material from the Basis for Conclusions on IAS 39 that discusses matters that the IASB has not reconsidered. That material is contained in paragraphs denoted by numbers with the prefix BCZ. In those paragraphs cross-references to the Standard have been updated accordingly and minor necessary editorial changes have been made. In 2003 and later some IASB members dissented from the issue of IAS 39 and subsequent amendments, and portions of their dissenting opinions relate to requirements that
have been carried forward to IFRS 9. Those dissenting opinions are set out in an appendix after this Basis for Conclusions.

BASIS FOR CONCLUSIONS ON IFRS 9 MEASUREMENT: The scope of IAS 39 was not raised as a matter of concern during the global financial crisis and, hence, the IASB decided that the scope of IFRS 9 should be based on that of IAS 39. Consequently, the scope of IAS 39 was carried forward to IFRS 9. It has been changed only as a consequence of other new requirements, such as to reflect the changes to the accounting for expected credit losses on loan commitments that an entity issues (see paragraph BC2.8). As a result, most of paragraphs in this section of the Basis for Conclusions were carried forward from the Basis for Conclusion on IAS 39 and describe the IASB’s rationale when it set the scope of that Standard. Loan commitments
BASIS FOR CONCLUSIONS ON IFRS 9 MEASUREMENT: 2 Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. In the IAS 39 implementation guidance process, the question was raised whether a bank’s loan commitments are derivatives accounted for at fair value under IAS 39. This question arises because a commitment to make a loan at a specified rate of interest during a fixed period of time meets the definition of a derivative. In effect, it is a written option for the potential borrower to obtain a loan at a specified rate.
BASIS FOR CONCLUSIONS ON IFRS 9 MEASUREMENT: .3 To simplify the accounting for holders and issuers of loan commitments, the IASB decided to exclude particular loan commitments from the scope of IAS 39. The effect of the exclusion is that an entity will not recognise and measure changes in fair value of these loan commitments that result from changes in market interest rates or credit spreads. This is consistent with the measurement of the loan that results if the holder of the loan commitment exercises its right to obtain financing, because changes in market interest rates do not affect the measurement of an asset measured at amortised cost (assuming it is not designated in a category other than loans and receivables).1
BASIS FOR CONCLUSIONS ON IFRS 9 MEASUREMENT:4 However, the IASB decided that an entity should be permitted to measure a loan commitment at fair value with changes in fair value recognised in profit or loss on the basis of designation at inception of the loan commitment as a financial liability through profit or loss. This may be appropriate, for example, if the entity manages risk exposures related to loan commitments on a fair value basis.
BASIS FOR CONCLUSIONS ON IFRS 9 MEASUREMENT.5 The IASB further decided that a loan commitment should be excluded from the scope of IAS 39 only if it cannot be settled net. If the value of a loan commitment can be settled net in cash or another financial instrument, including when the entity has a past practice of selling the resulting loan assets shortly after origination, it is difficult to justify its exclusion from the requirement in IAS 39 to measure at fair value similar instruments that meet the definition of a derivative.

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