Ben Couch, Valuation Practice Fellow, FASB The views expressed in this presentation are those of the presenters, not necessarily those of the FASB.

Fair Value Measurement

Agenda

• Project timeline and background • Fair value measurement overview • Disclosure • Application to nonpublic entities • Effective date and transition 2

Project Timeline

2004 2003 2005 2006 Jun 2003

FVM project added to FASB’s agenda

Jun 2004

FASB exposure draft published

Sep 2004

FASB round table meetings

Sep 2005

FVM project added to IASB’s agenda

Sep 2006

FASB issued SFAS 157

Nov 2006

IASB discussion paper published

(using SFAS 157 as starting point) 2007

Project Timeline

continued

2009 2008 2010 2011 Oct 2008

IASB Expert Advisory Panel report

Measuring and disclosing the fair value of financial instruments in markets that are no longer active

FASB FSP FAS 157-3 published

Determining the Fair Value of a Financial Asset when the Market for that Asset is Not Active

May 2009

FASB FSP FAS 157-4 published

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

May 2009

IASB Exposure draft published

Fair Value Measurement

Nov-Dec 2009

IASB Round table meetings

Jun 2010

FASB exposure draft published

Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

IASB exposure draft published

Measurement Uncertainty Analysis Disclosure for Fair Value Measurements

May 2011

Common IFRS and U.S. GAAP fair value measurement standards

ASU No. 2011-04 IFRS 13 H2 2011

IFRS Foundation educational material

Consistent fair value measurements

IFRSs US GAAP Fair value measurement guidance in various standards May 2009 exposure draft

Fair Value Measurement

Topic 820 (codified SFAS 157) Objective: Common (identical) fair value measurement and disclosure standards 5

Fair Value Measurement Overview Topic

Premiums and discounts

Main changes in U.S. GAAP Resolution

Premiums and discounts relevant to market participants for the unit of account may be used if Level 1 inputs unavailable. No block discounts (entity-specific, unit of account issues).

Financial instruments can be valued on a net basis.

Fair value for financial instruments with offsetting risks Fair value of instruments classified in shareholders’ equity Requirement to value from the perspective of a market participant holding instrument as an asset.

Disclosures • Quantitative inputs for Level 3 • Narrative sensitivity analysis • Valuation processes • Current use if different from highest and best use • Level in fair value hierarchy for fair value measurements disclosed but not reported • All transfers into/out of Levels 1 and 2

Fair Value Measurement Overview continued Topic

NAV practical expedient Deposit liabilities Disclosures

Differences between Topic 820 and IFRS 13 Reason for difference

Different accounting for investment companies in local country GAAP means IASB cannot yet allow a practical expedient.

Different requirements in IFRS and US GAAP for measuring fair value of deposit liabilities • IFRS 13 contains measurement guidance • Topics 825 and 942 contain measurement guidance • IFRS does not allow net presentation of derivatives • IFRS requires quantitative sensitivity analysis for financial instruments • In IFRS nonpublic entities are covered by SME standard

Premiums and Discounts

• Must be consistent with characteristics of asset or liability and the unit of account – No block discounts

Is a Level 1 input available?

Available

Would market participants incorporate premium or discount in transaction?

n/a Not available Yes No  Market participants act in their economic best interest in a transaction for the unit of account.

Does fair value include premium or discount?

FV = Level 1 price x quantity held Yes No

Financial Instruments

• Exception for financial assets and liabilities with offsetting positions in market risk or counterparty credit risk – Entity must have documented risk management strategy – Only for portfolios of instruments measured at FV – Accounting policy decision

Financial Instruments

continued

• Market risks: – Must be substantially the same – Duration of instruments leading to exposure to market risk must be substantially the same • Counterparty credit risk: – Must have arrangement to mitigate credit risk in place

Liabilities and Shareholders’ Equity

Yes

Fair value =

observable market price of instrument

Is there an observable market price to transfer the instrument?

No

Does somebody hold the corresponding asset?

Yes No

Fair value =

observable market price of asset

Fair value = fair value of the corresponding asset Fair value =

another valuation technique Yes No

Fair value =

another valuation technique

Is there an observable market price for the instrument traded as an asset?

Disclosure

• More information required for Level 3 fair value measurements: – A quantitative disclosure of the unobservable inputs and assumptions used in the measurement – A description of the valuation control process in place – A discussion of the sensitivity of the fair value to changes in unobservable inputs and any inter relationships between those inputs that magnify or mitigate the effect on the measurement

Disclosure

continued

• Example

Quantitative information about fair value measurements using significant unobservable inputs (Level 3) ($ in millions) Description Fair value at 12/31/X9 Valuation technique(s) Unobservable input Range (weighted average) Equity securities:

Healthcare industry 53 Discounted cash flow Market comparable companies weighted average cost of capital long-term revenue growth rate long-term pre-tax operating margin discount for lack of marketability control premium EBITDA multiple revenue multiple discount for lack of marketability control premium 7% - 16% (12.1%) 2% - 5% (4.2%) 3% - 20% (10.3%) 5% - 20% (17%) 10% - 30% (20%) 10 - 13 (11.3) 1.5 - 2.0 (1.7) 5% - 20% (17%) 10% - 30% (20%)

Disclosure

continued

• Current use of a nonfinancial asset when it differs from the highest and best use considered in its fair value measurement and reasons why – Required whether fair value is recognized or only disclosed • All transfers between Level 1 and Level 2 of the fair value hierarchy (no significance threshold)

Disclosure

continued

• For fair value measurements that are only disclosed, the level in which the fair value measurement would be categorized within the fair value hierarchy – Other disclosure requirements for fair value measurements would not apply

Application of Topic 820 to Nonpublic Entities

• Measurement principles apply equally to public and nonpublic entities, but some disclosures not required for nonpublic entities – Transfers between Level 1 and Level 2 – Sensitivity of Level 3 fair value measurements to changes in unobservable inputs – Level in which a fair value measurement would be categorized within the fair value hierarchy when asset or liability not measured at fair value in statement of financial position, but disclosure of fair value is required

Effective Dates and Transition

2012 2011 2013 May 2011

Common IFRS and U.S. GAAP fair value measurement standards

ASU No. 2011-04 IFRS 13 December 15, 2011

ASU No. 2011-04 effective

Public entities

• Interim and annual periods • Prospective transition with disclosure of changes and quantitative effect • Early application not permitted

Nonpublic entities

• Annual periods • Prospective transition with disclosure of changes and quantitative effect • Early application permitted for interim periods after December 15 January 1, 2013

IFRS 13 effective

Prospective transition Early application permitted

Q&A

Expressions of individual views by members of the FASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the FASB on accounting matters are determined only after extensive due process and deliberation.