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July 14, 2008

CESR proposes guidance on fair value measurement

The Committee of European Securities Regulators (CESR) is seeking comments on proposed guidance for fair value measurement and related disclosures of financial instruments in illiquid markets.

The statement is intended to assist preparers when preparing the next financial statements by taking into account the current market conditions. The proposed guidance is divided into two categories: measurement and disclosures.

The guidance emphasises the starting point for the measurement of financial instruments is assessing whether an instrument is traded on an active or non-active market. CESR suggested that as the identification of an active or non-active market requires judgement, a well-documented valuation policy that is consistent across time and across financial instruments is needed.

CESR pointed out that as the use of valuation techniques also entails a significant amount of judgment, the issuer should document the criteria, the assumptions and the inputs to the valuation techniques to ensure consistency.

It also noted that transactions conducted in a market that is not considered active can often provide the most relevant input for valuation techniques.

CESR emphasised that given the complexity of many business situations, the different business rationales for holding financial instruments and the uncertainty around fair values, clear disclosures are necessary for users to understand these aspects and their implications for the fair value measurements included in the financial statements. The committee’s advice included that good disclosure practice is a natural counterpart to the use of judgment in measurement practices.

CESR specified the proposed guidance remains under the domain of the application of current IFRS. The consultation period ends on 12 September 2008. CESR will review the statement according to the comments received and will publish the final document in October 2008.

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