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October 31, 2008 at 12:03 PM
An advisory panel at the International Association Standards Board says company managers and auditors should feel free to use their judgment when valuing financial instruments affected by dysfunctional markets.
The IASB, London, a board that helps develop international accounting standards, has released the advisory panel’s report on use of fair value measurement methods when markets become inactive.
“Determining fair value in a market that has become inactive depends on the facts and circumstances and may require the use of significant judgement about whether individual transactions are forced,” advisory panel members write in the report. “Any transaction determined to be forced does not form part of a fair value measurement.”
When auditors or others estimate the value of a financial instrument affected by an inactive market, they may come up with different estimates, the panel members write.
Companies should cope with the conflicts by striving to use consistent methods and disclosing how they came up with their values, the panel members write.
“Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make, such as for credit and liquidity,” the panel members write.
IASB is using the panel report to prepare a draft on improving financial instruments disclosure rules.
