1 Fair value or an alternative measurement model ICAEW Roundtable 8 July 2008 Interventionby Fernando Restoy Commissioner Spanish CNMV Chairman CESR-Fin Committee of European Securities Regulators

2 On the FAIR VALUE DEBATE Fair value: big achievement. Provides relevance and homogeneity to financial statements Fair value: big achievement. Provides relevance and homogeneity to financial statements...within a set of accounting principles that can be improved...within a set of accounting principles that can be improved –Lack of a fully coherent measurement approach For financial and non financial assets For financial and non financial assets For financial assets and liabilities For financial assets and liabilities For difFerent types of financial assets For difFerent types of financial assets For financial assets held for different purposes For financial assets held for different purposes

3 On the FAIR VALUE DEBATE –... partly due to the lack of a comprehensive conceptual framework –...and to the need of pragmatism Technical difficulties to calculate fair value (real assets, non-traded financial instruments) Technical difficulties to calculate fair value (real assets, non-traded financial instruments) Avoid (apparently) counter-intuitive outcomes (financial liabilities) Avoid (apparently) counter-intuitive outcomes (financial liabilities) Limit (excessive) volatility of income statements (a.f.s. instruments, loans and receivables...) Limit (excessive) volatility of income statements (a.f.s. instruments, loans and receivables...)

4 On the FAIR VALUE DEBATE But, has proved robust in the financial turmoil But, has proved robust in the financial turmoil –Most effects in banks‘ trading books (no reasonable alternative) –Arguments on excessive procyclicality of accounting principles are misguided Fair values are procyclical Fair values are procyclical But, do not lead by themselves to destabilising spirals But, do not lead by themselves to destabilising spirals It, something, accurate measurement contributes to limit excessive risk taking It, something, accurate measurement contributes to limit excessive risk taking –Check, instead the role of: Market practices (stop-loss strategies, margin calls) Market practices (stop-loss strategies, margin calls) Capital regulation Capital regulation

5 On the FAIR VALUE DEBATE –But avoid shortcuts: financial information is not a prudential policy tool (do not shoot the messenger) Although, of course some improvements may be necessary. Among others Although, of course some improvements may be necessary. Among others –Additional guidance on valuation of illiquid instruments –More comprehensive disclosures on valuation techniques

6 CESR statement on fair value measurement CESR will publish a statement regarding fair value measurement within a few days. It will be open for public consultation until 12 September 2008 CESR will publish a statement regarding fair value measurement within a few days. It will be open for public consultation until 12 September 2008 CESR‘s ROLE CESR‘s ROLE Ensure sound and consistent application across jurisdictions of IFRS Ensure sound and consistent application across jurisdictions of IFRS Ensure market participants receive comprehensive and relevant information in the current difficult situation Ensure market participants receive comprehensive and relevant information in the current difficult situation OBJECTIVES OBJECTIVES Based on experience, as enforcers, provide an input that could help preparers to properly apply accounting principles when measuring financial instruments in illiquid markets Based on experience, as enforcers, provide an input that could help preparers to properly apply accounting principles when measuring financial instruments in illiquid markets Provide references to strengthen disclosure of valuation practices Provide references to strengthen disclosure of valuation practices

7 CESR statement on fair value measurement SCOPE SCOPE Remains under the domain of application of current IFRS in line with the responsibilities for CESR members as securities supervisors and enforcers. Remains under the domain of application of current IFRS in line with the responsibilities for CESR members as securities supervisors and enforcers. –The competence of setting and issuing general interpretations of existing standards lies with IASB and IFRIC. Focuses on Focuses on –Measurement Active and non active markets Active and non active markets Selection of inputs to valuation techniques Selection of inputs to valuation techniques –Leading disclosure practices

8 CESR statement on fair value measurement MEASUREMENT MEASUREMENT On the identification of active and non active markets the statement stresses: On the identification of active and non active markets the statement stresses: –As judgment is required, need of a well-documented valuation policy. Should be consistent across time and across financial instruments –Even if a market is not very liquid or the number of transactions is relatively low compared to other markets or to the past, the market could still be active –The size of the holdings of instruments is not a criterion to decide whether a market should be considered active –Different pricing sources can be available in an active market, such as prices for actual transactions or for binding quotes –Market quotes can only be disregarded if there is sufficient evidence that they do not constitute a reliable reference for valuation

9 CESR statement on fair value measurement On the use of valuation techniques On the use of valuation techniques –Entails a significant amount of judgment –The issuer should document the criteria, the assumptions and the inputs to the valuation techniques to ensure consistency year after year –Transactions conducted in a market that is not considered active can often provide the most relevant information to determine fair value. –Liquidity risk and correlation risk could also be relevant in addition to the inputs to valuation techniques in IAS 39.AG82 –The use of indexes should be approached with caution

10 CESR statement on fair value measurement DISCLOSURE DISCLOSURE Good disclosure practices is a natural counterpart to the use of judgment in measurement practices Good disclosure practices is a natural counterpart to the use of judgment in measurement practices Issuers should consider publishing the most relevant criteria and accounting policies for deciding on Issuers should consider publishing the most relevant criteria and accounting policies for deciding on –Active or non active markets and –Identification of a forced transaction –Prioritisation among several price sources

11 CESR statement on fair value measurement and provide information (by asset subclasses) on and provide information (by asset subclasses) on –References used in active markets –Type of valuation techniques including inputs, assumptions and data –Any relevant change in techniques applied to specific instruments The statement also provides an example on how issuers could present a useful summary of their valuation procedures in a tabular form separating the information in the following categories: The statement also provides an example on how issuers could present a useful summary of their valuation procedures in a tabular form separating the information in the following categories: –Quoted prices in active markets –Valuation techniques with observable and non observable inputs