3.1ȱ Itȱisȱworthȱaȱreminderȱthatȱthisȱprojectȱisȱadoptingȱaȱ‘backȱtoȱbasics’ȱapproachȱtoȱexaminingȱtheȱ fundamentalsȱofȱtheȱfinancialȱreportingȱofȱpensions;ȱitȱisȱnotȱseekingȱtoȱreȬexamineȱtheȱfundamentalsȱofȱ financialȱreporting.ȱȱTheȱmeasurementȱissueȱhasȱthereforeȱbeenȱapproachedȱbyȱconsideringȱtheȱfollowingȱ importantȱcharacteristics,ȱdrawnȱfromȱotherȱaccountingȱliterature,ȱthatȱdistinguishȱpossibleȱmethodsȱofȱ measuringȱassets:ȱ
(a) measurementsȱbasedȱonȱcurrentȱorȱhistoricalȱinformationȱ (b) marketȬbasedȱorȱentityȬspecificȱmeasurementsȱ
Measurementsȱbasedȱonȱcurrentȱorȱhistoricalȱinformationȱȱ
3.2ȱ TheȱdiscussionȱinȱChapterȱ5ȱrelatingȱtoȱmeasurementȱofȱliabilitiesȱtoȱpayȱbenefitsȱsupportsȱaȱ currentȱvalueȱmeasureȱ–ȱwhichȱreflectsȱtheȱamountȱofȱtheȱeconomicȱburdenȱofȱtheȱliabilityȱatȱtheȱ measurementȱdateȱ–ȱbasedȱonȱupȱtoȱdateȱinformationȱaboutȱpresentȱandȱfutureȱeconomicȱconditions.ȱȱ Therefore,ȱaȱmethodȱthatȱmeasuresȱtheȱassetsȱatȱaȱcurrentȱvalueȱwouldȱbeȱexpectedȱtoȱrankȱmoreȱhighlyȱinȱ termsȱofȱprovidingȱdecisionȬusefulȱinformationȱaboutȱtheȱunderlyingȱeconomicsȱthanȱaȱmethodȱthatȱ measuresȱthemȱatȱanȱamountȱbasedȱonȱtheirȱhistoricalȱcost.ȱȱIfȱtheȱassetsȱwereȱmeasuredȱonȱaȱbasisȱthatȱdidȱ notȱreflectȱeconomicȱconditionsȱatȱtheȱbalanceȱsheetȱdate,ȱanȱaccountingȱmismatchȱinȱrespectȱofȱtheȱ
treatmentsȱofȱtheȱassetsȱandȱtheȱrelatedȱliabilitiesȱwouldȱariseȱwhichȱwouldȱmakeȱtheȱentity’sȱfinancialȱ positionȱlessȱunderstandable.ȱȱȱ
3.3ȱ Inȱtheȱlightȱofȱtheȱforegoing,ȱitȱisȱconcludedȱthatȱreportingȱassetsȱheldȱtoȱpayȱbenefitsȱatȱcurrentȱ valuesȱprovidesȱmoreȱusefulȱinformationȱthanȱreportingȱthemȱatȱhistoricalȱmeasures.ȱȱThisȱisȱconsistentȱ withȱtheȱviewsȱpresentedȱonȱmeasuringȱliabilitiesȱtoȱpayȱbenefits.ȱ
MarketȬbasedȱorȱentityȬspecificȱmeasuresȱ
3.4ȱ Ifȱmeasurementsȱbasedȱonȱhistoricalȱinformationȱareȱdiscardedȱfromȱfurtherȱconsideration,ȱtheȱ principalȱcandidatesȱforȱcurrentȱvalueȱmeasuresȱareȱ‘marketȬbased’ȱandȱ‘entityȬspecific’ȱmeasures.ȱȱȱ MarketȬbasedȱmeasuresȱ
3.5ȱ ByȱmarketȬbasedȱweȱmeanȱthatȱassetsȱwouldȱbeȱreportedȱatȱmarketȱvaluesȱatȱtheȱbalanceȱsheetȱdate,ȱ whereȱmarketȱpricesȱareȱavailable.ȱȱWhereȱmarketȱpricesȱareȱnotȱavailableȱ(because,ȱforȱexample,ȱtheȱassetȱ isȱnotȱtradedȱinȱanȱactiveȱmarket),ȱaȱpriceȱatȱwhichȱtheȱassetȱcouldȱbeȱexchangedȱatȱtheȱbalanceȱsheetȱdateȱ wouldȱbeȱestimatedȱusingȱvaluationȱtechniques.ȱ
3.6ȱ TheȱdefinitionȱofȱfairȱvalueȱinȱtheȱFASBȱStatementȱ157ȱ‘FairȱValueȱMeasurements’ȱ(issuedȱbyȱtheȱ IASBȱasȱaȱdiscussionȱpaperȱinȱNovemberȱ2006)ȱisȱaȱmarketȬbasedȱmeasurement:ȱ
“Fairȱvalueȱisȱtheȱpriceȱthatȱwouldȱbeȱreceivedȱtoȱsellȱanȱassetȱorȱpaidȱtoȱtransferȱaȱliabilityȱinȱanȱorderlyȱ transactionȱbetweenȱmarketȱparticipantsȱatȱtheȱbalanceȱsheetȱdate.”ȱ
TheȱIASBȱdrawsȱtoȱattentionȱtheȱexplicitȱreferenceȱinȱtheȱproposedȱdefinitionȱtoȱmarketȱparticipantsȱ–ȱtheȱ implicationȱbeingȱthatȱaȱfairȱvalueȱmeasurementȱshouldȱbeȱbasedȱonȱtheȱassumptionsȱthatȱmarketȱ participantsȱ(ratherȱthanȱtheȱentity)ȱwouldȱuseȱinȱpricingȱanȱasset,ȱregardlessȱofȱtheȱentity’sȱintentionȱorȱ abilityȱtoȱsellȱtheȱassetȱatȱtheȱmeasurementȱdate.
3.7ȱ SFASȱ157ȱestablishesȱaȱthreeȬlevelȱhierarchyȱthatȱprioritisesȱtheȱinputsȱtoȱvaluationȱtechniquesȱ usedȱtoȱmeasureȱfairȱvalue.ȱȱItȱgivesȱtheȱhighestȱpriorityȱtoȱquotedȱpricesȱinȱactiveȱmarkets1ȱforȱidenticalȱ assetsȱorȱliabilitiesȱ(Levelȱ1)ȱ–ȱi.e.ȱaȱquotedȱpriceȱshouldȱusuallyȱbeȱusedȱtoȱmeasureȱfairȱvalueȱwheneverȱ available.ȱȱTheȱnextȱpriorityȱisȱgivenȱtoȱinputsȱotherȱthanȱquotedȱpricesȱthatȱareȱobservableȱforȱtheȱassetȱorȱ liability,ȱeitherȱdirectlyȱorȱindirectlyȱ(Levelȱ2).ȱȱTheȱlowestȱpriorityȱisȱgivenȱtoȱunobservableȱinputsȱ(Levelȱ 3),ȱwhichȱmightȱbeȱusedȱinȱsituationsȱinȱwhichȱthereȱisȱlittle,ȱifȱany,ȱmarketȱactivityȱforȱanȱassetȱorȱitsȱ inputs.ȱȱȱȱ
EntityȬspecificȱmeasuresȱ
3.8ȱ TheȱphilosophyȱbehindȱanȱentityȬspecificȱvalueȱisȱthatȱtheȱvalueȱofȱmanyȱassetsȱdependsȱnotȱonlyȱ onȱtheȱpropertiesȱofȱtheȱassetȱitself,ȱbutȱalsoȱonȱitsȱrelationshipȱtoȱitsȱowner.ȱȱAssetsȱareȱmoreȱorȱlessȱ specialised,ȱmanyȱcontributingȱtoȱtheȱtotalȱcashȱflowsȱofȱaȱbusiness.ȱȱDifferencesȱinȱtheȱeconomicȱ
constraintsȱandȱopportunitiesȱavailableȱtoȱdifferentȱentitiesȱareȱreflectedȱinȱdifferentȱperceptionsȱofȱassets’ȱ valuesȱtoȱtheirȱowners.ȱȱForȱexample,ȱaȱparticularȱentityȱmayȱbeȱableȱtoȱexploitȱanȱassetȱinȱitsȱbusinessȱinȱaȱ wayȱthatȱothersȱcannotȱandȱsoȱtheȱassetȱmayȱbeȱworthȱmoreȱtoȱtheȱentityȱthanȱtheȱmarketȱprice.ȱȱȱ
1 An active market for an asset is a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
3.9ȱ TheȱprincipalȱexampleȱofȱanȱentityȬspecificȱmeasurementȱinȱaccountingȱstandardsȱisȱvalueȬinȬuse.ȱȱ Valueȱinȱuseȱisȱaȱmeasurementȱbasisȱusedȱinȱcertainȱcircumstancesȱtoȱdetermineȱwhetherȱitemsȱofȱ
property,ȱplantȱandȱequipmentȱandȱintangibleȱassetsȱareȱimpairedȱandȱshouldȱbeȱwrittenȱdownȱtoȱtheirȱ recoverableȱamounts.ȱȱValueȱinȱuseȱisȱdefinedȱinȱIASȱ36ȱ‘ImpairmentȱofȱAssets’,ȱasȱ“theȱpresentȱvalueȱofȱ theȱfutureȱcashȱflowsȱexpectedȱtoȱbeȱderivedȱfromȱanȱassetȱorȱcashȬgeneratingȱunit”.ȱȱItȱreflectsȱtheȱcashȱ flowsȱexpectedȱfromȱcontinuingȱuseȱofȱtheȱassetȱandȱfromȱitsȱultimateȱdisposal.ȱȱȱ
Assetsȱtradedȱinȱactiveȱmarketsȱ
3.10ȱ Someȱbelieveȱthatȱtheȱrequirementȱtoȱuseȱaȱmarketȱvalueȱforȱassetsȱheldȱtoȱfundȱpensionȱliabilitiesȱ shouldȱbeȱreconsideredȱandȱthatȱthereȱisȱaȱcaseȱtoȱbeȱmadeȱforȱanȱentityȬspecificȱmeasurement.ȱȱThisȱ wouldȱapplyȱtoȱallȱsuchȱassets,ȱincludingȱassetsȱthatȱareȱtradedȱinȱactiveȱmarkets2.ȱȱTheȱfollowingȱ argumentsȱareȱmadeȱforȱthisȱviewpoint:ȱ
(a)ȱ Assetsȱthatȱareȱheldȱtoȱprovideȱfundsȱforȱretirementȱbenefitȱobligationsȱhaveȱaȱdifferentȱuseȱfromȱ similarȱassetsȱthatȱareȱheldȱforȱtradingȱorȱspeculativeȱpurposes;ȱanȱentityȬspecificȱvalueȱwouldȱ reflectȱthatȱdifferentȱuseȱwhenȱthereȱwasȱnoȱcurrentȱintentionȱtoȱsell.ȱȱȱ
(b)ȱ IfȱanȱentityȱbelievesȱanȱinvestmentȱisȱworthȱholdingȱforȱtheȱlongȬtermȱtoȱprovideȱfundsȱforȱpensionȱ obligationsȱandȱhasȱtheȱabilityȱtoȱdoȱso,ȱvariabilityȱinȱmarketȱpricesȱ(whichȱreflectsȱamongȱmanyȱ otherȱthingsȱshortȬtermȱvariationsȱinȱtheȱpricingȱofȱrisksȱinȱtheȱmarketsȱandȱhenceȱinȱtheȱriskȱ premiumsȱrelatingȱtoȱdifferentȱclassesȱofȱassets)ȱdoesȱnotȱnecessarilyȱchangeȱtheȱinvestment’sȱ fundamentalȱvalueȱtoȱtheȱentity.ȱȱThisȱisȱparticularlyȱtrueȱwhenȱmarketsȱareȱtemporarilyȱdislocatedȱ atȱaȱfinancialȱreportingȱdate.ȱȱStatedȱdifferently,ȱifȱanȱinvestmentȱisȱheldȱatȱleastȱpartlyȱforȱtheȱ purposeȱofȱreceivingȱincomeȱoverȱaȱlongȱperiod,ȱshortȬtermȱfluctuationsȱinȱmarketȱpricesȱdoȱnotȱ affectȱtheȱcashȱflowsȱthatȱareȱexpectedȱtoȱbeȱcontributedȱbyȱtheȱemployerȱtoȱmeetȱitsȱlongȬtermȱ obligationsȱandȱitȱisȱwrongȱtoȱreflectȱthemȱinȱtheȱfinancialȱstatements.ȱȱȱ
(c) Measuringȱallȱassetsȱatȱtoday’sȱmarketȱpricesȱfailsȱtoȱinformȱusersȱaboutȱtheȱexpectedȱbenefitsȱofȱ differentȱassetȱallocationȱandȱinvestmentȱstrategies.ȱȱAnȱargumentȱthatȱisȱsometimesȱraisedȱagainstȱ entityȬspecificȱmeasuresȱisȱthatȱanȱinvestmentȱinȱbondsȱwithȱaȱmarketȱpriceȱofȱCUȱ1,000ȱisȱworthȱ theȱsame,ȱandȱshouldȱbeȱreportedȱatȱtheȱsameȱamount,ȱasȱanȱinvestmentȱinȱequitiesȱwithȱaȱmarketȱ priceȱofȱCUȱ1,000.ȱȱThatȱargumentȱisȱsimplisticȱbecauseȱtheȱexpectedȱfutureȱcashȱflowsȱorȱfutureȱ pricesȱareȱnotȱtheȱsame.ȱȱStudiesȱhaveȱshownȱthatȱequitiesȱhaveȱoutperformedȱcorporateȱbondsȱ andȱgovernmentȱsecuritiesȱoverȱlongȱperiods.ȱȱThereȱshouldȱbeȱaȱwayȱofȱreflectingȱexpectedȱfutureȱ valuesȱwhenȱtheȱrelatedȱliabilitiesȱwillȱmature.ȱȱȱ
(d) Manyȱplansȱhaveȱdiversifiedȱoutȱofȱquotedȱsecuritiesȱintoȱalternativeȱinvestmentsȱsuchȱasȱprivateȱ equity.ȱȱValuationsȱofȱsuchȱassetsȱthatȱareȱderivedȱusingȱvaluationȱtechniquesȱtendȱtoȱsmoothȱoutȱ
2 An active market has the same meaning as in other accounting standards dealing with measurement of financial instruments. For example, this would correspond to Level 1 inputs in the fair value hierarchy in SFAS 157 (see paragraph 3.7 above).
theȱshortȬtermȱvolatilityȱthatȱisȱreflectedȱinȱquotedȱmarketȱprices,ȱwithȱtheȱresultȱthatȱtheȱpresentȱ accountingȱrequirementsȱmakeȱthemȱappearȱtoȱbeȱless,ȱratherȱthanȱmore,ȱriskyȱthanȱquotedȱ securities.ȱȱȱ
(e) TheȱexistingȱaccountingȱstandardsȱhaveȱdrivenȱemployersȱandȱtrusteesȱtoȱmakeȱsubȬoptimalȱ decisionsȱinȱrelationȱtoȱfundingȱlongȬtermȱobligationsȱbyȱencouragingȱinvestmentsȱinȱassetsȱwithȱ lowȱreturnsȱtoȱminimiseȱaccountingȱ(orȱvolatility)ȱriskȱinȱtheȱshortȬterm.ȱȱȱ
3.11ȱ Othersȱnoteȱthat,ȱinȱgeneral,ȱtheȱconceptȱofȱanȱentityȬspecificȱvalueȱsuchȱasȱvalueȱinȱuseȱisȱ
restrictedȱinȱaccountingȱstandardsȱtoȱtangibleȱorȱintangibleȱassetsȱthatȱareȱusedȱinȱaȱbusiness,ȱforȱexampleȱ inȱmeasuringȱtheȱrecoverableȱamountȱofȱplantȱorȱequipment.ȱȱTheyȱbelieveȱthatȱassetsȱthatȱareȱheldȱtoȱ provideȱfundsȱforȱpensionsȱdoȱnotȱyieldȱeconomicȱbenefitsȱthroughȱuseȱinȱtheȱentity’sȱbusiness;ȱinsteadȱ theirȱfunctionȱisȱtoȱholdȱaȱstoreȱofȱvalue.ȱȱUnderȱthisȱviewȱitȱisȱnotȱrelevantȱtoȱdistinguishȱsimilarȱassetsȱ heldȱbyȱdifferentȱentitiesȱinȱtheȱsameȱwayȱthatȱspecialisedȱassetsȱmightȱbeȱviewedȱinȱtheȱcontextȱofȱspecificȱ owners,ȱbecauseȱtheȱstoreȱofȱvalueȱcannotȱbeȱworthȱmoreȱtoȱtheȱentityȱthanȱmarketȱvalue.ȱȱȱ
3.12ȱ Havingȱsaidȱthat,ȱtheyȱnoteȱthatȱtheȱdifferentȱviewpointsȱonȱmarketȬbasedȱorȱentityȬspecificȱ approachesȱessentiallyȱfocusȱonȱtheȱmeasurementȱofȱholdingsȱofȱsecuritiesȱ(especiallyȱequities)ȱthatȱareȱ tradedȱinȱactiveȱmarkets,ȱtheȱissueȱbeingȱwhetherȱtheyȱshouldȱbeȱmeasuredȱatȱmarketȱvaluesȱorȱotherȱ estimateȱofȱcurrentȱvalue.ȱȱForȱotherȱtypesȱofȱassets,ȱvaluationȱtechniquesȱ(oftenȱbasedȱonȱdiscountedȱcashȱ flows)ȱareȱusuallyȱrequiredȱtoȱestimateȱcurrentȱvaluesȱunderȱeitherȱapproach.ȱȱSoȱtheȱissueȱappearsȱtoȱbeȱ notȱsoȱmuchȱaboutȱentityȬspecificȱandȱmarketȬbasedȱmeasuresȱperȱse,ȱbutȱratherȱwhetherȱaȱvaluationȱ techniqueȱcanȱbeȱusedȱinsteadȱofȱaȱmarketȱvalueȱwhenȱtheȱlatterȱisȱavailable.ȱȱTheyȱbelieveȱthatȱtheȱchangeȱ fromȱsomeȱpreviousȱaccountingȱstandardsȱonȱpensions,ȱwhichȱallowedȱassetsȱtoȱbeȱmeasuredȱatȱactuarialȱ values,ȱtoȱtheȱpresentȱaccountingȱstandards,ȱwhichȱrequireȱsuchȱassetsȱtoȱbeȱmeasuredȱatȱmarketȱvalues,ȱ wasȱwellȱfoundedȱinȱtheȱcontextȱofȱsuchȱassetsȱforȱtheȱfollowingȱreasons:ȱ
(a)ȱ Whenȱtheȱassetȱinȱquestionȱis,ȱforȱexample,ȱaȱsmallȱparcelȱofȱsharesȱinȱaȱquotedȱcompany,ȱaȱcaseȱ forȱreflectingȱtheȱcurrentȱmarketȱvalueȱinȱtheȱowner’sȱfinancialȱstatementsȱisȱbasedȱonȱtheȱ existenceȱofȱaȱmarket.ȱȱGivenȱaȱnumberȱofȱassumptions,ȱitȱrepresentsȱtheȱamountȱthatȱcouldȱbeȱ receivedȱfromȱsaleȱofȱtheȱasset,ȱandȱalsoȱtheȱcostȱthatȱtheȱownerȱwouldȱincurȱinȱobtainingȱanȱ equivalentȱasset.ȱȱInȱadditionȱitȱcanȱbeȱarguedȱthatȱitȱrepresentsȱtheȱmarket’sȱassessmentȱofȱtheȱ presentȱvalueȱofȱfutureȱcashȱflowsȱand,ȱasȱitȱhasȱbeenȱspecifiedȱitȱisȱaȱsmallȱparcel,ȱitȱdoesȱnotȱ conferȱsignificantȱrightsȱtoȱinfluenceȱtheȱinvestee,ȱsoȱtheseȱcashȱflowsȱareȱtheȱsameȱirrespectiveȱofȱ theȱowner.ȱȱȱ
(b)ȱ Itȱisȱnotȱpossibleȱtoȱknowȱwhetherȱanȱasset’sȱmarketȱvalueȱisȱaboveȱorȱbelowȱitsȱ‘fundamentalȱ value’.ȱȱTheȱmarketȱvalueȱmightȱnotȱbeȱaȱgoodȱrepresentationȱofȱtheȱasset’sȱvalueȱinȱtheȱlongȬterm,ȱ butȱitȱisȱtheȱbestȱestimateȱavailableȱatȱtheȱtime.ȱȱPutȱanotherȱway,ȱwhyȱshouldȱanȱentityȱbeȱableȱtoȱ makeȱaȱbetterȱassessmentȱofȱvalueȱthanȱtheȱmarket?ȱȱFurthermore,ȱwhilstȱitȱisȱacknowledgedȱthatȱ marketsȱareȱsometimesȱdislocated,ȱitȱisȱconsideredȱthatȱitȱisȱnotȱpossibleȱtoȱisolateȱtheȱfactorsȱthatȱ mightȱgiveȱriseȱtoȱaȱdifferentȱlongȬtermȱvalue.ȱȱȱ
(c)ȱ Mostȱwouldȱagreeȱthat,ȱforȱassetsȱthatȱdoȱnotȱhaveȱaȱmarketȱvalue,ȱthereȱareȱmoreȱwaysȱofȱ influencingȱtheȱnumberȱthatȱisȱreportedȱinȱtheȱbalanceȱsheet.ȱȱButȱthatȱdoesȱnotȱjustifyȱallowingȱaȱ valuationȱtechniqueȱtoȱbeȱusedȱwhenȱthereȱisȱaȱmarketȱvalue;ȱifȱthereȱisȱaȱdifferenceȱbetweenȱtheȱ marketȱvalueȱandȱtheȱoutputȱfromȱaȱvaluationȱtechnique,ȱitȱisȱpossibleȱthatȱsomethingȱisȱmissingȱ fromȱtheȱvaluationȱmodel.ȱȱȱ
(d)ȱ Itȱcannotȱbeȱplausiblyȱcontendedȱthat,ȱatȱtheȱbalanceȱsheetȱdate,ȱtheȱentityȱwouldȱwillinglyȱandȱ rationallyȱeitherȱpayȱmoreȱthanȱtheȱmarketȱpriceȱtoȱacquireȱanȱidenticalȱasset,ȱnorȱwouldȱitȱ willinglyȱandȱrationallyȱacceptȱlessȱthanȱtheȱmarketȱprice.ȱȱTheȱasset’sȱeconomicȱvalueȱcannotȱ exceedȱtheȱpriceȱatȱwhichȱitȱcouldȱbeȱreplaced.ȱȱȱ
(e)ȱ TheȱargumentȱthatȱanȱinvestmentȱinȱbondsȱwithȱaȱmarketȱvalueȱofȱCUȱ1,000ȱisȱworthȱtheȱsameȱasȱ anȱinvestmentȱinȱequitiesȱwithȱaȱmarketȱvalueȱofȱCUȱ1,000ȱisȱcorrectȱinȱtheȱcontextȱofȱfinancialȱ statementsȱdrawnȱupȱatȱtheȱmeasurementȱdate.ȱȱAnyȱextraȱreturnȱthatȱisȱexpectedȱtoȱbeȱearnedȱ fromȱinvestingȱinȱriskierȱclassesȱofȱassetsȱisȱaȱrewardȱforȱtakingȱextraȱriskȱandȱshouldȱbeȱaccountedȱ forȱinȱfutureȱperiods.ȱȱItȱwouldȱbeȱinappropriateȱforȱanȱaccountingȱmodelȱtoȱrecogniseȱtheȱ
expectedȱfutureȱvalueȱofȱassetsȱinȱtheȱstatementsȱofȱanȱentity’sȱcurrentȱfinancialȱpositionȱandȱ performance;ȱthatȱwouldȱbeȱlikelyȱtoȱreflectȱaȱfinancialȱpositionȱthatȱaȱriskȬseekingȱstrategyȱforȱ investmentȱisȱmoreȱvaluableȱthanȱaȱriskȬaverseȱstrategy.ȱȱWhenȱaȱdecisionȱisȱmadeȱtoȱinvestȱinȱ bondsȱorȱequitiesȱtoȱprovideȱfundsȱtoȱmeetȱaȱliability,ȱitȱisȱnotȱpossibleȱtoȱsayȱwhetherȱoneȱisȱ inherentlyȱmoreȱvaluableȱthanȱtheȱother.ȱ3ȱȱ
(f) Anȱaccountingȱmodelȱthatȱmightȱrequireȱanȱentityȱtoȱreportȱanȱincreaseȱinȱitsȱnetȱassetsȱbyȱ changingȱitsȱinvestmentȱstrategyȱby,ȱsay,ȱswitchingȱfromȱbondsȱtoȱequitiesȱisȱflawedȱ–ȱnoȱvalueȱ hasȱ(yet)ȱbeenȱaddedȱbyȱchangingȱtheȱassetȱallocation.ȱȱAȱproblemȱwithȱtheȱargumentȱforȱaȱhigherȱ valueȱthanȱmarketȱvalueȱisȱthatȱitȱwouldȱappearȱthatȱanȱentityȱcouldȱreportȱanȱimmediateȱgainȱbyȱ increasingȱleverageȱ–ȱforȱexample,ȱifȱitȱborrowedȱforȱinvestment,ȱitȱwouldȱreportȱanȱadditionalȱ assetȱifȱitȱexpectedȱtoȱearnȱaȱhigherȱreturnȱthanȱtheȱrateȱatȱwhichȱitȱhadȱborrowed.ȱȱTheȱentity’sȱ ownȱperceptionȱofȱtheȱvalueȱofȱitsȱinvestmentȱstrategyȱshouldȱbeȱcommunicatedȱbyȱdisclosureȱnotȱ recognition.ȱȱȱ
(g) InvestingȱinȱvolatileȱassetsȱtoȱprovideȱfundsȱforȱlongȬtermȱliabilitiesȱisȱaȱvolatileȱbusinessȱ proposition,ȱsoȱitȱisȱnotȱsurprisingȱthatȱtheȱaccountingȱnumbersȱmightȱreflectȱthatȱvolatility.ȱȱ However,ȱtheȱbasisȱforȱreportingȱtheȱfinancialȱpositionȱatȱaȱpointȱinȱtimeȱdoesȱnotȱimplyȱthatȱitȱisȱ orȱisȱnotȱrationalȱforȱemployersȱandȱtrusteesȱtoȱtakeȱinvestmentȱdecisionsȱaboutȱfundingȱlongȬtermȱ obligationsȱthatȱdoȱnotȱseekȱtoȱminimiseȱaccountingȱrisk.ȱȱȱ
3 Some claim that holding equities for longer periods increases rather than reduces risk because there is more chance of experiencing a disaster over a long period; they illustrate this with the higher cost of insuring against the risk of earning less than a risk-free rate of interest.
3.13ȱ ȱInȱtheȱlightȱofȱtheȱforegoingȱdiscussion,ȱthisȱpaperȱadvancesȱtheȱviewȱthatȱtheȱpresentȱ requirementȱinȱpensionsȱaccountingȱstandardsȱthatȱassetsȱtradedȱinȱactiveȱmarketsȱareȱmeasuredȱatȱ marketȱvaluesȱisȱwellȱfounded.ȱȱȱ
Largeȱholdings4ȱ
3.14ȱ Someȱareȱconcernedȱaboutȱmarketȱpricesȱbeingȱeffectivelyȱmarginalȱpricesȱbasedȱonȱrelativelyȱ smallȱquantitiesȱofȱsecuritiesȱandȱnotȱnecessarilyȱonȱtheȱtotalȱquantityȱofȱsecuritiesȱheldȱbyȱaȱparticularȱ plan,ȱifȱtheȱplanȱhasȱaȱlargeȱholding.ȱȱForȱexample,ȱtheȱ‘NormalȱMarketȱSize’ȱ(NMS),ȱasȱdefinedȱbyȱtheȱ LondonȱStockȱExchange,ȱisȱtheȱpercentageȱofȱanȱindividualȱcompany’sȱstockȱforȱwhichȱaȱmarketȱmakerȱisȱ obligedȱtoȱprovideȱaȱquote.ȱȱNMSȱisȱnormallyȱonlyȱ2.5%ȱofȱtheȱtotalȱvolumeȱofȱsharesȱforȱtheȱcompanyȱinȱ questionȱandȱmarketȱmakersȱareȱnotȱobligedȱtoȱprovideȱaȱquoteȱforȱanyȱtransactionȱofȱaȱsizeȱinȱexcessȱofȱ NMS.ȱȱȱ
3.15ȱ Theȱquestionȱarises,ȱtherefore,ȱifȱaȱlargeȱholdingȱofȱaȱsecurityȱisȱbeingȱmeasured,ȱwhetherȱtheȱ marketȱpriceȱofȱanȱindividualȱsecurityȱmultipliedȱbyȱtheȱnumberȱofȱsharesȱprovidesȱtheȱappropriateȱ measurement,ȱorȱwhetherȱthatȱvalueȱshouldȱbeȱadjustedȱtoȱreflectȱtheȱilliquidityȱofȱtheȱlargeȱposition.ȱȱȱ 3.16ȱ Thisȱissueȱisȱnotȱspecificȱtoȱpensionȱplans,ȱhowever.ȱȱItȱappliesȱtoȱanyȱlargeȱholdingsȱthatȱareȱ reportedȱinȱfinancialȱstatementsȱatȱaȱmarketȬbasedȱmeasure.ȱȱItȱisȱthereforeȱbeyondȱtheȱscopeȱofȱthisȱpaperȱ toȱaddressȱit,ȱotherȱthanȱtoȱhighlightȱitȱasȱaȱmatterȱthatȱisȱcurrentlyȱunderȱdebateȱ(byȱnotingȱbelowȱtheȱ positionȱtakenȱinȱtheȱaforementionedȱIASBȱDiscussionȱPaperȱ‘FairȱValueȱMeasurement’ȱandȱSFASȱ157),ȱ becauseȱtheȱviewȱhasȱbeenȱtakenȱthatȱthereȱareȱnoȱspecialȱreasonsȱwhyȱtheȱfinancialȱreportingȱ
requirementsȱforȱpensionȱplanȱassetsȱshouldȱdifferȱinȱthisȱrespectȱfromȱtheȱfinancialȱreportingȱ requirementsȱthatȱapplyȱtoȱfinancialȱassetsȱgenerally.ȱȱȱ
3.17ȱ TheȱDiscussionȱPaperȱ‘FairȱValueȱMeasurement’ȱ(whichȱincorporatesȱSFASȱ157)ȱproposesȱthatȱifȱ anȱentityȱhasȱaȱlargeȱholdingȱinȱanȱassetȱthatȱisȱtradedȱinȱanȱactiveȱmarket,ȱnoȱadjustmentȱisȱmadeȱtoȱtheȱ quotedȱmarketȱpriceȱbecauseȱofȱtheȱsizeȱofȱtheȱpositionȱrelativeȱtoȱtradingȱvolumeȱ(blockageȱfactor)ȱ–ȱevenȱ ifȱtheȱmarket’sȱnormalȱdailyȱtradingȱvolumeȱisȱnotȱsufficientȱtoȱabsorbȱtheȱquantityȱheldȱandȱplacingȱ ordersȱtoȱsellȱtheȱpositionȱinȱaȱsingleȱtransactionȱmightȱaffectȱtheȱquotedȱprice.ȱȱTheȱIASBȱobservesȱthatȱ thisȱtreatmentȱisȱsimilarȱtoȱtheȱguidanceȱinȱitsȱstandardsȱonȱfinancialȱinstruments,ȱnotingȱthatȱtheȱ illiquidityȱofȱanȱindividualȱinstrumentȱisȱnotȱaffectedȱbyȱtheȱsizeȱofȱaȱpositionȱheldȱbyȱanȱentity.”5ȱȱȱȱ 3.18ȱ Theȱissueȱrelatesȱtoȱwhetherȱtheȱunitȱofȱaccountȱisȱ(a)ȱtheȱindividualȱsecurityȱorȱ(b)ȱaȱblockȱofȱ securities.ȱȱInsightȱintoȱtheȱFASB’sȱreasoningȱforȱconcludingȱthatȱtheȱunitȱofȱaccountȱisȱtheȱindividualȱ securityȱisȱgivenȱinȱtheȱfollowingȱextractȱfromȱtheȱBasisȱforȱConclusionsȱtoȱSFASȱ157ȱ(paragraphȱC79):ȱ
4 This paper does not address situations in which an asset is a shareholding in another entity that provides a controlling interest.
5 The IASB asked respondents to its discussion paper for their views on this issue.
“Inȱreachingȱthatȱdecision,ȱtheȱmajorityȱofȱtheȱBoardȱaffirmedȱitsȱconclusionsȱrelatingȱtoȱtheȱprohibitionȱonȱ theȱuseȱofȱblockageȱfactorsȱinȱotherȱFASBȱStatements.ȱȱInȱparticular,ȱtheȱBoardȱemphasizedȱthatȱwhenȱaȱ quotedȱpriceȱinȱanȱactiveȱmarketȱforȱaȱsecurityȱisȱavailable,ȱthatȱpriceȱshouldȱbeȱusedȱtoȱmeasureȱfairȱvalueȱ withoutȱregardȱtoȱanȱentity’sȱintentȱtoȱtransactȱatȱthatȱprice.ȱȱBasingȱtheȱfairȱvalueȱonȱtheȱquotedȱpriceȱ resultsȱinȱcomparableȱreporting.ȱȱAdjustingȱtheȱpriceȱforȱtheȱsizeȱofȱtheȱpositionȱintroducesȱmanagementȱ intentȱ(toȱtradeȱinȱblocks)ȱintoȱtheȱmeasurement,ȱreducingȱcomparability.ȱȱFollowingȱtheȱreasoningȱusedȱinȱ Statementȱ107,ȱtheȱquotedȱpriceȱprovidesȱusefulȱinformationȱbecauseȱinvestorsȱregularlyȱrelyȱonȱquotedȱ pricesȱforȱdecisionȱmaking.ȱȱAlso,ȱtheȱdecisionȱtoȱexchangeȱaȱlargeȱpositionȱinȱaȱsingleȱtransactionȱatȱaȱ priceȱlowerȱthanȱtheȱpriceȱthatȱwouldȱbeȱavailableȱifȱtheȱpositionȱwereȱtoȱbeȱexchangedȱinȱmultipleȱ transactionsȱ(inȱsmallerȱquantities)ȱisȱaȱdecisionȱwhoseȱconsequencesȱshouldȱbeȱreportedȱwhenȱthatȱ decisionȱisȱexecuted.ȱȱUntilȱthatȱtransactionȱoccurs,ȱtheȱentityȱthatȱholdsȱtheȱblockȱhasȱtheȱabilityȱtoȱeffectȱ theȱtransactionȱeitherȱinȱtheȱblockȱmarketȱorȱinȱanotherȱmarketȱ(theȱprincipalȱorȱmoreȱadvantageousȱ marketȱforȱtheȱindividualȱtradingȱunit).”ȱ
Investmentȱstrategyȱ
3.19ȱ ArgumentsȱforȱanȱentityȬspecificȱmeasurementȱcallȱintoȱquestionȱhowȱtheȱvalueȱtoȱtheȱentityȱofȱtheȱ investmentȱstrategyȱitȱisȱpursuingȱtoȱmeetȱitsȱobligationsȱshouldȱbeȱreportedȱtoȱusers.ȱȱȱ
3.20ȱ Establishingȱaȱstrategyȱrequiresȱanȱassessmentȱofȱfutureȱinvestmentȱreturnsȱonȱassetsȱheldȱtoȱmeetȱ theȱobligationsȱandȱtheȱabilityȱofȱtheȱemployerȱtoȱmakeȱfurtherȱcontributionsȱifȱtheyȱareȱrequired.ȱȱTheȱ strengthȱofȱtheȱemployer’sȱcovenantȱmayȱaffectȱdecisionȬmakers’ȱviewsȱofȱanȱappropriateȱriskȱprofileȱofȱ theȱassets.ȱȱUsersȱareȱinterestedȱinȱtheȱemployer’sȱabilityȱtoȱcontinueȱtoȱmeetȱitsȱobligationsȱasȱtheyȱfallȱ due,ȱoutȱofȱresourcesȱcurrentlyȱsetȱasideȱandȱresourcesȱpotentiallyȱavailable.ȱȱȱ
3.21ȱ Someȱargueȱthatȱtheȱroleȱplayedȱbyȱtheȱinvestmentȱstrategyȱinȱmeetingȱtheȱobligationȱshouldȱbeȱ reflectedȱasȱsomeȱkindȱofȱassetȱinȱorderȱtoȱshowȱaȱbalancedȱviewȱofȱtheȱassetsȱandȱliabilities.ȱȱThisȱassetȱ wouldȱrepresentȱaȱvalueȱplacedȱonȱtheȱfutureȱcashȱflowsȱfromȱtheȱinvestmentsȱthatȱisȱnotȱreflectedȱinȱtheȱ currentȱmarketȱvalueȱandȱcouldȱperhapsȱbeȱshownȱseparatelyȱasȱanȱadditionȱtoȱ(orȱpossiblyȱinȱsomeȱ circumstancesȱaȱsubtractionȱfrom)ȱtheȱmarketȱvalue.ȱȱȱ
3.22ȱ Mostȱcontributorsȱtoȱthisȱpaperȱtakeȱtheȱview,ȱforȱtheȱreasonȱgivenȱinȱparagraphȱ3.12(f)ȱabove,ȱthatȱ theȱroleȱofȱinvestmentȱstrategyȱinȱmeetingȱobligationsȱtoȱpayȱbenefitsȱrequiresȱexplanationȱ(ratherȱthanȱ recognition)ȱinȱfinancialȱstatementsȱ(seeȱChapterȱ9).ȱȱȱ
3.23 Thisȱpaperȱadvancesȱtheȱviewȱthatȱtheȱroleȱofȱinvestmentȱstrategyȱinȱmeetingȱobligationsȱtoȱpayȱ benefitsȱrequiresȱexplanationȱ(ratherȱthanȱrecognition)ȱinȱfinancialȱstatements.ȱȱ
Assets not traded in active markets
3.24ȱ Theȱaboveȱdiscussionȱhasȱlargelyȱrelatedȱtoȱtheȱexistenceȱofȱanȱactiveȱmarketȱforȱtheȱtypesȱofȱassetsȱ underȱconsideration.ȱȱThisȱraisesȱquestionsȱaboutȱtheȱtreatmentȱofȱalternativeȱinvestmentsȱthatȱareȱnotȱ
tradedȱinȱactiveȱmarketsȱwithȱquotedȱprices,ȱsuchȱasȱpropertiesȱandȱunlistedȱequityȱinvestments.ȱȱȱ 3.25ȱ TheȱdiscussionȱearlierȱinȱthisȱChapterȱaboutȱtheȱrelevanceȱofȱmarketȬbasedȱandȱentityȬspecificȱ measuresȱisȱalsoȱapplicableȱtoȱassetsȱnotȱtradedȱinȱactiveȱmarkets,ȱandȱaȱsimilarȱconclusionȱmightȱbeȱ drawnȱtoȱthatȱinȱparagraphȱ3.11ȱthatȱtheȱtypesȱofȱassetsȱunderȱconsiderationȱcannotȱbeȱworthȱmoreȱtoȱtheȱ entityȱthanȱvaluesȱatȱwhichȱtheyȱcouldȱbeȱexchanged.ȱȱȱȱ
3.26ȱ Theȱdiscussionȱthenȱturnsȱtoȱtheȱrelevanceȱofȱalternativeȱmethodsȱofȱmeasuringȱsuchȱassets.ȱȱSomeȱ considerȱthatȱthereȱshouldȱbeȱfallbackȱtoȱtheȱtreatmentȱofȱsimilarȱassetsȱinȱotherȱIFRS,ȱratherȱthanȱaȱ
differentȱsetȱofȱrequirementsȱforȱassetsȱheldȱtoȱprovideȱfundsȱforȱpensions.ȱȱForȱexample:ȱ
x applyingȱIASȱ40ȱ‘InvestmentȱProperty’ȱwouldȱallowȱpropertyȱinterestsȱtoȱbeȱreportedȱunderȱaȱ fairȱvalueȱmodelȱorȱaȱcostȱmodel;ȱ
x applyingȱIASȱ39ȱ‘FinancialȱInstruments:ȱRecognitionȱandȱMeasurement’ȱwouldȱsuggestȱthatȱaȱ costȱmodelȱshouldȱbeȱusedȱtoȱmeasureȱinvestmentsȱinȱequityȱinstrumentsȱthatȱdoȱnotȱhaveȱaȱ quotedȱmarketȱpriceȱinȱanȱactiveȱmarketȱandȱwhoseȱfairȱvalueȱcannotȱbeȱreliablyȱmeasured.ȱȱȱ 3.27ȱ IASȱ19ȱdoesȱnotȱmakeȱanȱexceptionȱtoȱaȱfairȱvalueȱmeasurementȱprincipleȱforȱplanȱassets.ȱȱAlso,ȱ earlierȱinȱthisȱChapter,ȱitȱhasȱbeenȱproposedȱthatȱreportingȱassetsȱheldȱtoȱpayȱbenefitsȱatȱcurrentȱvaluesȱ providesȱmoreȱusefulȱinformationȱthanȱhistoricalȱmeasuresȱ(seeȱparagraphȱ3.3).ȱȱUnderȱthisȱview,ȱaȱcostȱ modelȱwouldȱresultȱinȱanȱaccountingȱmismatchȱinȱrespectȱofȱtheȱtreatmentsȱofȱassetsȱandȱrelatedȱliabilities,ȱ presentingȱaȱmisleadingȱviewȱofȱtheȱnetȱposition.ȱȱȱ
3.28ȱ Moreover,ȱitȱseemsȱreasonableȱtoȱpresumeȱinȱsettingȱfinancialȱreportingȱrequirementsȱthatȱifȱassetsȱ areȱbeingȱheldȱtoȱprovideȱpensionsȱandȱsecurityȱofȱpensions,ȱthoseȱresponsibleȱshouldȱhaveȱsomeȱideaȱofȱ theirȱvalueȱonȱanȱongoingȱbasis,ȱandȱthatȱthereȱisȱsomeȱmethodologyȱavailableȱforȱestimatingȱtheirȱvalue,ȱ otherwiseȱquestionsȱwouldȱbeȱraisedȱaboutȱaccountabilityȱandȱgovernance.ȱȱThisȱpaperȱthereforeȱsupportsȱ theȱpositionȱthatȱthereȱisȱaȱstrongerȱcaseȱforȱrequiringȱthatȱassetsȱheldȱtoȱpayȱpensionsȱshouldȱbeȱreportedȱ atȱcurrentȱvaluesȱthanȱnecessarilyȱwouldȱapplyȱtoȱsimilarȱassetsȱheldȱforȱotherȱpurposesȱ–ȱforȱexample,ȱtheȱ caseȱforȱaȱconcessionȱsuchȱasȱthatȱinȱIASȱ39ȱinȱrespectȱofȱunquotedȱequitiesȱseemsȱlessȱstrongȱinȱtheȱcaseȱofȱ pensionȱplans.ȱȱȱ
3.29ȱ Thereȱisȱguidanceȱinȱotherȱaccountingȱstandardsȱonȱvaluationȱtechniquesȱforȱestimatingȱfairȱvaluesȱ ofȱassetsȱthatȱareȱnotȱtradedȱinȱactiveȱmarkets.ȱȱForȱexample,ȱIASȱ40ȱstatesȱthatȱtheȱfairȱvalueȱofȱinvestmentȱ propertyȱshallȱreflectȱmarketȱconditionsȱatȱtheȱbalanceȱsheetȱdateȱandȱdescribesȱvaluationȱtechniquesȱ rangingȱfromȱcomparisonsȱwithȱcurrentȱvaluesȱofȱsimilarȱpropertiesȱtoȱdiscountedȱcashȱflowȱprojectionsȱ usingȱdiscountȱratesȱthatȱreflectȱcurrentȱmarketȱassessmentsȱofȱtheȱuncertaintyȱinȱtheȱamountȱandȱtimingȱ ofȱtheȱcashȱflows.ȱȱSimilarly,ȱIASȱ39ȱdescribesȱaȱrangeȱofȱvaluationȱtechniquesȱforȱestimatingȱtheȱfairȱvalueȱ ofȱfinancialȱinstrumentsȱinȱtheȱabsenceȱofȱanȱactiveȱmarket,ȱwhichȱincludeȱreferenceȱtoȱcurrentȱfairȱvaluesȱ ofȱsimilarȱinstruments,ȱdiscountedȱcashȱflowȱanalysisȱandȱoptionȱpricingȱmodels.ȱȱSinceȱtheȱobjectiveȱofȱ usingȱsuchȱtechniquesȱisȱtoȱestimateȱaȱcurrentȱvalue,ȱandȱtheyȱareȱintendedȱtoȱbeȱconsistentȱwithȱaȱmarketȬ
basedȱapproachȱforȱmeasuringȱassetsȱthatȱareȱtradedȱinȱactiveȱmarkets,ȱsuchȱtechniquesȱshouldȱalsoȱbeȱ appropriateȱforȱmeasuringȱassetsȱheldȱtoȱfundȱpensionȱliabilities.ȱȱItȱisȱimportantȱthatȱfinancialȱstatementsȱ includeȱappropriateȱdisclosuresȱaboutȱtheȱvaluationȱtechniques,ȱbecauseȱvaluationsȱcanȱbeȱsensitiveȱtoȱtheȱ assumptionsȱthatȱhaveȱbeenȱused.ȱȱȱ
3.30ȱ Someȱofȱtheȱissuesȱtouchedȱonȱaboveȱareȱissuesȱthatȱshouldȱconcernȱtheȱvariousȱindustriesȱinȱ whichȱassetsȱofȱpensionȱplansȱareȱnowȱinvesting,ȱbecauseȱtheyȱwouldȱhaveȱtoȱrespondȱbyȱdeliveringȱ relevantȱinformationȱaboutȱvaluesȱtoȱthoseȱwhoȱareȱaccountableȱforȱsuchȱassets.ȱȱȱ
3.31ȱ Inȱtheȱlightȱofȱtheȱforegoingȱdiscussion,ȱthisȱpaperȱadvancesȱtheȱviewȱthat:ȱ
Whenȱanȱassetȱisȱnotȱtradedȱinȱanȱactiveȱmarket,ȱaȱcurrentȱvalueȱshouldȱbeȱestimatedȱusingȱaȱvaluationȱ techniqueȱinȱaccordanceȱwithȱtheȱguidanceȱinȱotherȱaccountingȱstandards.ȱȱ
4 Summary
4.1ȱ ThisȱChapterȱadvancesȱtheȱfollowingȱviewsȱonȱtheȱmeasurementȱofȱassetsȱheldȱtoȱpayȱbenefits:ȱ (a)ȱ Reportingȱassetsȱheldȱtoȱpayȱbenefitsȱatȱcurrentȱvaluesȱprovidesȱmoreȱusefulȱinformationȱthanȱ
reportingȱthemȱatȱhistoricalȱmeasures.ȱȱThisȱisȱconsistentȱwithȱtheȱviewsȱpresentedȱonȱmeasuringȱ liabilitiesȱtoȱpayȱbenefits.ȱȱ(Paragraphsȱ3.2Ȭ3.3)ȱ
(b)ȱ Theȱpresentȱrequirementȱinȱpensionsȱaccountingȱstandardsȱthatȱassetsȱtradedȱinȱactiveȱmarketsȱareȱ measuredȱatȱmarketȱvaluesȱisȱwellȱfounded.ȱȱ(Paragraphsȱ3.10Ȭ3.13)ȱ
(c)ȱ Theȱroleȱofȱinvestmentȱstrategyȱinȱmeetingȱobligationsȱtoȱpayȱbenefitsȱrequiresȱexplanationȱ(ratherȱ thanȱrecognition)ȱinȱfinancialȱstatements.ȱȱ(Paragraphsȱ3.19Ȭ3.23)ȱ
(d)ȱ Whenȱanȱassetȱisȱnotȱtradedȱinȱanȱactiveȱmarket,ȱaȱcurrentȱvalueȱshouldȱbeȱestimatedȱusingȱaȱ valuationȱtechniqueȱinȱaccordanceȱwithȱtheȱguidanceȱinȱotherȱaccountingȱstandards.ȱȱ(Paragraphsȱ 3.24Ȭ3.31)ȱ
ȱ
APPENDIX A