12/13/2007: Big Six issue fair value paper

Excerpt from Big Six issue fair value paper
Prepared by the Global Public Policy Committee (GPPC) of the six largest international accounting networks comprising representatives of BDO International, Deloitte, Ernst & Young, Grant Thornton International, KPMG and PricewaterhouseCoopers.

In recent months financial market conditions have been characterised by significant volatility compounded by a liquidity crunch. Although the primary market shock arose due to defaults on sub-prime mortgages in the United States, the effect has been felt globally due to widespread use of structured securities and leveraged funding. Entities with exposure to the financial markets through debt, equity, derivative and leveraged finance activities may experience significant price volatility as a result of liquidity, credit or other issues. The immediate consequences of current market conditions are credit losses on direct and indirect investments in sub-prime mortgages and securitised loans. However, there have been more widespread effects as lenders and investors have re-evaluated their willingness to provide funding and this resulting lack of liquidity has contributed to a decline in the fair value of financial instruments. As a consequence all entities, not only those with direct or indirect exposure to subprime mortgages, could be affected by current market conditions. This paper highlights those aspects of existing IFRS accounting literature that are most likely to be relevant when establishing the fair value of financial assets and financial liabilities and related disclosures in the context of current market conditions.