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Limits of Level 3 Fair Value Measurement: Based on Conceptual Framework



Author(s)

Nobuhito Ochi

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DOI:10.17265/1548-6583/2017.12.001

The IASB stated that in the review of the conceptual framework, if measurement uncertainty is very high, a measurement basis different from fair value may provide more appropriate information. Level 3 fair value measurements are inappropriate for areas (called “Level 4” by the author) in which models are not formulated and that have material uncertainty in measurement. The purpose of this paper is to elucidate “measurement uncertainty”, which impacts “faithful representation” in fair value measurement, from the perspective of “verifiability”. To do so, it will employ a conceptual examination of the limits of Level 3 fair value measurement based on IFRS 13 (Fair Value Measurement). While taking into consideration recent discussions on reviewing conceptual framework, the author will reorganize the conceptual categories of verifiability (i.e., clarification of the “reasonable verifiability” categories) to underpin the fact that material uncertainties in measurement have obstructed constructing faithful representation. In addition, the author will discuss the problem that the dichotomy of direct and indirect found in IASB is not accurate enough to fully understand the concept of verifiability. In this context, the author will also suggest that the concept of verifiability, reorganized through “reasonable verifiability”, can satisfy the requirements for constructing faithful representation.

level 3 fair value measurement, faithful representation, measurement uncertainty, verifiability