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October 2009

Highlights of CICA Handbook's fair value hierarchy rules

Earlier this year, the Accounting Standards Board adopted amendments made to IFRS 7, Financial Instruments: Disclosures into the Canadian GAAP, CICA Handbook Section 3862. The new rules apply to fiscal years ending after Sept. 30, 2009, and enhance disclosures by requiring financial institutions to assess the reliability and objectivity of the inputs they use to measure the fair value of their assets and liabilities. They also closely align both Canadian and international standards to the fair value disclosure rules established in U.S. GAAP under the Federal Accounting Standards Board’s Statement FASB 157.

 

As part of the new disclosure elements, financial institutions must classify their assets and liabilities into one of three levels of a fair value hierarchy.  This hierarchy spans from Level 1, which includes assets measured using quoted prices in active markets, through to Level 3, which is a category for assets that are measured with more subjective estimation methods that are not based on observable market data.

 

The Investment Fund Institute of Canada (IFIC) has issued a guideline that explains how the new hierarchy might be applied to investment funds.  IFIC’s exact definitions for each level are:

 

• Level 1: unadjusted quoted prices in active markets for identical assets or liabilities
• Level 2: inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly
• Level 3: inputs based on unobservable market data

 

Going forward, investment fund institutions must include this disclosure information in their financial statements by identifying in which of the three fair value levels their assets or liabilities are allocated. They must also reconcile Level 3 assets and liabilities to identify the movement in valuation between the beginning and end of a fiscal year. In addition, significant movement between Level 1 and Level 2 assets must be disclosed, although this requirement is optional in the initial year of adoption.

 

CIBC Mellon’s accounting systems and reporting tools are already compliant with these new disclosure elements, and can support our clients’ disclosure requirements in accordance with these new standards.  We will provide our applicable clients with further information in the near future that identifies the default level mapping that we have applied to each asset class. Our systems and tools have the flexibility to re-classify assets and liabilities at the account and affiliate level in accordance with our clients’ specific requirements.

 

If you have any questions about these new accounting standards, please contact your CIBC Mellon service representative.

 

By Peter Maden, vice president, institutional and pension accounting and chair, CIBC Mellon IFRS committee 

 

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Trade Talk® is provided for general information purposes only and CIBC Mellon Global Securities Services Company, CIBC Mellon Trust Company, CIBC, The Bank of New York Mellon Corporation and their affiliates make no representations or warranties as to its accuracy or completeness. Readers should be aware the content of this publication should not be regarded as legal, tax, accounting, investment, financial or other professional advice nor is it intended for such use.

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