IFRS 13 Fair Value Measurement - Winston Robinson

8/9/2019 IFRS 13 Fair Value Measurement - Winston Robinson

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IFRS 13 Fair ValueMeasurement

© 2008 Deloitte Touche Tohmatsu

Presented by Winston Robinson

of Deloitte Jamaica February 1, 2013


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• Describe the major requirements of IFRS 13 Fair Value

Measurement

• Apply the requirements of IFRS 13 to a range of practicalscenarios

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1. Introduction

2. Scope of IFRS 13

3. Definition of fair value and key principles

4. Initial measurement

5. Application of fair value measurement - Non-financial assets

6. Application of fair value measurement - liabilities and an

entity’s own equity instruments

7. Valuation techniques

8. Fair value hierarchy

9. Disclosures

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Introduction

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Why was IFRS 13 issued?Why was IFRS 13 issued?Why was IFRS 13 issued?Why was IFRS 13 issued?IFRSs

Fair value measurement

guidance existed in

various standards and

was

not complete and

inconsistent

• The IASB and the FASB

worked together for a number

of years to develop common

requirements for fair valuemeasurements and

disclosures.

• The IASB issued IFRS 13 in

US GAAP

Topic 820 Fair ValueMeasurement

May 2011.

• The FASB issued an Update

(ASU 2011-04) to ASC 820 in

May 2011.

• Only a few differences exist

between IFRS 13 and ASC

820 as modified.

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What is the objective of IFRS 13?

#1:

What is

#2:

How should an

#3

What should be

IFRS 13 sets out a framework for measuring

fair value in a single IFRS, and answers:

meant by “fairvalue”?

entity measurefair value?

disclosed about fairvalue measurements?

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When will IFRS 13 become effective?

• IFRS 13 is effective for annual periods beginning on or

after 1 January 2013. Earlier application is permitted.

• IFRS 13 should be applied prospectively from the

beginning of the annual period in which it is initially

applied.

• The disclosure requirements need not be applied in

comparative information for periods before initial

application of IFRS 13.

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Scope of IFRS 13

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What is the scope of IFRS 13?

Scope of IFRS 13

13

.

permits fair value measurements ordisclosures

Applies to both initial and subsequent

measurement as to how to determine fairvalue

IFRS 13 does not address

which types of assets,

liabilities and items classifiedas an entity’s own

shareholders’ equity should be

measured at fair value

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Examples of how broad the scope of IFRS 13 is

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IFRS 5

• Identifiable assets and liabilities of an acquiree aremeasured at fair value

• Non-controlling interest can be measured at fair value at

the date of acquisition

• Previously-held equity interest is measured at fair value on

a step acquisition

• Non-current assets and/or disposal groups are measured at

the lower of carrying amounts and fair value less costs to

16

18

sell.

• Items that are measured using the revaluation model (i.e.,

fair value at the date of revaluation less subsequent

accumulated depreciation and impairment)

•

•

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IAS 32

IAS 36

• Fair value of a compound instrument as a whole

• When the recoverable amount is determined based on “fairvalue less costs of disposal”

• Items that are measured using the revaluation model (i.e.,

IAS 39

IAS 38 fair value at the date of revaluation less subsequentaccumulated depreciation and impairment)

• Financial assets and liabilities are measured at fair value

on initial recognition

• Financial assets and liabilities that are measured at fairvalue at the subsequent reporting dates

• Financial assets and liabilities that are not measured at fair

value at subsequent reporting dates but disclosure of fair

value is required in accordance with IFRS 7

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IAS 40

IAS 41

• Investment properties that are measured using the fairvalue model

• Investment properties that are measured using the cost

model – still need to apply IFRS 13 because IAS 40

requires disclosure of fair value

• Biological assets are measured at fair value on initial

recognition and at each reporting date

• Agricultural produce are measured at fair value at the point


Interpretations

o arves

• IFRIC 13 Customer Loyalty Programmes

• IFRIC 17 Distributions of Non-cash Assets to Owners

• IFRIC 18 Transfers of Assets from Customers

• IFRIC 19 Extinguishing Financial Liabilities with EquityInstruments

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Scope exemptions

2

Category 1:Exempt from IFRS 13 measurement

and disclosure requirements

• -

Category 2:Exempt only from IFRS 13

disclosure requirements

transactions within the scope ofIFRS 2

• Leasing transactions within the

scope of IAS 17

• Measurements that have

similarities to fair value but arenot fair value (e.g., net realisable

value in IAS 2 or value in use in

IAS 36)

value in accordance with IAS 19• Retirement benefit plan

investments measured at fair

value in accordance with IAS 26

• Assets for which the recoverable

amount is fair value less costs ofdisposal in accordance with IAS

36

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Definitionof fair value and

key principles

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Definition of fair value

Fair value is anEXIT PRICE

Liability

Price that would be

paid to transfer theliabi

Asset

The price that would be

received to sell the

asset

In an orderlytransaction

Between market

participants

At measurement

date

• NOT based on how much

the reporting entity has to

pay to settle a liability

• Should be based on how

much the reporting entityhas to pay to a market

participant such that the

market participant is willing

to take over the liability

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• What is the principal (or if none exists, themost advantageous) market?

Market

• What is being measured?

• What is the appropriate unit of account? Is itthe same as the basis for valuation?

Unit of

account

What should be considered in determining fair value?

• What assumptions would market participantsin the principal (or the most advantageous) markettake into account when pricing the asset or liability?

• What characteristics of the asset or liability wouldmarket participants take into account?

Assumptions

• What inputs are available and could be usedin determining the fair value? What is (are)the appropriate valuation technique(s)?

Inputs and

valuation

techniques

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Step 1: Unit of account

• Whether the asset or liability is a stand-alone asset or

liability, a group of assets, a group of liabilities or agroup of assets and liabilities for recognition or

disclosure purposes depends on its unit of account

•

determined in accordance with the IFRS that requires orpermits the fair value measurement, except as provided

in IFRS 13 (e.g., IFRS 13.48, IFRS 13.80).

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Facts:

• Entity A owns 16% equity interest in Entity B (160 million

shares). Assume that Entity B is a listed company in Hong Kong

and its shares are traded in an active market

• Entity A accounts for the 16% equity interest in Entity B as an

available-for-sale investment in accordance with IAS 39.

Questions:

Unit of account: Example 1

• How should Entity A determine the fair value of the 16% equityinterest in Entity B?

• Should Entity A determine the fair value of the 16% interest

based on the quoted price per share multiplied by the number of

shares?• Or should Entity A take into account the blockage factor in

determining the fair value of the 16% interest? Blockage factor

reflects the size of the 16% when pricing the 16% interest.

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:

• What is the appropriate IFRS that requires the 16% equity

interest to be measured at fair value?

IAS 39• What is the unit of account in accordance with IAS 39?

the individual share (where shares are traded in an active


mar e

BC 47(b) of IFRS 13 states: “in IAS 39 the unit of account is

generally an individual financial instrument”

• Entity A measures the fair value of the 16% equity interest as

follows:= Quoted price per share*160,000,000

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:

• Entity A owns 54% equity interest in Entity B. Entity B is a listed entity

in Country B and its shares are traded in an active market

• Entity B is a subsidiary of Entity A

• Goodwill arose when Entity A acquired Entity B a few years ago

• Assume (a) the operation of Entity B is a separate cash-generating

unit in accordance with IAS 36 and (b) the recoverable amount of the

Unit of account: Example 2Unit of account: Example 2Unit of account: Example 2Unit of account: Example 2

cas -generat ng un t s eterm ne ase on ts a r va ue ess costs

to sell.

Questions:

• How should Entity A determine the “fair value” of the cash-generating

unit (i.e., Entity B’s operation)?

• Should Entity A take into account the control premium in determining

the fair value of the cash-generating unit?

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:


• IFRS 13.14 requires entities to identify the unit of account – the

unit of account should be determined in accordance with the

IFRS that requires or permits the fair value measurement

• The relevant IFRS is IAS 36 that requires Entity A to identify and

quantify impairment loss (if any)

• And what is being measured is a cash-generating unit in

accordance with IAS 36 (i.e., the 54% interest in Entity B) that

includes a control premium

• Therefore, when Entity A measures the fair value of the 54%

interest in Entity B, it should take into account the controlpremium it has over Entity B.

US GAAP is explicit that control premiums are permitted for reporting

units. The above position is subject to clarification with the IASB.

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:• Entity A owns 54% equity interest in Entity B (300 million shares).

Entity B is a listed entity in Country B and its shares are traded in an

active market

• Entity B is a subsidiary of Entity A• Entity A is preparing its separate financial statements in accordance

with IAS 27

•


with IAS 39. Entity A accounts for the interest in Entity B as anavailable-for-sale investment in accordance with IAS 39.

Questions:

• How should Entity A determine the fair value of the interest in Entity

B? Should Entity A take into account the control premium indetermining the fair value of the interest in Entity B?

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:

• Based on IAS 27, Entity A chooses to account for the interest in Entity

B in accordance with IAS 39

• Entity A should determine the unit of account in accordance with IAS39

• What is the appropriate IFRS that requires the 54% equity interest to

be measured at fair value?


IAS 39

• What is the unit of account in accordance with IAS 39?

the individual share (where shares are traded in an active market)

• Entity A measures the fair value of the 54% equity interest as follows:

= Quoted price per share*300,000,000

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Step 2: The market

Principal market(the market with the greatest volume or level

activity for the asset or liability)

A fair value

measurement

assumes that the

transaction to sell the

asset or transfer theliability takes place

in…

Most advantageous market

(the market that maximises the amount that would be receivedto sell the asset or minimises the amount that would be paid totransfer the liability, after taking into account transaction costs

and transport costs)

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Identifying the market

Step 2

Among the markets

identified under Step 1,Determine the principal

(or most advantageous)

market

Step 1

Identify markets towhich the reporting

entity has access

1

Entity A is engaged in thetrading of goods and has

access to Markets B, C, D, E

and F

2

Entity A determines that

Market B is the principal (or

most advantageous) market

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Identifying the market

Does it mean that

we need to do an

exhaustive search

in identifying the

principal (or the

most

Entities need not undertake

an exhaustive search of all

possible markets

• Should take into account all

information that is reasonably

market?

ava a e

• In the absence of evidence to the

contrary, the market in which the

entity would normally enter into a

transaction to sell the asset or to

transfer the liability is presumed tobe the principal market or the

most advantageous market

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Identifying the market: Example

Entity A

(a corporate)Interest rate swap Bank B

On initial recognition,

the swa was entered

Questions:

– What is the principal market for Entity A?

– What is the principal market for Bank B?

– Are they the same?

into for noconsideration

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Identifying the market: Example

( )

Bank B’s perspective: the principal

market is the interbank market

Entity A’s perspective:

the principal market is the retail market:

• If Bank B were to transfer its rights and

obligations under the swap, it would do

so with a dealer in that market

• The transaction price (i.e., zero) would

not necessarily represent the fair value

of the swap to Entity B at initial

recognition• Bank B should apply IAS 39 to

determine whether it recognises any

day 1 gain or loss.

• If Entity A were to transfer its rights and

obligations under the swap, it would do so

with a dealer counterparty in that retail

market

• In that case, the transaction price (i.e., zero)

would represent the fair value of the swap to

Entity A at initial recognition (i.e., the exitprice that Entity A would receive to sell or

pay to transfer the swap in a transaction with

a dealer counterparty in the retail market).

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Step 3: Assumptions

ADJUST

Fair value is an

EXIT PRICE

Transaction costs

Don’t adjust – not acharacteristic of an

asset or liability

Transaction costs are

accounted for in

Transport costs

Adjust if location is a

characteristic of an

DON’T ADJUST

accordance with otherapplicable IFRSs.

asset

Example

Example

commission fees payable to real

estate agents when an entity sells

its property

Note: Both transport

costs and transaction

costs would be taken

into account in

identifying the mostadvantageous market

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The Price: Example 1

• Entity A acquired an investment property

for a transaction price of CU100 million

• Entity A paid commission fees to real

estate agent of about CU5 million

• Entity A recorded the investment

property on initial recognition at CU105million in accordance with IAS 40.20

• The market value of the investment

property remains unchanged at

CU100 million

• Assume that if Entity A sold the

property on 31 Dec 20X1, it had to

incur commission fees of CU5 million

1 Dec 20X1 31 Dec 20X1

Entity A measures its investment property using the fair value model in

accordance with IAS 40 Investment Property .Question:

At what amount should Entity A record the investment property as at

31 December 20X1?

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:

• Entity A should record the investment property at CU100

million as at 31 December 20X1

• Commission fees to real estate agents are transactioncosts to be incurred when Entity A sells the property

• Fair value should not be adjusted for the transaction costs


of CU5 million• The difference between the carrying amount of CU105 as

at 1 Dec 20X1 and the fair value as at 31 Dec 20X1 is

recognised in the profit or loss.

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Facts:

• Entity A has agricultural produce as defined under IAS 41,

which is required to be measured at fair value at the point of

harvest.• The agricultural produce is located in location A.

• It was determined that Entity A’s principal market is location B.


• r c ng quo e a oca on s per un o agr cu ura

produce.

• It would cost Entity A transportation costs of CU5 to ship each

unit of agricultural produce from location A to location B.

Question:• What is the fair value of each unit of agricultural produce?

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Suggested accounting response:

• Entity A should take into account transportation costs to

be incurred to ship agricultural produce from location A to

location B in arriving at the fair value of the agriculturalproduce.

• This is because the location in this example reflects the


characteristics of the subject asset.

• Therefore, the fair value of each unit of agricultural

produce is CU95.

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The Price: Characteristics of the asset or liability

Pricing

Market

participants

Assume they

act in their

best

economic

interest

Fair value ofasset or liability

assumptions

Condition and

location

Restrictions on

sale or use

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Facts:

• Entity A has a loan receivable from Entity B (a borrower).

Question:

• Should Entity A consider the credit standing of Entity B in

determining the fair value of the loan receivable?

Characteristics of the asset or liability: Example

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• Yes. Entity A should consider Entity B’s credit standing in

determining the fair value of the loan receivable in

accordance with IFRS 13.• IFRS 13.22 states, in part, “An entity shall measure the

fair value of an asset or a liability using the assumptions

Characteristics of the asset or liability: Example

t at mar et part c pants wou use w en pr c ng t e asset

or liability, assuming that market participants act in their

economic best interest.”

• Market participants would incorporate the effects of the

borrower’s credit into the valuation of a loan receivablebecause this can potentially affect the amount of proceeds

they ultimately receive from the borrower.

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Facts:

• Entity A owns some equity instruments (financial assets

within the scope of IAS 39/IFRS 9.

• There are some restrictions on the sale of the shares for aspecified period of time.

Question:

Restrictions on the sale or use of an asset

• Should a restriction on the sale or use of an asset beconsidered in determining its fair value?

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• It depends.

• For example, the contractual restriction on the sale of the

instrument should be incorporated in the asset’s fair valuemeasurement (if the restriction is instrument-specific and

would be transferred to market participants).

Restrictions on the sale or use of an asset

• Entity-specific restrictions should not be considered indetermining the fair value of the asset.

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Facts:

• Entity A owns some ordinary shares of Entity B

• Entity B is a private entity

• The constitutional documents of Entity B (e.g., the articles

of association) specify that shareholders are not allowed

to sell its shares to parties other than the existing

Restrictions on sale or use: Example 1

shareholders, unless they get consent from the existingshareholders.

Question:

• Should Entity A take into account such a restriction on

sale in determining the fair value of the investment?

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• Yes. Entity A should take into account the restriction in

determining the fair value of the investment in Entity B

• The constitutional documents are considered as contractual

arrangements between shareholders• The restriction is a characteristics of the instrument and would

be transferred to market participants


,

restriction• The adjustment will vary depending on all of the following:

– the nature and duration of the restriction

– the extent to which buyers are limited by the restriction (e.g.,

there might be a large number of qualifying investors) and

– qualitative and quantitative factors specific to both the

instrument and the issuer.

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Facts:• Entity A is one of the shareholders of Entity B

• Entity B becomes a listed company – listed on Country

B’s stock exchange• For the purposes of the listing, Entity A undertakes not to

sell its shares for the coming 5 years since the initial


• There are no restrictions set out in the contractual terms

of instrument.

Question:

• Should Entity A take into account such a restriction on salein determining the fair value of the investment?

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• The restriction is not included in the contractual terms of

the instrument

• The restriction is specific to Entity A only

• Therefore, such a restriction would not be transferred to

market participants


Such a restriction should not be reflected in the fairvalue of the instrument.

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Facts:

• Entity A borrows monies from a bank

• Entity A owns some equity interests in Entity B. Entity B is a

listed entity with its shares listed on the Stock Exchange ofCountry B

• The equity interests in Entity B are pledged as collaterals as


• The borrowing arrangement restricts Entity A from selling ortransferring the equity interests in Entity B during the loan

period.

Question:

• Should Entity A take into account such a restriction on sale in

determining the fair value of the investment in Entity B?

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• The restriction in this example is entity-specific

• Other market participants would not be subject to this

restriction and such a restriction would not be transferredwith the instrument

• Therefore, the restriction should not be taken into account


in arriving at the fair value of the instrument

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Fair value vs. transaction price

Fair value

Price that would be

received to sell the asset or

paid to transfer the liability

Transaction price

Price paid to acquire the

asset or received to

assume the liabilityvs.

Is transaction price always equal to fair value? If not,how should a ‘day 1 gain/loss’ be accounted for?

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Fair value vs.. transaction price


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Fair value vs.. transaction price

Transaction takes place under

duress or the seller is forced toaccept the price in the transaction

Transaction is between related

parties (i.e., transactions may

include capital contribution /

distribution element)

Unit of account represented by

In many cases, the transactionprice will equal the fair value

(e.g., on the transaction date, the

transaction to buy an asset takes

place in the market in which the

asset would be sold)

IFRS 13 requires us to take into

account factors that are specific to

...

The market in which the

transaction takes place isdifferent from the principal (or

most advantageous) market (refer

interest rate swap example in

previous slides)

the transaction price differs from

the unit of account for the asset orliability measured at fair value

(e.g., a business combination

situation)

t e transact on an to t e asset or

liability.

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Fair value vs. transaction price

How to account for ‘day 1 gain or loss’?

1

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Application of fairvalue measurement to

non-financial assets

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N fi i l t


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Non-financial assetsA

:the use by market participants that

would maximise the value of the

liabilities within which the assetwould be used

(

)

Physically possible?

(location or size of the

asset)

Financially feasible?

(ability to generate adequate

income or cash flows to

produce an investment return

that market participants

expect)

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Non-financial assets

Determined from market

participant’s perspective

(even if reporting entity

intends a different use)

Entity’s current use

: A

Highest and best use must

be supportable

presumed to be highest

and best use(unless market or other

factors suggest a different

use by market participants

would maximise the value)

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Highest and best use: Example


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Facts:

• Entity A owns a factory property in Country A

• The factory property is comprised of two elements: (a) freehold land

and (b) building elements that are accounted for as separate classes

of property, plant and equipment and presented separately within the

statement of financial position

• Freehold land is not depreciated whilst the building element is

depreciated over its estimated useful life

g p

• Entity A accounts for the factory property (freehold land and building

elements) using the revaluation model in accordance with IAS 16• In recent years, nearby sites have been redeveloped as sites for high-

rise commercial buildings

• Taking into account all available market and other factors, Entity A

determined that the highest and best use of the site is to use it fordeveloping a high-rise commercial building.

Question:

• How should Entity A determine the fair value of the property?

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:

•

A

.


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Valuation premise for non-financial assets


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Valuation premise for non financial assets

Fair value:

the price that would be

received in a current

transaction to sell the asset

to market participants that

would use the asset on a

stand-alone basisThe highest

and best use

Provide maximum value

to market participants on

a stand-alone basis

Fair value:the price that would be

received in a current

transaction to sell the asset

assuming it would be used

with other assets andliabilities which would be

available to market

participants

of a non-

financial assetProvide maximum value

to market participants

through its use in

combination with other

assets and liabilities asa group

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Applying the valuation premise: Example


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Facts:

• Entity A acquired a 100% equity interest in Entity B (the acquiree)

• Entity B has undertaken a research and development project to develop

a medicine (currently cure has not yet been discovered) – i.e., in process

R&D• Entity A is also engaged in pharmaceutical industry. Entity A and Entity B

are competitors – Entity A is also in the process of developing medicine


.

medicine first will become the market leader on that area

• Entity A does not intend to use the R&D acquired as it has already had

the knowledge. The acquisition of Entity B is for defensive purposes

• Entity A has to develop the fair value of the R&D at the date of

acquisition.

Question:

• How should Entity A determine the fair value of the in-process R&D at the

date of business combination?

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S t d ti


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Step 1 – Determine the highest andbest use of the R&D

(Maximum value to market

participants)

Option 1:

Continue development if

market participants

Option 2:

Cease development if,

for competitive reasons,

Option 3:

Cease development if

market participants


wou con nue o o so

would lock up the

project

development

Step 2 – Determine fair value of the R&D

Determined on the premise of how much a market

participant would pay the reporting entity for theR&D and that the market participant would continue

development of the R&D.Assume Option 1

represents the highest

and best use for

market participants

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Application of fair valuemeasurement

o a es an e en y sown equity instruments

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Liabilities


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Fair value is an

EXIT PRICE

In an orderly

ransac on

Between market

participants

At measurementdate

Assumes:

• Liability is transferred to a market

participant, not settled, at the

measurement date

• The liability remains outstanding and the

market participant transferee would berequired to fulfil the obligation

• Regardless of whether the reporting entity

has the ability to transfer its liability to

someone else

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An entity’s own equity instruments


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y q y

B

A

:

•

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Liabilities and entity’s own equity instruments


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Is there a quoted price for thetransfer of an identical or a similar

liability or entity’s own equity

instrument?

Is there an identical item that is

Use the

quoted price

held by another party as an

asset?

Measure the fair value of the liability or

equity instrument using a valuation

technique from the perspective of a

market participant that owes the

liability or has issued the claim on

equity

Measure the fair value of the liability orequity instrument from the perspective

of a market participant that holds

the identical item as an asset at the

measurement date

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Liabilities: non-performance risk


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Fair value is an

EXIT PRICE

In an orderly

Liability

Price that would be paid

to transfer the liability

ransac on

Between market

participants

At measurementdate

Should reflect non-performance risk

• Regardless of whether the liability is a financial

liability or a non-financial liability

• Non-performance risk includes, but not limited

to, an entity’s own credit risk

• Non-performance risk is assumed to be the

same before and after the transfer

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Liabilities: Example 1


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Facts:

• Entity A designates the notes as at fair value through profit or

loss on initial recognition


Entity A(an investment

bank) – with a AA

credit rating

Corporates

(purchasers of the

notes)

1 207

• On initial recognition and at subsequent reporting dates, Entity

A needs to determine the fair value of the notes

• There is no market for the transfer of the identical liability

• Assume that there is no collateral or corporate guarantee.

Question:• How should Entity A determine the fair value of the notes?

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Suggested accounting response:• The liability is held by another party as an asset

• Entity A should measure the fair value of the notes from the perspective of a

market participant that holds the identical item as an asset at the measurement

date• The fair value of the notes could be determined based on:

o Quoted price of the notes (when the notes are traded in an active

p

o A valuation technique if neither active market nor other observableinputs are available

For example, the fair value of the notes are estimated using an expected

present value technique – the cash flows are discounted at a rate that

includes risk-free rate plus, if non-performance risk has not already been

reflected in the cash flows, the current market observable AA corporatebond spread and adjusted for Entity A’s specific credit risk.

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Facts:

• Entity A (a corporate) assumes a decommissioning liability in a

business combination—e.g., it is legally required to dismantle

and remove an offshore oil platform at the end of the related

asset’s useful life• Such a decommissioning liability is not held by another party as

an asset

• e a r va ue o suc a ecomm ss on ng a y s ou e

determined from a market participant that owes the liability• Assumes that the fair value is determined using an expected

present value technique.

Question:

• How should Entity A determine the fair value of the

decommissioning liability at the date of business combination?

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Suggested accounting response:• Such an item is not held by another party as an asset

• Entity A should measure the fair value of the liability using a valuation

technique from the perspective of a market participant that owes the

liability

• Entity A should take into account the following inputs in estimating the

fair value of the decommissioning liability at the date of acquisition:

p

– Estimated labor costs, allocation of overhead

– Compensation that market participants would ask to undertake the

activity and to assume risks associated with the obligation (e.g.,

the risk that the actual cash outflows might differ from those

expected)

– Effect of inflation

– Time value of money

– Non-performance risk

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Valuation techniques

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•

()

•

•

•

•

• A

• =

(A 8)

(

)

• :

•

•

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Convert the future

amounts into a single

current amount

Prices and other

relevant information

generated by markettransactions involving

identical or

comparable items

Current replacementcost

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Income approach


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Future amounts

(e.g., cash flows or

income and

expenses)

• Present value techniques;• Option pricing models (e.g., the Black-Scholes-Merton formula or a

binomial model)

• The multi-period excess earnings method (normally used to measure

the fair value of some intangible assets)

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Present value techniques


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:

•

•

•

• A

•

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Single approach vs. multiple approaches?


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• The appropriateness (i.e., relevance

and applicability of each valuation

technique)

• Whether there is sufficient reliabledata available to support a particular

approach

• Comparative level of the alternative

.

13

• Any significant decline in volume and

level of market activity• View of market participants on the

relevance of valuation techniques

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Valuation techniques: Example 1


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• Cost approach is generally not appropriate in estimating the fair

value of investments in equity securities

• Market approach and income approaches are common

valuation techniques in estimating the fair values of investments

in equity securities that are not publicly traded

income approach–depends on the specific facts andcircumstancesFor example: Where no significant adjustments are required regarding the market

approach (i.e., Level 2 inputs), it would be acceptable to use the market approach only in

estimating the fair value of the investments in equity securities.

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Facts:

• Entity A acquires a group of assets. These assets include an

income-producing software asset developed internally and

used for licensing to customers

• Assume that the highest and best use of the software asset is

its current use

software assets is not available• Market participants would not be able to construct a substitute

software of comparable utility.

Question:

• Which valuation technique(s) should Entity A use in estimatingthe fair value of the software asset?

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• Market approach is not appropriate in this particular

circumstance

• Cost approach is not appropriate either as market participants

would not be able to construct a substitute software of

comparable utility

For example: use a present value technique to determine the fair value of the software

asset - taking into account cash flows that can be generating from licensing the software

to customers.

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Fair value hierarchy


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Level 1

Quoted prices in activemarket for identical assets

or liabilities

Level 2Observable inputsother than quoted

• The fair value hierarchy is

applicable to both financial and

non-financial items that are within

the scope of IFRS 13

• The fair value hierarchy gives the

highest priority to quoted prices in

active markets for identical assets

prices in level 1,

either directly orindirectly

Level 3

Unobservable

inputs

an a es an e owes

priority to unobservable inputs• The fair value measurement is

categorised in its entirety based

on the lowest level of significant

input

• Fair value hierarchy depends on

the inputs, not valuation

techniques.

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Fair value hierarchy


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Any quoted price for an

identical asset or liability

(Level 1 inputs )?

A

1 ?

Use of observable

inputs that aresignificant to the

measurement in its

entirety =

Level 2 measurement

Use of unobservable

inputs that aresignificant to the

measurement in its

entirety =

Level 3 measurement

Use the Level 1 input =Level 1 measurement

(must be unadjusted)

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Fair value hierarchy–Level 1


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Level 1

Quoted prices in activemarket for identical assets

or liabilities

Level 2Observable inputsother than quoted

A

prices in Level 1,

either directly orindirectly

Level 3

Unobservable

inputs

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1

2

? A

1 ?

1,

3

.

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• When Level 1 inputs are available, entities must use Level 1 inputsin measuring the fair value of an asset/liability/an entity’s own equity

instrument, except in the following circumstances:

o When an entity holds a large number of similar (but not identical)

assets or liabilities (e.g., debt securities) that are measured at fairvalue and a quoted price in an active market is available but not readily

accessible for each of those assets or liabilities individually

o When a quoted price in an active market does not represent fair value

at the measurement date (e.g., significant events take place after theclose of a market but before the measurement date)

o When measuring the fair value of a liability or an entity’s own equity

instruments using the quoted price for the identical item traded as an

asset in an active market and that price needs to be adjusted forfactors specific to the items.

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1

2

•

•

• 3

1,

3

• 3 •

• /

(..,

).

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Fair value hierarchy: Example 1


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Facts:• Entity A owns an investment property that is accounted for

using the fair value model in accordance with IAS 40

• According to the valuation report, the fair value of theinvestment property is determined based on the fair

values of comparable properties in the similar location.

Question:

• How should Entity A categorise the fair value

measurement (i.e., Level 1, 2 or 3)?

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Suggested accounting response:• Level 2

• This is because the fair value is determined based on

market observable inputs that are significant to the fairvalue measurement (i.e., the market prices of comparable

properties in similar location). There were no

unobservable inputs or adjustments made that would

have a significant impact.

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Facts:• Entity A enters into a fixed-price three-year agreement to sell 50

megawatts (MW) of on-peak power for delivery at location ABC

beginning on 1 Jan 20X1, and continuing through 31 Dec 20X3

• On 31 March 20X1, Entity A is determining the fair value of theagreement

• Active market quotes are available for forward contracts to sell power

• Entity A uses the one-year of observable forward pricing data anddevelops an expectation for the remaining 1 year and 9 months.

Question:

• How should Entity A categorise the fair value measurement (i.e.,

Level 1, 2 or 3)?

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Suggested accounting response:• Level 3

• Since the forward price curve is observable for only 12

months of the 33 months (i.e., 36%), it does not meet thecriterion that the input is observable for substantially the

full term of the asset or liability.

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Disclosures

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Facts:

Disclosures: Example 1


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Facts:• IFRS 3 generally requires identifiable assets and liabilities

of an acquiree to be measured at fair value at the date of

acquisition.

Question:

• Is the acquirer required to apply the disclosure

requirements set out in IFRS 13 with respect to the fair

value measurement at the date of the acquisition?

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Disclosures: Example 1


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Suggested accounting response:• No, the disclosure requirements set out in IFRS 13 only apply to

assets and liabilities that are measured at fair value on a recurring or

non-recurring basis in the statement of financial position after initial

recognition

• Identifiable assets and liabilities of the acquiree that are required to

be measured at fair value at the date of acquisition are subject to the

,

the disclosure requirements set out in IFRS 13

• Such identifiable assets and liabilities may subsequently be measured

at fair value in accordance with applicable IFRSs. Subject to the

scope exemptions set out in IFRS 13.6-7, these assets and liabilities

will be subject to the measurement and disclosure requirements set

out in IFRS 13.

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Focus on situations in which assets and liabilities are

measured at fair value after initial recognition

Recurring vs. Non-recurring basis


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Recurring basis

Recurring fair value measurements of assets

or liabilities are those that other IFRSsrequire or permit in the statement of financial

position at the end of each reporting period

Non-recurring basis

Non-recurring fair value

measurements of assets or liabilities

are those that other IFRSs require or

measured at fair value after initial recognition.

xamp es

• Investment properties measured using the

fair value model under IAS 40• Financial assets at fair value through profit

or loss (e.g., held-for-trading investments)

under IAS 39/IFRS 9

• Available-for-sale investments under IAS

39

• Property, plant and equipment/intangibleassets measured using the revaluation

model under IAS 16/IAS 38

• Biological assets under IAS 41

permit in the statement of financial

position in particular circumstances

Examples

• Assets classified as held for sale

measured at the lower of fair value

less costs to sell and their carrying

amounts under IFRS 5

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Key learning points

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• How broad the scope of IFRS 13 is

• What are the scope exemptions set out in IFRS 13Scope of

IFRS 13

• What the new definition of fair value is under IFRS 13

• What the key principles regarding fair value

Definition of fair

value and key

• How to apply the fair value measurement requirement in

different scenarios, including:

• Non-financial assets

• Liabilities and an entity’s own equity instruments

Measurement

measurements areprinciples

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Key learning points

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• Understand the basic concepts of the three valuation

approaches set out in IFRS 13

Valuation

techniques

• Understand the requirements regarding the fair value

hierarchy and how an item should be classified into theFair value

hierarch

• Understand the IFRS 13 disclosure requirements

• Able to differentiate between ‘recurring’ and ‘non-

recurring’ fair value measurements

Disclosures

different levels of the fair value hierarchy

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IFRS 13 Fair Value Measurement - Winston Robinson

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