Implementing IFRS 13 Fair Value Measurement - … · Implementing IFRS 13 Fair Value Measurement...

Implementing IFRS 13 Fair Value

Measurement

Association des Directeurs de

Comptabilité & de Gestion (APDC)

18 April 2013

Speakers

Yann Magnan

Yann Magnan, Managing Director, is the leader of the Paris, France office of Duff & Phelps SAS. He is part of

the Financial Advisory Practice and the leader for Valuation Advisory Services across Europe.

Before joining Duff & Phelps, Yann began his career at E&Y Audit France and then moved to E&Y Valuation &

Business Modeling France. As a member and then co-leader at E&Y V&BM Paris, Yann was involved in

numerous international transaction and valuation projects, including business valuations, financial modeling, but

also intangible assets’ valuations such as trademarks, brands, customer relationships, telecom licenses and

technologies. His other experiences include tax valuations, transaction opinions and arbitration valuation. Yann

was appointed E&Y V&BM Southwest Europe Leader beginning 2006.

Yann’s recent engagements are: several Purchase Price Allocations in the Aerospace and Defense industry,

several Purchase Price Allocations in the Technology and Telecom industries, valuation of a leading French film

studio in connection with potential IPO, valuation of a cartoon studio for tax purposes, impairment testing at a

leading French media conglomerate, including valuation of the French and US studios and their catalogue,

valuation of leading French internet companies, valuation of transportation contracts for a global leader in the

transportation business, Purchase Price Allocations at incumbent telecom company on Spanish, UK, and

Luxemburg assets; PPP models reviews in the Utility industry for French Utility leader; valuation and Purchase

Price Allocation for leader in the energy industry; independent business valuation for a major infrastructure

investment fund; Purchase Price allocation on a leader of generic healthcare industry based in Eastern Europe;

Purchase Price Allocation on photovoltaic acquisition for a French leader in the oil industry.

Yann has given numerous lectures on valuation, especially related to valuations, in France and abroad. He is

also a visiting professor at HEC Paris.

Yann graduated from Ecole Centrale Paris with an MSc in Engineering.

He is a member of Société Française des Evaluateurs.

Duff & Phelps SAS

Managing Director, Valuation Advisory Services

Paris

+33 1 40 06 40 23

[email protected]

3 Duff & Phelps - Private & Confidential

Hilary S. Eastman, CFA

Hilary Eastman is a director in Duff & Phelps’ Office of Professional Practice, where she provides firm-wide technical guidance on a variety of valuation, financial reporting and tax reporting issues. Hilary recently re-joined Duff & Phelps’ after spending nearly 7 years at the International Accounting Standards Board (IASB). Hilary is based in the London office, promoting the firm's IFRS education efforts and marketing initiatives, as well dealing with IFRS implementation issues.

At the IASB Hilary led the joint IASB-FASB fair value measurement project that led to the issuance of IFRS 13 Fair Value Measurement and ASU 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Hilary presented complex fair value measurement topics to the IASB and the FASB for their consideration in developing converged guidance. She has also been involved in the development of the IFRS Foundation's educational material on fair value measurement, the project to revise IFRS 3 Business Combinations in 2008, and the IASB’s Expert Advisory Panel on measuring fair value when markets have become inactive.

Hilary became the IASB’s Senior Manager, Investor Liaison upon the completion of IFRS 13. In that role she worked with the investor community to ensure that they understood the implications of the IASB’s work on their analysis of financial statements. She also worked to ensure that the IASB understood the information needs of investors and analysts. In addition, she managed the IASB’s investor group, the Capital Markets Advisory Committee.

In her role at the IASB, Hilary regularly presented at conferences globally, including in the United States, Europe and Asia, both for the IFRS Foundation and for third parties, on the topics of fair value measurement, financial instruments and the IASB’s investor outreach activities.

Before joining the IASB, Hilary was part of Duff & Phelps’ Valuation Advisory Services business unit, focusing on clients’ valuation needs, primarily for financial reporting or tax purposes. She spent over six years providing valuation and tax services to clients in Europe, the United States and Australasia, many of which were multinational. Hilary has conducted numerous business and asset valuations for a variety of purposes, including purchase price allocations, goodwill impairment testing and mergers and acquisitions. She has been involved in multiple valuation assignments for a wide range of industries, including pharmaceutical, information technology and industrial manufacturing.

Hilary received her bachelor’s and master’s degrees in finance from San Diego State University. She is also a CFA charterholder and a member of CFA Institute and CFA Society of the UK, and is a member of the CFA Society of the UK’s Financial Reporting and Analysis Committee.

18 April 2013

Duff & Phelps Ltd.

Director, Office of Professional Practice

London, United Kingdom

+44 20 7715 6789

[email protected]

4 Duff & Phelps

Agenda

General Fair Value Measurement Principles 1

Practical Implications when Applying:

IFRS 3 Business Combinations 2

IAS 36 Impairment of Assets 3

IAS 40 Investment Property 4

IAS 39 Financial Instruments: Recognition and Measurement 5

IFRS 10 Consolidated Financial Statements 6

Fair Value Disclosures 7

Differences Between IFRS 13 and US GAAP’s ASC Topic 820 8

5 18 April 2013 Duff & Phelps

Section

Will be most relevant for companies with:

• M&A activity (fair value of acquired assets and assumed liabilities)

• Revalued assets (eg PP&E, land, investment properties)

• Impairments of assets when recoverable amount is based on fair value less costs

of disposal

• Financial assets and liabilities

Some of the biggest changes are for disclosures:

• Disclosure by three-level hierarchy

• Qualitative sensitivity analysis

• Quantitative disclosure for Level 3 inputs

IFRS 13 Will Affect Some Companies More than Others

Duff & Phelps 6 18 April 2013

In general, the new (and more explicit) measurement guidance

will require more support for the assumptions made

General Fair Value Measurement

Principles

Section 1

From 1 January 2013, IFRS 13 Applies to all Fair Values

in IFRSs (with a few exceptions)

8 18 April 2013

• IFRSs that require or permit fair

value measurements

• IFRSs that require or permit

disclosures about fair values

• Fair value less costs to sell and fair

value less costs of disposal

• Disclosures for subsequent fair

value measurements

• Share-based payments

• Leases

• Measurements similar to fair

value (such as net realisable

value for inventories, value in use

for impairment testing and the

measurement of provisions and

contingent liabilities)

• Goodwill and other impairment

disclosures

• Retirement benefits and

employee benefits disclosures

The standard applies to:* The standard does not apply to:

Duff & Phelps

* In the first year of application, comparative periods do not need to be restated.

Fair Value Defined – Now Identical to US GAAP


The amount for which an asset could be exchanged or a liability settled between knowledgeable, willing

parties in an arm’s length transaction.

Is the entity buying or selling

the asset?

What is meant by settling

the liability?

Market-based or entity-

specific?

When does the exchange

or settlement take place?

The price that would be received to sell an asset or paid to transfer a liability in

an orderly transaction between market participants at the measurement date.

The entity is selling

the asset

The entity is

transferring the

liability

It is clearly market-

based

The sale or

transfer takes

place on a specific

date

Exit Price Concept: Clear market-based,

sale-focused objective

Highest and Best Use / Valuation Premise

Now Explicit: Current use versus alternative

uses

Liabilities / Own Equity: Fair value of

corresponding asset if there is one

Bid-ask Spread: No longer only bid for

assets and ask for liabilities

Three-level Hierarchy of Inputs: Prioritises

use of relevant observable market data

New Disclosures: Particularly for Level 3—

models using unobservable inputs

The Unit of Account in other IFRSs Determines

What is Valued

Standard What Unit of account

IFRS 3 Business Combinations Identifiable assets acquired The individual asset

IAS 36 Impairment of Assets Cash-generating unit The individual CGU

IAS 40 Investment Property Investment property

building

The individual building, comprising the

building and the associated lease

contracts

IAS 39 Financial Instruments:

Recognition and Measurement

Financial asset The individual financial asset

IFRS 10 Consolidated Financial

Statements

Investment in a subsidiary Tentative IASB decision:

Investment as a whole, not the individual

instruments making up the investment


• The IFRS that requires or permits the fair value measurement specifies the

asset or liability to be valued (the “unit of account”). For example:

The Exit Transaction Takes Place in the Principal Market


Is there a market that has the

greatest volume and level of

activity for the asset or

liability?

Which market maximises the

amount that would be

received to sell the asset

and minimises the amount

that would be paid to

transfer the liability?

That is the principal market

and its price must be used: Price 50

Transport costs 3

Fair Value 47

Market B is not the most

advantageous market

No Yes

Market

A

Market

B

Market A is the most

advantageous market and its

price must be used: Price 51

Transport costs 5

Fair Value 46

Price 51

Transport costs 5

Transaction costs 2

Net proceeds 44

Price 50

Transport costs 3

Transaction costs 4

Net proceeds 43

Market Participants Transact in the Principal Market

• Market participants act in their economic best interest in a transaction for the unit of

account

• Identifying characteristics of market participants who would transact for the asset or

liability is fundamental to the determination of fair value


Independent of each other

Knowledgeable and sufficiently informed about the asset or liability and the

transaction

Able to enter into a transaction for the asset or

liability

Willing to enter into a transaction for the asset or

liability (not forced)

Market participants

Fair Value Reflects the Highest and Best use of an Asset

• Highest and best use is usually (but not always) the current use by the entity

• An asset either provides maximum value through its use:

– In combination with other assets and liabilities as a group; or

– On a stand-alone basis

• Highest and best use does not apply to financial instruments or liabilities


The use of an asset by market participants that would maximise the value of the asset that is:

Physically possible

Legally permissible

Financially feasible

Example

Assessing Highest and Best Use • A building is used as a factory but is in a newly residential area. Other industrial

and commercial buildings have been converted into residential use in the area

• Based on expected future cash flows from use as a factory, the company

estimates a value of EUR 20m. However, the building could be sold for conversion

to residential property for EUR 21m, incurring transaction costs of EUR 1.5m.

Prior to sale, the building would require repairs costing EUR 0.5m to return site to

safe for human dwelling

• What is the fair value of the building?

1. EUR 19m

2. EUR 19.5m

3. EUR 20.5m

4. EUR 21m

14 Duff & Phelps

Example continued

Assessing Highest and Best Use

3. EUR 20.5m

• “Highest and best use” is the highest value achieved through either current or

alternative use

• The value is calculated net of repair cost but do not include transaction costs

15 Duff & Phelps

The Valuation Technique used Depends on the Availability of

Data and its Ability to Reflect the Economic Characteristics

Valuation technique Description Example

Market Approach Uses prices and other relevant information

generated by market transactions involving

identical or comparable (ie similar) assets,

liabilities or a group of assets and liabilities, such

as a business

Market comparable method

Can be used only if observable

market prices for the same or

similar assets and liabilities are

available

Income Approach Convert future amounts (eg cash flows or

income and expenses) to a single current (ie

discounted) amount using current market

expectations about those future amounts

Discounted cash flow method

Can be used only if there are

directly identifiable cash flows

Cost Approach Reflects the amount that would be required

currently to replace the service capacity of an

asset

Current replacement cost or

current reproduction cost

Used for assets that do not

have observable market prices

and are not income producing


The Three-Level Fair Value Hierarchy Indicates the Relative

Level of Subjectivity of the Measurement

• Must maximise relevant observable inputs (Levels 1 and 2), minimise unobservable

inputs (Level 3)

• The level in the fair value hierarchy of the fair value measurement in its entirety

depends on the lowest level input that is significant to the measurement


Level 1 Level 2 Level 3

• Quoted prices in active

markets for identical assets

and liabilities

• Must be used without

adjustment whenever

available

• Market approach

• Inputs other than

quoted prices included

within Level 1 that are

observable for the asset

or liability

• Market approach, income approach, cost approach

• Inputs other than

quoted prices included

within Level 1 that are


or liability

• Market approach, income

approach, cost approach

• Inputs other than quoted

prices included within

Level 1 that are


or liability

• Market approach, income

approach, cost approach

• Inputs for the asset or

liability that are not

observable (but still must

be consistent with

assumptions market

participants would make)

• Quoted prices in active

markets for identical

assets and liabilities

• Must be used without

adjustment whenever

available

• Market approach

• Inputs other than quoted

prices included within

Level 1 that are


or liability

Example

Fair Value Hierarchy • How would you categorise the measurement of the units in the following

investment funds?

Unit 1

• A unit in an investment fund is quoted

in an active market. However the

underlying investments are in

unquoted equities that would be

categorised within Level 3 in the fair

value hierarchy

Unit 2

• A unit in a non-quoted investment

fund which only invests in financial

assets quoted in active markets. No

adjustments are made to the quoted

prices when arriving at the value of the

fund

Unit 1 Unit 2

1. Level 1 Level 1

2. Level 1 Level 2

3. Level 2 Level 1

4. Level 3 Level 2

18 Duff & Phelps

Example continued

Fair value hierarchy

2. Level 1 and Level 2

Unit 1

• Level 1

• This is because the fund’s units

are quoted in an active market.

Unit 2

• Level 2

• Although the fund’s investments are

quoted, the fund’s own units are

not quoted

• However the fund’s units may be

appraised indirectly, using the

quoted fund’s investments

19 Duff & Phelps

The Fair Value of a Liability Generally equals the Fair Value of

the Corresponding Asset

Is there an observable market price

to transfer the liability?

Does somebody hold the

corresponding asset?

Fair value =

observable market

price of liability

Fair value = fair value of

the corresponding asset

Is there an observable

market price for the liability

traded as an asset?

Fair value = another

valuation technique

No Yes

Yes No

Yes

Fair value =

observable market

price of asset

No

Fair value = another

valuation technique

20

Adapted from IASB “Fair Value measurement” webcast on 23 May 2011

18 April 2013 Duff & Phelps

e.g. decommissioning obligation e.g. financial debt

e.g. derivative

This diagram also applies to an

entity’s own equity instruments

The Transaction Price is Often Presumed to equal Fair Value

21

Potential differences between

transaction price and fair value Example

Transactions between related parties Need to verify whether transaction was at arm’s length

Seller under duress If seller is experiencing financial difficulties, need to verify

whether price paid or received reflects an orderly transaction

Different unit of account • Buy asset in one form, modify it and sell it in another form

• Buy group of assets, recognise a separate individual asset

(eg business combination)

• Over or under payment relative to fair value (eg bargain

purchase in business combination; may be entity-specific)

Different markets • Retail versus dealer market

• Bid-ask spread differences


• The recognition of ‘day 1’ gains or losses is determined by other IFRSs

• Calibration to observable market data is required

Application to IFRS 3

Business Combinations

Section 2

Assets Acquired and Liabilities Assumed are Measured

at their Acquisition-date Fair Values

What is the same? • Requirement to prioritise observable

market prices

• Focus on using market participant

assumptions

• Emphasis on use of asset by market

participants (highest and best use)

What has changed? • Exit price focus for the asset or

liability

• Reference to principal (or most

advantageous) market

• Incorporating non-performance risk

into the measurement of liabilities

assumed


• Disclosures about business combinations are covered by IFRS 3, not IFRS 13

Changes for the Fair Value of Consideration Transferred,

Assets Acquired and Liabilities Assumed

Asset or liability What to be aware of when applying IFRS 13

Intangible assets Characteristics of market participants and assessing how they

would use the asset

Inventories Unit of account and determining principal market

PP&E (including investment property) Relationship between valuation premise and assessment of

economic obsolescence

Non-financial liabilities (e.g.

decommissioning obligation, contingent

liabilities and contingent consideration)

Incorporate compensation market participants would demand for

taking on the obligation

Consider effect of non-performance risk (including credit risk)

Should be the same as fair value of corresponding asset if there

is one

Financial assets, financial liabilities, pre-

existing interest in a step acquisition and

non-controlling interest

See changes to IAS 39


Example

What if an Asset’s Current Use is not its Highest and Best Use?

• Entity A acquires land in a business combination (or is using the revaluation model in

IAS 16)

• The land is currently being used as a site for a factory

• Nearby sites have recently been developed for residential use as sites for high-rise

apartment buildings

• Entity A determines that its land could be developed as a site for residential use

because there is evidence that market participants would take into account the potential

to do so when pricing the land

• The highest and best use of the land would be determined by comparing:

the value of the land as currently used as a site for a factory (valuation premise

for all assets in the group is to be used in combination with other assets), with

the value of the land as a vacant site for residential use—assuming the factory is

demolished (valuation premise for all assets in the group is to be used on a

standalone basis)


Example continued

What if an Asset’s Current Use is not its Highest and Best Use?

• The valuation premise says that all assets within the asset group must be valued

on a consistent basis

All are used in combination with other assets or all are used on a standalone

basis

• For the highest and best use not to be the current use, two things must happen:

The costs to convert the land to its alternative use must not be prohibitive (ie

ensure that financial feasibility criterion is met)

The increase in value of the land in its alternative use must overshadow the

sum of the decrease in standalone values of the other assets within the

group

• If those things happen, are the other assets within the group (eg the factory)

impaired?


Application to IAS 36

Impairment of Assets

Section 3

An Asset is Impaired if its Carrying Amount is More Than

its Recoverable Amount

What is the same? • Priority for observable prices when

available

• Fair value reflects current market

conditions

• CGU concept is consistent with

valuation premise concept for asset

groupings

What has changed? • There is no longer a requirement to

use bid prices

• Fair value reflects an orderly

transaction regardless of the entity’s

situation

• Explicit reference to the asset’s

highest and best use


• Disclosures about impaired assets are covered by IAS 36, not IFRS 13

Higher of …

Carrying AmountRecoverable

AmountComparison

Fair Value less Costs of

Disposal (FVLCD)

Value in Use

(VIU)


Investment Property

Section 4

An Entity May Remeasure its Investment Properties at

Fair Value

What is the same? • Focus on market participant

assumptions

• Focus on current market conditions

• Emphasis on orderly and arm’s length

transaction

• Priority given to observable market

prices, but other inputs may be used

• Fair value reflects rental income from

current leases

What has changed? • Explicit reference to highest and best

use and valuation premise, and those

assumptions will need to be

supported


• Be careful not to double-count items that are other assets or liabilities, not the

investment property asset

• IFRS 13 did not change reliability threshold


Financial Instruments:

Recognition and Measurement

Section 5

Financial Instruments are Measured at Fair Value Initially

and, in Some Cases, Subsequently

What is the same? • Focus on exit price

• Emphasis on market participant

assumptions

• Focus on current market conditions

• Priority on observable market prices

• Measurement on a net basis if there are

offsetting market risks

• Incorporating non-performance risk

• Fair value at initial recognition is

normally the same as transaction price

– Day 1 gains or losses prohibited

unless model uses only observable

market data

– Calibrate to observable market data

• Transaction costs not part of fair value

• No block discounts

What has changed? • Principal market focus, not most

advantageous active market

• No longer bid for assets and ask for

liabilities

• Additional guidance on measuring fair

value when markets have become

inactive

• Additional disclosures now required


• Disclosures about the fair value of financial instruments are now in IFRS 13, not

IFRS 7

Financial Instruments can be Valued on a Net Basis if Risk-

Managed on a Net Basis

• Previous guidance allowed net measurement for offsetting market risks, but not

explicitly about counterparty credit risk

• Market risk:

– Risk(s) must be substantially the same

– Duration of instruments leading to exposure to market risk must be substantially

the same

• Counterparty credit risk:

– Must have arrangement to mitigate credit risk in place

– Reflects both credit valuation adjustments (CVA) and debit valuation adjustments

(DVA)

• Net measurement does not apply to presentation (value must be allocated to

individual instrument unit of account)

• IASB will be discussing interaction between portfolio exception and other

measurement requirements in IFRS 13 (including how to treat instruments with Level

1 inputs and block discounts)


The Valuation Technique and Inputs must Reflect the

Characteristics of the Asset or Liability

• Sometimes a premium or discount must be applied to reflect those characteristics:

– Any premium or discount applied must be consistent with characteristics of asset

or liability and the unit of account

– Need to be careful not to double-count or omit value (eg do not adjust for control if

the price already reflects its value)


Is there Level 1 input available

for the asset or liability?

Would market participants

incorporate a premium or

discount in a transaction for

the asset or liability?

It must be used without

adjustment FV = Level 1 price x quantity held

Fair value reflects

a premium or

discount

Fair value does not

reflect a premium or

discount

No Yes

Yes No

• No block discounts (they are a characteristic of the holding, not of the asset itself)

Fair Value of Unquoted Equity Instruments

• IFRS 9 removed cost exemption that was in IAS 39

– An entity was precluded from measuring an

unquoted equity instrument at fair value if its fair

value was not reliably measurable

– IASB concluded that unquoted equity instruments

can be measured reliably

– However, there were concerns about:

» What approaches were appropriate and

acceptable under IFRS

» What to do if limited information is available, such

as sometimes in emerging markets

• Material focuses on IFRS 9 but much of it is applicable

for IAS 39 and IFRS 10


Main valuation approaches for unquoted equity


Income

approach

Identical or similar

instrument

Guideline

companies and

transactions

Discounted Cash

Flows

Dividend Discount

Models

Market

approach Cost approach

(not developed)

Adjusted net

asset approach

4 approaches described

Choosing a valuation technique

• Valuation techniques used should use least subjective adjustments (i.e. maximise

observable market data)

• However, IFRS 13 acknowledges that one or several valuation techniques may be

more appropriate depending on facts and circumstances


Choice of valuation method

depends on:

Information

availability

Market

conditions

Investment

horizon

Stage of the life

cycle

Industry

• Existence of market

references

• Availability of cash

flow projections

• Etc.

• Bullish markets

• Bearish markets

• Flight to quality

• Etc.

• Finite-life assets

• Short-term

investment

• Etc.

• Start-up

• Power plants

• Etc.

• Specific valuation

references used for

certain industries

(e.g. specific

multiples)

Information

availability

Market

conditions

Investment

horizon

Stage of the life

cycle

Calibrating valuation techniques

Fair value reflects market conditions at the measurement date

• At initial recognition:

– Calibrate the valuation technique to the transaction price using available (and

relevant) market data

• In subsequent periods:

– Assess how changes in market conditions affect observable and unobservable

inputs to determine whether the fair value has changed


Examples of calibration at initial recognition:

Set DCF result equal to transaction price

Set results from the market approach equal to transaction price (ie calibrating

both multiples and any premium/discount applied)

Application to IFRS 10

Consolidated Financial Statements

Section 6

From 1 January 2014, Investment Entities Must Measure

their Subsidiaries at Fair Value

• Fundamental change to consolidation rules in IFRSs

– Investment entity subsidiaries (controlled investments) no longer consolidated

– Users told IASB that fair value information is more useful

• Resulting measurement questions:

– Is the unit of account the “investment in the subsidiary” or the individual

instruments comprising that investment?

– If the unit of account is the investment, how to reconcile the requirement in IFRS

13 to use Level 1 inputs whenever available?

• Investment entities are subject to disclosures in IFRS 13


The Unit of Account is not Always Clear

Standard What Unit of account

IAS 27 Separate Financial

Statements

Investment in a subsidiary The investment as a whole or the

individual financial assets per IAS 39 and

IFRS 9?

IAS 28 Investments in Associates Investment in an associate

(for venture capital and

similar investors)

The investment as a whole or the


IFRS 9?

IFRS 10 Consolidated Financial

Statements

Investment in an

investment entity subsidiary

The investment as a whole or the


IFRS 9?

For example:

41

Does IAS 39/IFRS 9 or the standard initially requiring the fair value

measurement determine the unit of account?


Example

Fair Value of Debt When Valuing a Controlling Equity Interest

• Assume Entity A has a controlling equity interest in Entity B

• Assume the terms of Entity B’s debt (e.g. bank debt) require that it be repaid at par

upon a change in control (i.e. it has a “change in control provision”)

• The following values have been determined for Entity B:

• If Equity Value = Enterprise Value – Debt Value:

– Is the fair value of a controlling interest in the equity $50 or $55?

– In other words, does the value of the debt assume that the change in control

provision has been triggered and that it is repaid on the valuation date?


Enterprise Value $150

Debt par value 100

Debt fair value 95

Example continued

Fair Value of Debt When Valuing a Controlling Equity Interest

Fair value

of equity

Value of

debt Rationale

View

A

$50 Par value Assumes the change in control provision has been triggered:

• Fair value is an exit price and an exit (sale) of a controlling interest in the

equity would trigger the change in control provision at the measurement

date.

• A market participant buyer of the equity instruments would not pay $55 to

acquire them if it would only receive $50 to sell its interest on the

measurement date.

View

B

$55 Fair value Assumes the change in control provision has not been triggered:

• Although fair value is an exit price, it reflects the sale of an asset or

transfer (not settlement) of a liability with the characteristics that exist on

the measurement date. One of the characteristics of the debt is that it has

a change in control provision that has not been triggered—because an

actual change in control has not yet happened.

• The fair value of the debt reflects the existence of the change in control

provision and market participant expectations about the likelihood and

timing of an actual change in control.

• Economically, why would the equity holder sell the equity and repay the

debt today for $100 if they could wait until the debt matures and repay the

debt at that time for $100, which is worth $95 today?


Fair Value Disclosures Section 7

More Consistent and Transparent Information

About Fair Values

What is the same? • Financial instruments

– Three-level hierarchy

– Transfers between levels

– Level 3 reconciliation

– Quantitative sensitivity analysis

– Key inputs used in valuation

• Non-financial assets and liabilities

– Methods and assumptions used

– Use of market prices vs models

– Reconciliations of beginning and ending balances

What has changed? • Three-level hierarchy for all fair values

• Guidance for disaggregation by class

• Qualitative sensitivity analysis

• Explicit quantitative disclosure for Level 3 inputs

• Valuation processes

– IAS 16 and IAS 40 already required disclosure of use of independent valuer

• Whether highest and best use is not current use, and why

• Information about fair values disclosed but not recognised

• Accounting policy for using portfolio exception

• Existence of third-party guarantees


Differences between IFRS 13 and

US GAAP’s ASC Topic 820

Section 8

Differences between IFRS 13 and US GAAP’s ASC Topic 820

Difference Reason for Difference

Investment Interests

in Investment

Companies

IFRSs do not articulate whether or not the use of NAV is appropriate in

estimating the fair value of an interest in an investment company

Some different disclosures in ASC Topic 820 about use of NAV practical

expedient

Deposit Liabilities Guidance in IFRS 13, not ASC Topic 820

Disclosures IFRSs generally do not allow net presentation for derivatives, so the

amounts disclosed in Level 3 may differ

IFRS 13 requires a quantitative sensitivity analysis for Level 3 financial

instruments

ASC Topic 820 has some different disclosure requirements for non-

public entities. IFRS for SMEs, not IFRS 13, addresses disclosures for

similar entities.

Wording and Style Spelling and grammar differences between North American and British

English


Any questions?

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