IFRS 13 establishes principles for measuring fair value and sets out disclosure requirements about fair value measurements. It defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 determines how to apply fair value when required by other standards and provides guidance on valuation techniques, inputs to valuations, and disclosures required.
IFRS 13 establishes principles for measuring fair value and sets out disclosure requirements about fair value measurements. It defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 determines how to apply fair value when required by other standards and provides guidance on valuation techniques, inputs to valuations, and disclosures required.
IFRS 13 establishes principles for measuring fair value and sets out disclosure requirements about fair value measurements. It defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 determines how to apply fair value when required by other standards and provides guidance on valuation techniques, inputs to valuations, and disclosures required.
IFRS 13 establishes principles for measuring fair value and sets out disclosure requirements about fair value measurements. It defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 determines how to apply fair value when required by other standards and provides guidance on valuation techniques, inputs to valuations, and disclosures required.
IFRS 13 is the first comprehensive standard to deal
with the concept of measuring fair value. The objectives of IFRS 13 are to establish principles for fair value measurement of assets and liabilities, and set out required disclosures about fair value measurement.
This standard determines HOW to apply fair value if required or
permitted by other standards.
NOTE: IFRS 13 does NOT apply to:
Transactions accounted for under either IFRS 2: Share Based Payments or
IAS 17: Leases; Net Realisable Value (IAS 2: Inventory) and Value In Use for impairments (IAS 36: Impairment) which have similar characteristics to fair value, but are not fair value; The disclosure requirements of Plan Assets (IAS 19: Employee Benefits & IAS 26: Accounting and Reporting by Retirement Benefit Plans) and Assets measured at Fair Value less Costs to Sell (IAS 36: Impairment).
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1. the price that would be 2. received to sell an asset or paid to transfer a liability 3. in an orderly transaction 4. between market participants 5. at the measurement date. In essence this is an EXIT PRICE that would be achieved in a hypothetical transaction between market participants.
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exposed to the market for a reasonable amount of time to allow for marketing activities that are customary for transactions involving these assets/liabilities. The transaction is NOT a forced transaction (ie not a fire sale).
Assumes that:
Principal Market
This is the market in which the
entity NORMALLY transacts. Can also be the most advantageous market to which that entity has access.
Assumes that:
Market Participants
These participants are
independent. These participants are knowledgeable (ie have a reasonable understanding of the asset/liability). The participants are willing and able to transact.
Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA
Special Considerations when dealing with non-financial
assets: Highest and Best Use: -
The fair value of a non-financial asset is the price that would be paid by a market participant given the best use that can be made of an asset, irrespective of its current use.
However, highest and best use must be:
-
A use that is physically possible
Legally permissible Financially feasible
This concept requires that the fair value of a non-financial asset be considered from the perspective of a market participant and NOT based on the entitys plans/current use!
Fair Value of Liabilities:
IFRS 13 does NOT require liabilities to be measured at fair value, but does provide guidance where an entity chooses to measure a liability at fair value.
In addition to the fair value requirements above:
-
The fair value for liabilities should assume the liability remains outstanding after transfer and the transferee will fulfil the obligations; The fair value should take into consideration non-performance risk including the entitys own credit risk.
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held by others (investors/other counter-parties) the fair value of those liabilities should be determined from the perspective of the ASSET-HOLDER (ie the fair value of the investors/counterpartys asset)
Where liabilities of an entity do
not represent assets of a counter-party, fair value should be determined from the perspective of the market participant required to fulfil the obligation. (Normally measured by using the present value of expected cash flows, taking into account a risk premium that actual cash flows will differ from those expected, and an expected return on investment.)
Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA
Initial recognition: On initial recognition the transaction price is GENERALLY equal to the fair value, but the entity will still need to apply the definition of fair value to ensure accuracy (ie is the value equal to an exit price?). In certain instances an item requires measurement at fair value upon initial measurement, for example the fair value of net assets acquired in a business combination in terms of IFRS3. This is therefore an entry price and not an exit price.
It is therefore sometimes necessary to adjust the actual transaction
price (being and entry price) on initial recognition to an exit price (fair value).
This may result in the immediate recognition of a gain or loss in profit
or loss or other comprehensive income.
Short-term items: The fair value of short-term receivables and payables with no stated interest rate may be measured at the invoice amount without discounting when the effect of not discounting is IMMATERIAL.
Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA
information generated by market transactions involving similar assets/liabilities
INCOME APPROACH
Converts future cash flows/income
& expenses to a discounted current amount. Fair value measurement is determined on the basis of current market expectations about those future amounts.
COST APPROACH
Reflects the amount that would
currently be required to replace the service capacity of an asset (ie current replacement cost).
Each of these approaches make use of OBSERVABLE and
UNOBSERVABLE inputs. IFRS 13 proposes a bias towards the use of OBSERVABLE inputs whenever possible and appropriate. Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA
A change in valuation technique is treated as a CHANGE IN ESTIMATE in
terms of IAS 8: Accounting Policies, Changes in Estimates & Errors.
Such a change will only lead to PROSPECTIVE ADJUSTMENTS, with no
restatement of previously reported amounts.
Disclosure: IFRS 13 requires the fair value ASSUMPTIONS and RELATED INFORMATION to be disclosed were applicable.
The disclosure requirements are largely a copy of the fair value disclosures required by IFRS 7: Disclosure of Financial Instruments.
IFRS 13 requires the same 3-level fair value disclosures!
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety.
Partners: Michelle Beukes (CA) SA & Hartmann Beukes (CA) SA
market information, but not directly from a quoted price in an active market.
Level 3 Hierarchy
Fair value is determined primarily from inputs
reflective of MANAGEMENTS EXPECTATIONS.
In addition, for LEVEL 3, a reconciliation is required disclosing:
Total gains/losses for the period recognised in profit or
loss , and a description of where they are disclosed; Total gains/losses recognised in Other Comprehensive Income; Purchases, sales, settlements issues; and Transfers into and out of Level 3, and reasons for the transfers.
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