Ifrs 13

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IFRS 13

Fair Value Measurement


Overview

 Definition of fair value


 Fair value hierarchy
 Valuation techniques
 Application to non financial assets
 Application to liabilities and an entity’s
own equity instruments
 Disclosures
Objective

Objectiv defines fair value and sets out a


e single framework for its
measurement and required
disclosures
Scope

Scope • all fair value and fair value based


measurements except:
– leases (in the scope of IFRS 16)
– share-based payments (in the
scope of IFRS 2)
• The disclosures required by this
IFRS are not required for the
following:
(a) plan assets measured at fair value in
accordance with IAS 19 Employee Benefits;
(b) retirement benefit plan investments
measured at fair value in accordance with IAS
26 Accounting and Reporting by Retirement
Benefit Plans and
(c) assets for which recoverable amount is fair
value less costs of disposal in accordance with
IAS 36
Fair Value Measurement
The unit of account
When measuring fair value under IFRS 13, the item
to be measured is based on the unit of account
specified by the IFRS or IAS that requires/permits fair
value e.g. a:
• stand-alone asset or liability (e.g. financial
asset or liability)
• group of assets or liabilities (e.g. cash
generating unit)
• group of assets and liabilities (e.g. business)
The unit of account is the level at which an asset
or a liability is aggregated or disaggregated in
an IFRS for recognition purposes.
The unit of account
Examples
Example The unit of account
100 shares in a large quoted
company classified as available- Each share (stand-alone asset)
for-sale in accordance with IAS 39
A non-controlling interest of 10%,
comprising 100 shares, in an Generally considered to be the
acquired entity to be measured at entire non-controlling interest
fair value under IFRS 3

A 100% holding in a subsidiary,


comprising 100 shares, to be Generally considered to be the
measured at fair value in the parent's total 100% of the shares
separate financial statements
Definition of fair value
Fair value is defined as:

• the price that would be received to sell an


asset or paid to transfer a liability (exit
price)

• in an orderly transaction

• between market participants

• at the measurement date.


Definition of fair value-
characteristics

Exit
price

Not a Definition Market-


liquidation of Fair based
price or
Value approach
forced sale

Current
price
Exit price
Fair value is defined as:

• the price that would be received to sell an asset or


paid to transfer a liability (exit price)…..

The characteristics of the asset or liability are taken into


account in measuring the fair value if:
– the characteristics are specific to the asset or
liability (rather than to the entity), and
– they would influence market participants’ pricing
decisions.
Restrictions on use, sale or
transfer of assets
Example
Would the following restrictions impact fair value ?
Impacts
Scenario fair
value
1. entity holds an equity instrument (financial asset) for
which sale is legally restricted for a specified period
Yes
and restriction is embedded in the terms of the
instrument
2. entity holds an equity instrument (financial asset) and
has agreed with another entity not to sell for at least 12 No
months
3. charity holds land donated for use only as a
playground but which could be sold to raise funds and No
the restriction would not transfer to the buyer
4. entity holds a piece of land that is subject to an
enduring legal right of the utility company to run Yes
power cables across the land
Orderly transaction

Fair value is defined as:


• the…(exit price) Not a liquidation price
or forced sale
• in an orderly transaction….

The transaction to sell the asset or transfer the liability takes


place in the principal market for the asset or liability

In the absence of a principal market, the transaction takes place


in the most advantageous market for the asset or liability.
Principal or most
advantageous market

assume the transaction the market with the greatest


takes place in the volume and level of
principal market activity for asset or liability

In the
absence
of
a
principal the market that:
market • maximises the amount that
assume that the would be received to sell the
transaction takes place asset or
in the most • minimises the amount that
advantageous would be paid to transfer the
market liability
after considering transaction
costs and transport costs.
Transaction and transport
costs

include in explanatio
cost type description
fair value n
cost to sell the
asset/transfer the no, but characteristic
liability that are consider in of the
transaction directly assessment of transaction,
cost attributable to the which market is
not of the
disposal or most
advantageous asset/liability
transfer and would
not otherwise have
been incurred

cost that would be yes, if


transport incurred to location is a characteristic
transport an asset
cost from its current
characteristic of of the asset
location to its exit the asset
market
Fair Value Measurement
Example 1
Price
Transpo less Transactio
Market Price Net
rt costs transpo n costs
rt costs
A 27 3 24 3 21

B 25 2 23 1 22

Scenario Fair value


market A is the principal market 24
market B is the principal market 23
neither market is the principal
23
market
Fair Value Measurement
Example 2
Market 1 2
Daily trade volume 100,000 20,000
Price 100 108
Price less transport
95 101
costs
Transaction costs 4 4
Net 91 97

Entity A has an access to the two markets.


Entity A sells in Market 2.
Which Market will determine the fair value in accordance with IFRS 13?
Fair Value Measurement
Solution
The principal market is market 1 since it has the greatest
volume and level of activity.
The most advantageous market is market 2 since it has the
highest net proceeds.

The fair value will be determined in accordance to market 1


since:
• market 1 is the market with the greatest volume and
level of activity
• Entity A has an access to that market
Therefore, the fair value will be 95.
Fair Value Measurement
Market participants at the
measurement date

Fair value is defined as:


• the…(exit price)
• in an orderly transaction

• between market participants


• at the measurement date.
An entity should measure the fair value of an asset or a
liability using the assumptions that market participants
would use when pricing the asset or liability, assuming that
market participants act in their economic best interest.
Fair value hierarchy

IFRS 13 establishes a three level fair value hierarchy for


inputs to measure fair value:
unadjusted quoted prices in active
markets for identical assets or
liabilities
inputs other than
Level 1 quoted
prices included in Level 1
that are observable, either
directly or indirectly
Level 2
unobservable inputs
Level 3
Fair value hierarchy
Level 1
Level 1
unadjusted quoted prices in active markets for
identical assets or liabilities that the entity can access
at the measurement date
A quoted price in an active market provides the most
reliable evidence of fair value and should be used without
adjustment to measure fair value subject to some
exceptions.

Examples for Level 1 inputs:


• share prices in a stock exchange
• some traded derivatives
• some commodities.
Active market

Active market definition:

"A market in which transactions for the asset or


liability take place with suffi cient frequency
and volume to provide pricing information on
an ongoing basis."
Fair value hierarchy
Level 2
Level 2
inputs, other than quoted prices included in Level 1,
that are observable for the asset or liability, either
directly or indirectly
Examples for Level 2 inputs:
• quoted prices for similar assets or liabilities in active
markets
• quoted prices for identical or similar assets or
liabilities in markets that are not active.
Fair value hierarchy
Level 3
Level 3
unobservable inputs for the asset or liability

unobservable inputs should be used to measure fair value to


the extent that relevant observable inputs are not available.

Unobservable inputs should reflect the assumptions that


market participants would use when pricing the asset or
liability, including assumptions about risk.
Fair value hierarchy
Examples
Hierarch
Exampl
y input
e
level
Ordinary shares
of a blue-chip The shares are regularly
company traded on an active market
1 regularly traded Level 1 and so a quoted price from
on the London that market is available
Stock Exchange
(LSE)
The more significant the
Equity shares in adjustment to the listed
a private entity share price needed to
that has a Level 2/ reflect larger differences in
2
similar profile to Level 3 profile, the more likely the
a competitor assessment will become
listed company Level 3
Fair value hierarchy
Examples
Hierarch
Exampl
y input
e
level
The price at the reporting
date is the most objective
Bonds traded on and directly observable
a market that indicator of fair value.
has few Where transactions in the
transactions, the market are less frequent,
Level 2/
3 most recent some adjustment to the
Level 3
occurring two most recent price will be
weeks before needed. The more
the reporting significant the adjustment,
date the more likely the
assessment will become
Level 3.
Fair value hierarchy
Flowchart

Are there a quoted prices in Yes No


Is the price Level
active markets for identical
adjusted? 1
items?

Yes
No (*)

No Level
Are there any significant unobservable
inputs? 2

Yes

Level
3
Valuation techniques
When a price for an identical asset or liability is not observable,
an entity measures fair value using another valuation technique
that:
• maximises the use of relevant observable inputs and
• minimises the use of unobservable inputs
IFRS 13 provides guidance on the use of valuation techniques
when measuring fair value and states that there are three widely
used valuation techniques:
 the market approach
 the cost approach
 the income approach

An entity should use valuation techniques consistent with one


or more of those approaches to measure fair value.
Valuation techniques
 IFRS 13 describes three valuation
techniques:
o Market approach – uses prices
generated by market transactions
o Income approach – converts
future amounts to a single
(present value) amount
o Cost approach – determines the
value that reflects current
replacement cost
Application to non financial
assets

The fair value of non financial asset should reflect the highest
and best use from market participant perspective.

highest and best use:


the use of a non-financial asset by market participants that would
maximise the value of the asset or the group of assets and
liabilities (eg a business) within which the asset would be used.

CURRENT USE is presumed to be the


HIGHEST AND BEST USE
unless market or other factors suggest
otherwise
Application to non financial assets

Highest and best use should take into account a use that is:

 physically possible

 legally permissible and

 financially feasible
CURRENT USE is presumed to be the
HIGHEST AND BEST USE
unless market or other factors suggest
otherwise
Non financial assets
Example
 Entity A acquired a factory which includes:
plant and equipment, a building and land
 Entity A is not allowed to change the use of the land and the
building for a period of 5 years
 other entities have recently received planning consent to
redevelop industrial sites in the same region for residential
purposes
 Entity A legal consultants' advice is that Entity A could sell the
land and the building to a third party and the restriction will
not apply on the buyers.
What is the highest and best use of the property?
Non financial assets
Solution
The fair value of the land and building should take into account
the possibility of the change of usage since the restriction is a
characteristic of Entity A and not a characteristic of the asset.

Therefore, the fair value of the property will be the higher of:

 its current use or

 its use for residential development.


Application to liabilities and an
entity’s own equity instruments
 the measurement of fair value of financial liability, non-
financial liability or an entity’s own equity instrument:
 should assume that they are transferred to a market
participant at the measurement date
 should not take into account the existence of a restriction
that prevents the transfer of the item.

The basic measurement principle of these items:

quoted prices in active market for identical items.


Liabilities and an entity’s own
equity instruments Flowchart

Is there a quoted price for the transfer of an Yes the fair value
identical or a similar liability or entity’s own is the quoted
equity instrument? price
No

Are identical items held by other parties as an asset?


Yes
No
Are there other Is there a quoted price in an
No observable
No active market for the
inputs? identical item that held as an
Yes asset?
Yes

use use that price as fair use that quoted price as fair
valuation value (with the value (with the relevant
technique relevant adjustments) adjustments)
disclosure
Disclose information that helps users assess both of the
following:
 for assets and liabilities measured at fair value on a
recurring or non-recurring basis after initial
recognition:
– the valuation techniques
– the inputs used

 for recurring fair value measurements using significant


unobservable inputs (Level 3), the effect of the
measurements on:
– profit or loss
– other comprehensive income
 fair values that are required or permitted only on initial
recognition are exempted from IFRS 13’s disclosures.
Disclosures - summary
Non recurring fair value
measurement

1. the fair value measurement at the end of the period and

the Level in the hierarchy (IFRS 13.93 (a-b))

2. the policy for determining when transfers between

levels of the hierarchy are deemed to have occurred

3. a description of the valuation techniques, the inputs

used in Levels 2 and/or Level 3, any changes to the

valuation techniques and reasons for that change (IFRS

13.93(d))
Thank You
Questions and
Discussion

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