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Chapter 2 Fair Value Measurement

LEARNING OBJECTIVES 1. 2. 3. 4. #. Explain the reasons for the introduction of IFRS 13. Describe the basis for the determination of fair value. Describe the three valuation methods for the fair value measurement under IFRS 13. Explain the three tier fair value hierarch! applied to the valuation techni"ues. Describe the $eneral disclosure re"uirements.

F a ir / a lu e + e a su re m e n t

R e a so n s fo r th e In tro d u c tio n of % & FR S 13

D e fin itio n s

. a sis o f F a ir / a lu e + e a su re m e nt

/ a lu a tio n ( e c h n i" u e s

F a ir / a lu e % ie ra rc h !

' r d e r l! ( ra n sa c tio n ) n it o f * ccount + a r, e t - h o ic e

In c o m e * p p ro a c h + a r, e t * p p ro a c h - o st * p p ro a c h

0evel 1 In p u ts 0evel 2 In p u ts 0eve 3 In p u ts

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1.1

Reas!ns "!r the Intr!#u$ti!n !" IFRS 1%


(he ob2ective of IFRS 13 is to provide a sin$le source of $uidance for fair value measurement 3here it is re"uired b! a reportin$ standard4 rather than it bein$ spread throu$hout several accountin$ standards. (here is no3 a uniform frame3or, for measurement of fair value for entities around the 3orld 3ho appl! either )S 5**6 or IFRS 5**6. IFRS 13 does not extend the use of fair value4 it pr!&i#es 'ui#an$e !n h!( it sh!ul# )e #etermine# (hen an initial !r su)se*uent "air &alue measurement is re"uired b! a reportin$ standard. IFRS 13 does not appl! to7 8a9 Share based pa!ment 8IFRS 29 8b9 0eases 8I*S 1:9 8c9 ;R/ in Inventories 8I*S 29 8d9 /alue in use in Impairment 8I*S 3<9 IFRS 13 is effective for accountin$ periods commencin$ on or after 1 =anuar! 2>134 3ith earl! adoption permitted. Reas!ns "!r the issue !" IFRS 1% 8a9 (o !&er$!me in$!nsisten$+ in the (a+ that "air &alue measurements re"uired b! a reportin$ standard are determined for inclusion in the financial statements of an entit!. (o !&er$!me in$reasin' $!mple,it+ in h!( "air &alue measurements are currentl! #etermine# b! individual entities in different situations. (o form part of the response of the accountanc! profession to the 'l!)al "inan$ial $risis. (o in$rease an# $!n&er'e the supp!rtin' #is$l!sure re*uirements to provide information that is relevant to users of financial statements4 so that the! understand the basis upon 3hich a fair value measurement has been determined and applied 3ith a set of financial statements. (o in$rease the e,tent !" $!n&er'en$e )et(een IFRS GAA- an# .S GAAas there is no3 a common definition for fair value measurement4 to$ether 3ith a structure or frame3or, for ho3 it is to be determined 3hen re"uired b! either IFRS 5**6 and )S 5**6.

1.2 1.3

1.4

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8b9 8c9 8d9

8e9

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2.1

/e"initi!ns Rele&ant t! Fair Value


/e"initi!ns 8a9 Fair &alue is defined as the price that 3ould be received to sell an asset !r pai# t! trans"er a lia)ilit+ in an !r#erl+ transa$ti!n bet3een mar,et participants at the measurement date? i.e. it is an e,it 0sellin'1 pri$e4 3hether !)ser&a)le in an a$ti&e mar2et 8level one input94 or estimated usin$ a &aluati!n te$hni*ue 83ith the use of level 2 and@or level 3 inputs9. Mar2et parti$ipants $!mprise in#epen#ent )u+ers an# sellers 3ho are in"!rme# an# (illin' an# a)le t! enter int! a transa$ti!n in the principal or the most advanta$eous mar,et as appropriate. E,it pri$e is the price that 3ould be re$ei&e# t! sell an asset !r pai# t! trans"er a lia)ilit+. A$ti&e mar2et is a mar,et in 3hich transactions for the asset or liabilit! ta,e place 3ith su""i$ient "re*uen$+ an# &!lume to pr!&i#e pri$in' in"!rmati!n on an !n'!in' )asis. -rin$ipal mar2et is the mar,et 3ith the 'reatest &!lume an# le&el !" a$ti&it+ for the asset or liabilit!. M!st a#&anta'e!us mar2et is the mar,et that ma,imises the am!unt that (!ul# )e re$ei&e# t! sell the asset !r minimises the am!unt that (!ul# )e pai# t! trans"er the lia)ilit+4 a"ter ta2in' int! a$$!unt transa$ti!n $!sts an# transp!rt $!sts.

8b9

8c9 8d9

8e9 8f9

2.2 2.3

From the above definition4 it can be seen that fair value under IFRS 13 is a mar2et3 )ase# measurement4 n!t an entit+3spe$i"i$ measurement. (he definition of fair value "!$uses !n assets an# lia)ilities because the! are a primar! sub2ect of accountin$ measurement. In addition4 this %&FRS shall be applied to an entit!As o3n e"uit! instruments measured at fair value.

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3.1

The Basis !" a Fair Value Measurement


Basis !" a "air &alue measurement (he follo3in$ factors should be ta,en into consideration 3hen measurin$ fair value7 8a9 .nit !" a$$!unt B (he asset or liabilit! to be measured ma! be an individual asset 8e.$. plot of land9 or liabilit!4 or a $roup of assets and liabilities 8e.$. a cash $eneratin$ unit or business94 dependin$ upon exactl! 3hat is re"uired to be measured. 8b9 (he measurement should re"le$t the pri$e at 3hich an !r#erl+ transa$ti!n )et(een (illin' mar2et parti$ipants (!ul# ta2e pla$e under current mar,et conditions4 i.e. n!t a #istress transa$ti!n. 8c9 (he entit! must determine the mar,et in 3hich an orderl! transaction 3ould ta,e place. (his 3ill be the prin$ipal mar2et or4 "ailin' that4 the m!st a#&anta'e!us mar2et that an entit! has access to at the measurement date. (he! 3ill often4 but not al3a!s4 be the same. 8d9 )nless there is evidence other3ise4 the mar,et that an entit! 3ould normall! enter into is presumed to be the principal or most advanta$eous mar,et. 8e9 It is "uite possible that different entities 3ithin a $roup or different businesses 3ithin an entit! ma+ ha&e #i""erent prin$ipal !r m!st a#&anta'e!us mar2ets4 for example4 #ue t! their l!$ati!n. 8f9 (he valuation or measurement should reflect the $hara$teristi$s !" the asset !r lia)ilit+ 8a$e4 condition4 location4 restrictions on use or sale4 etc.9 if the! are relevant to mar,et participants. 8$9 It is n!t a#4uste# "!r transa$ti!n $!sts B the! are n!t a "eature !" the asset !r lia)ilit+4 )ut ma! be rele&ant (hen #eterminin' the m!st a#&anta'e!us mar2et. If location4 for example4 is a characteristic of the asset4 then price ma! need to be ad2usted for an! costs that ma! be incurred to transport an asset to or from a mar,et.

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3.2

E,ample 1 *n asset is sold in t3o different active mar,ets at different prices. *n entit! enters into transactions in both mar,ets and can access the price in those mar,ets for the asset at the measurement date as follo3s7 Mar2et 1 5 2< 839 829 21 Mar2et 2 5 2# 819 829 22

6rice (ransaction cost (ransport cost ;et price received

If mar,et 1 is the prin$ipal mar2et for the asset 8i.e. the mar,et 3ith the $reatest volume and level of activit! for the asset94 the fair value of the asset 3ould be measured usin$ the price that 3ould be received in that mar,et4 after ta,in$ into account transport costs is 8C2< B C29 C24. Transa$ti!ns $!sts are i'n!re# as the+ are n!t a $hara$teristi$ !" the asset. If neither mar2et is the prin$ipal mar2et for the asset4 the fair value of the asset 3ould be measured usin' the pri$e in the m!st a#&anta'e!us mar2et. (he most advanta$eous mar,et is the mar,et that ma,imi6es the am!unt that (!ul# )e re$ei&e# t! sell the asset4 a"ter ta2in' int! a$$!unt transa$ti!n $!sts an# transp!rt $!st 8i.e. the net amount that 3ould be received in the respective mar,ets9. .ecause the ma,imum net am!unt that the entit! 3ould receive is C22 in +ar,et 24 the fair value of the asset 3ould be measured usin$ the price in that mar,et 8C2#94 less transport costs of C24 resultin$ in a fair value measurement of C23. *lthou$h transaction costs are ta,en into account 3hen determinin$ 3hich mar,et is the most advanta$eous mar,et4 the price used to measure the fair value of the asset is not ad2usted for those costs.

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4.1

Valuati!n Te$hni*ues
/aluation techni"ues should be used 3hich are appropriate to the asset or liabilit! at the measurement date and for 3hich sufficient data is available4 appl!in$ the fair value hierarch! to ma,imi6e the use !" !)ser&a)le inputs as "ar as p!ssi)le. Three &aluati!n te$hni*ues 8a9 8b9 8c9 In$!me appr!a$h B e.$. 3here estimated future cash flo3s ma! be converted into a sin$le4 current amount stated at present value. Mar2et appr!a$h B e.$. 3here prices and other mar,et related data is used for similar or identical assets4 liabilities or $roups of assets and liabilities. C!st appr!a$h B e.$. to arrive at 3hat ma! be re$arded as $urrent repla$ement $!st to determine the cost that 3ould be incurred to replace the service or operational capacit! of an asset.

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4.3

M!re than !ne &aluati!n te$hni*ue ma! be use# in helpin' t! #etermine "air &alue in a particular situation. ;ote that a $han'e in &aluati!n te$hni*ue is re$arded as a $han'e !" a$$!untin' estimate in accordance 3ith I*S D 3hich needs to be properl! disclosed in the financial statements.

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Fair Value 9ierar$h+


IFRS 13 establishes a hierarch! that cate$ories the inputs to valuation techni"ues used to measure fair value. Inputs 0evel 1 inputs E,planati!ns -omprise *u!te# pri$es 8E!)ser&a)leA9 in a$ti&e mar2ets for i#enti$al assets an# lia)ilities at the measurement date. *n a$ti&e mar2et is re$arded as one in 3hich transa$ti!ns ta2e pla$e (ith su""i$ient "re*uen$+ an# &!lume "!r relia)le pri$in' information to be provided. (hus ma! still be p!ssi)le 3here there is a l!( &!lume of transactions4 provided that there has been su""i$ient time "!r reas!na)le mar2etin' an# !ther mar2et3 relate# a$ti&it+ t! ta2e pla$e and 3here it is clear that an! such transactions are n!t )ase# up!n #istress transa$ti!ns. (his is re$arded as providin$ the most reliable evidence of fair value and is li,el! to be used (ith!ut a#4ustment. *re !)ser&a)le inputs4 !ther than those included 3ithin Le&el 1 a)!&e4 3hich are observable directl! or indirectl!. (his ma! include *u!te# pri$es "!r similar 8n!t i#enti$al9 asset or liabilities in active mar,ets4 !r prices for i#enti$al !r similar assets an# lia)ilities in ina$ti&e mar2ets. (!picall!4 the! are li,el! to re*uire s!me #e'ree !" a#4ustment to arrive at a fair value measurement. *re un!)ser&a)le inputs for an asset or liabilit!4 based on the )est in"!rmati!n a&aila)le4 includin$ information that ma! be reasonabl! available relatin$ to mar,et participants.

0evel 2 inputs

0evel 3 inputs

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E,ample 2 Examples of inputs used to determine fair value include7 Asset !r lia)ilit+ Le&el 1 Le&el 2 E,ample

E"uit! shares in a listed )nad2usted "uoted prices in an active entit! mar,et Finished $oods inventor! at 6rice paid b! retail customers a retail outlet 0icence ac"uired as part of a (he ro!alt! rate contained 3ithin the business combination 3hich contract as recentl! ne$otiated 3ith an unrelated part! -ash $eneratin$ unit /aluation multiple from observed transactions involvin$ similar businesses 6rice per s"uare metre for the buildin$ from observable mar,et data4 such as observed transactions for similar buildin$s in similar locations *d2ustment made to a mid mar,et non bindin$ price usin$ data that cannot be directl! observed or corroborated 6rofit or cash flo3 forecast usin$ o3n data

.uildin$ held and used

Le&el %

Interest rate s3ap

-ash $eneratin$ unit

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4:

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General /is$l!sure Re*uirements


(he $eneral disclosures include7 8a9 Meth!#s an# inputs use# in the process to determine a fair value measurement4 t!'ether (ith an+ $han'es in &aluati!n te$hni*ues 3hich have been applied from one reportin$ date to the next. 8b9 Information relatin$ to the hierar$h+ le&el 3hich is applicable to a particular fair value measurement included 3ithin the financial statements. 8c9 An+ trans"ers )et(een le&el !ne an# le&el t(! !" the &aluati!n hierar$h+. 8d9 For the lo3est cate$or! 3ithin the hierarch!4 le&el three4 re*uirements in$lu#e #etails !" assumpti!ns use# t! help #etermine "air &alue measurement4 a reconciliation of openin$ and closin$ balances and additional information re$ardin$ unobservable inputs. (he follo3in$ is an example of a fair value note disclosure for Sabathia -ompan!. It includes both the fair value amounts and the reliabilit! level. 8* similar disclosure 3ould be presented for liabilities.9

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For assets and liabilities measured at fair value and classified as 0evel 34 a reconciliation of 0evel 3 chan$es for the period is re"uired. In addition4 companies should report an anal!sis of ho3 0evel 3 chan$es in fair value affect total $ains and losses and their impact on net income. (he follo3in$ is an example of this disclosure.

4D

;uesti!n 1 (he International *ccountin$ Standards .oard 8I*S.9 issued IFRS 13 Fair /alue +easurement in 2>11 and this is li,el! to be relevant to entities 3ho prepare financial statements 3hich include the impact of measurements based upon fair value. Re*uire#< 8a9 8b9 8c9 Explain 3h! the I*S. has introduced IFRS 13 Fair /alue +easurement. 8# mar,s9 Explain ho3 fair value is to be determined in accordance 3ith IFRS 13. 81# mar,s9 Explain the nature of the supportin$ disclosures re"uired b! IFRS 13. 8# mar,s9 8(otal 2# mar,s9

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