15.1 IFRS 13 Fair Value

Question 1

What is the background for IFRS 13

Answer 1

• Standard setters have wanted to move towards fair value accounting and IFRS 13 comes up in other standards
• Used to be some contradictions on what fair value meant

Question 2

What are the exclusions for IFRS 13

Answer 2

• IFRS 16 Leases or to situations where different measurements are required such as net realisable value
• IAS 2 inventories
• IAS 36 Impairment of assets – value in use

Question 3

What is the definition of fair value

Answer 3

Fair value is 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

Question 4

What are the key points of IFRS 13

Answer 4

1. The fair value measurement is on the basis of a hypothetical transaction.
2. An exit price is required.
3. Not a forced liquidation or distress sale
4. Buyers and sellers in the principal (or most advantageous) market for the asset or liability.
5. The fair value is to be calculated as at the measurement date

Question 5

What considerations should be given when measuring an asset or liability

Answer 5

• When measuring fair value an entity shall take into account the characteristics of the asset or liability. Such characteristics include the following:
  o The condition and location of the asset
  o Restrictions, if any on the sale or use of the asset.
• An entity shall measure the fair value of an asset or 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

Question 6

Are transaction costs included

Answer 6

Despite this is looking at the market price of a good not transactional costs of such a sale are included

Question 7

What are the different valuation techniques

Answer 7

• Paragraph 61 of IFRS 13 requires the use of valuation techniques:
  o That are appropriate to the circumstances
  o For which there is sufficient data available
• Maximise the use of relevant observable inputs and minimise the use of unobservable inputs.
• Three widely used valuation approaches are the
  o Market approach
  o Cost approach
  o Income approach.
• IFRS 13 does not provide a hierarchy or ranking of the different valuation techniques.
• However, it does provide a hierarchy for the inputs that are required in order to carry out the different valuation techniques

Question 8

What is the market approach for valuation

Answer 8

Uses prices and other relevant information generated by market transactions involving identical or comparable assets

Question 9

What is the cost approach for valuation

Answer 9

Reflects the amount that would be required currently to replace the service capacity of an asset

Question 10

What is the income approach for valuation

Answer 10

Converts future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount

Question 11

What are the different levels of input for valuation techniques

Answer 11

• A range of inputs are required in order to be able to use a valuation method to produce a ‘fair value’ calculation.
• The inputs to valuation techniques used to measure fair value are categorised into three different levels.
• Level 1, Level 2, Level 3

Question 12

What is a level 1 input for valuation techniques

Answer 12

• Level 1 inputs comprise quoted prices (‘observable’) in active markets for identical assets and liabilities at the measurement date.
• This is regarded as providing the most reliable evidence of fair value and is likely to be used without adjustment

Question 13

What is a level 2 input for valuation techniques

Answer 13

• Level 2 inputs are observable inputs, other than those included within Level 1 above, which are observable directly or indirectly.
• This may include quoted prices for similar (not identical) assets or liabilities in active markets, or prices for identical or similar assets and liabilities in inactive markets.
• Typically, they are likely to require some degree of adjustments to arrive at a fair value measurement. For example, with regard to the condition or location of the asset.

Question 14

What is a level 3 input for valuation techniques

Answer 14

• Level 3 inputs are unobservable inputs for an asset or liability.
• An asset or liability is regarded as having been measured using the lowest level of inputs that is significant to its valuation

Question 15

When should fair value be measured on a recurring and non recurring bases

Answer 15

Recurring basis
* Fair value on a recurring basis arises when a reporting standard requires fair value to be measured on an ongoing basis.
o e.g. IAS 40 Investment Property
Non-recurring basis
* Fair value on a non-recurring basis arises when a reporting standard requires fair value to be measured at fair value only in certain specified circumstances.
o For example, IFRS 3 (Revised) Business Combinations – items (e.g. when calculating goodwill) are measured at fair value at the date of acquisition.

Question 16

What is the required disclosure under IFRS 8

Answer 16

• An entity shall disclose information that helps users of its financial statements assess both of the following:
• For 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,
  o The valuation techniques and inputs used to develop those measurements.
• For recurring fair value measurements using significant unobservable inputs,
  o The effect of the measurements on profit or loss or other comprehensive income for the period.
• All goes in the notes to the accounts