C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - FAIR VALUE MEASUREMENT

Question 1

Fair value measurement (IFRS 13).

Answer 1

Fair value measurement (IFRS 13). Fair value is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.
Fair value measurements are based on an asset or liability’s unit of account, which is specified by each IFRS where fair value measurement is required. For most assets and liabilities, the unit of account is the individual asset or liability, but in some instances may be a group of assets or liabilities.

Question 2

Active market.

Answer 2

Active market. A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Question 3

fair value hierarchy

Answer 3

Fair value is market-based measure, not entity specific one. Therefore, valuation techniques used to measure fair value maximise the use of relevant observable inputs and minimize the use of unobservable inputs. IFRS 13 establishes a fair value hierarchy that categorises the inputs to valuation techniques into 3 levels.
 Level 1 inputs. Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date (share price in Stock Exchange)
 Level 2 inputs. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (prices) or indirectly (derived from process). For example, quoted price of a similar assets in active markets or for identical or similar assets in non-active markets or use of quoted interest rates for valuation purposes.
 Level 3 inputs. Unobservable inputs for the asset or liability, eg discounting estimates of future cash flows. Level 3 inputs are only used where relevant observable inputs are not available or where the entity determines that transaction proce or quoted price does not represent fair value.

Question 4

most advantageous and principal market.

Answer 4

A fair value measurement assumes that the transaction takes place either:
 In the principal market for the asset or liability (market with the greatest volume and level of activity for the asset or liability).
 In the most advantageous market (in the absence of principal)
The most advantageous market is assessed after taking into account transaction costs and transport costs to the market. Fair value also takes into account transport costs but excludes transaction costs. The fair value should be measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest.

Question 5

FV for non-financial assets

Answer 5

For non-financial assets, the fair value measurement is the value for using the asset in its highest and best use (the use that would maximise its value) or by selling it to another market participant that would use it in its highest and best use. The highest and best use of a non-financial asset takes into account the use that is physically possible, legally permissible and financially feasible.

Question 6

fair value of a liability

Answer 6

The measurement of the fair value of a liability assumes that the liability remains outstanding and the market participant transferee would be required to fulfil the obligation, rather than it being extinguished. The fair value of a liability also reflects the effect of non-performance risk (risk that entity will not fulfil an obligation), which includes, but may not be limited to, an entity’s own credit risk.

Question 7

Valuation techniques.

Answer 7

Valuation techniques. The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset (or to transfer the liability) would take place between market participants at the measurement date under current market conditions. IFRS 13 requires that one of three valuation techniques must be used:
 Market approach – uses prices and other relevant information from market transactions involving identical or similar assets and liabilities;
 Cost approach – the amount required to replace the service capacity of an asset (also known as the current replacement cost – this approach cannot be used to measure the fair value of financial assets);
 Income approach – converts future amounts (cash flows, profits) to single current (discounted) amount.
An entity must use a valuation technique that is appropriate in the circumstances and for which sufficient data is available to measure fair value. The technique must maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.