IFRS 13 - Fair Value Flashcards
What is the purpose and scope of the SOFP
To present fairly the financial position of an entity
IFRS Fair Value Measurements:
Defines fair value
Sets out framework for measuring fair value
Requires disclosure of fair value measurements
All in one accounting standard (previously, fair value was addressed in many different accounting standards, e.g. IAS 16)
Which accounting standards require or permit fair value?
Not:
Share-based payments (IFRS 2)
Leasing transactions (IAS 17)
Measurements that are not fair value e.g., Net Realisable Value (IAS 2) and Value in Use (IAS 36)
What are the objectives of IFRS 13?
Consistency of measurement across accounting standards.
Consistency with US GAAP (IFRS 13 was a joint project between IASB and FASB as part of the IFRS convergence project)
What is the definition of Fair Value?
“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”
What is an orderly transaction?
It not a forced sale
Adequate market exposure
The transaction takes place: In the principal market for the asset/liability. Otherwise, in the most advantageous market (the market gives the highest value to the asset)
No need for any actual transaction
Market participants:
are Independent
are Knowledgeable
are Able & willing
Think from the point of view of the buyer
Assume they act in economic interest
Do not need to be specific people/companies
Market participants:
are Independent
are Knowledgeable
are Able & willing
Think from the point of view of the buyer
Assume they act in economic interest
Do not need to be specific people/companies
What is the exit price?
The actual price that would be paid
For the price deduct transport cost to principal market.
But do not include transaction costs.
What is the definition of non-financial assets according to IFRS 13
IFRS 13 states that a fair value measurement of a non-financial asset takes into account the “highest and best” use of the asset. The highest and best use of a non-financial asset must be physically and legally possible.
“When measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date”. What are some of these characteristics?
The condition and location of the asset
Restrictions, if any, on the sale or use of the asset
(For liabilities, fair value also reflects the effect of the non-performance risk, which includes the entities own credit risk)
What are the three main techniques used:
Market approach
Cost approach
Income approach
What is the market approach?
The market approach is a widely used valuation technique.
Uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities or a group of assets and liabilities, such as a business’
What is the cost approach?
The cost approach reflects the amount that would be required currently to replace the service capacity of an asset.
Current replacement cost.
Used to measure the fair value of tangible assets, e.g., Plant, Property and Equipment (PPE)
What is the income approach?
Present value of future cash flows
Reflects current market expectations of future cash flows
