IFRS 13 - Fair value

Question 1

Define Fair Value:

Answer 1

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 2

Objective of FV measurement:

Answer 2

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 conditions.

Question 3

Non-financial asset:

Answer 3

An asset which can’t be traded on financial markets and whose value is derived from its physical net worth.

Question 4

Financial Asset:

Answer 4

It can be traded on the financial market. Value is derived from a contractual claim (more liquid).

Question 5

What conditions need to be taken into consideration when determining the FV:

Answer 5

• Condition and location of asset
• Restrictions on sale or use of asset

Question 6

A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either:

Answer 6

• in the principal market for the asset or liability
• in the absence of the principal market, in the most advantageous market for the asset or liability.

Question 7

True or False:

The entity must be able to access the market, and as such must be selling in that market to be able to use it to measure FV.

Answer 7

False

Although an entity must be able to access a market, they need not be able to sell the particular asset or transfer the particular liability on the measurement date to be be able to measure fair value on the basis of the price in that market.

Question 8

How to record the FV or NFA’s (non-financial assets):

Answer 8

A FV measurement of a non-financial asset takes into account a market participant’s ability to generate economic befits by using the asset in its highest and best use OR by selling it to another market participant that would use the asset in its highest and best use.

Question 9

The HBU takes the following into consideration :

Answer 9

• use that is physically possible
• a use that is legally permissible (legal restrictions)
• a use that is financially feasible (generates adequate income or cash flows to produce and investment return to the market participants).

Question 10

The transfer of a liability or an entity’s own equity instrument assumes the following:

Answer 10

• a liability would remain outstanding and the market participant transferee would be required to fulfil the obligation. The liability would not be settle with the counterparty or otherwise extinguished on the measurement date.
• an entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise extinguished in the measurement date.

Question 11

When quotes price is not available, an entity shall measure the FV of the liability or equity instrument as follows:

Answer 11

(a) using the quoted price in the ACTIVE market for an identical item held by another party as an asset, if that price is available.

(b) if price is not available, using other observable inputs, such as the quoted price in a market that is not active for the identical item held by another party as an asset.

(c) if a and b are not available, use one of the following techniques:

• income approach
• market approach

Question 12

True or False

Fair value at initial recognition is always the same as the transaction price.

Answer 12

False

Question 13

Fair value hierarchy:

Answer 13

Level 1
Highest priority goes to quoted prices

Level 2

Level 3
Lowest priority goes to unobservable inputs

Question 14

Level 1 emphasise:

Answer 14

• the principal market for the asset of liability or in the absence of a principal market, the most advantageous market for the asset or liability

AND

• whether the entity can entered into a transaction for the asset or liability at the price in that market at the measurement date.

Question 15

Level 2 inputs:

Answer 15

Inputs other than quoted prices included within level 1 that are observable for the asset Le liability, either directly or indirectly.

This includes:
-quoted prices for similar assets or liabilities in active markets

• quoted prices for identical or similar assets or liabilities in non-active markets.
• inputs other than quoted prices that are observable for the asset or liability, for example:
  Interest rates and yield curves
  Implied volatilities
  Credit spreads
• market corroborated inputs

Question 16

Level 3 inputs:

Answer 16

Unobservable inputs for the asset or liability.

Question 17

Principal market:

Answer 17

Market with the greatest volume and level of activity for the asset or liability.

Question 18

Most advantageous market:

Answer 18

Market that maximises the amount that would be received to sell the asset or minimise the amount that would be paid to transfer the liability, after taking into transaction costs and transport costs.

Question 19

Read appendix B

Answer 19

NOW