Learning Unit 4 - Fair value, PPE and Investment property

Question 1

Provide the definition of fair value in terms of IFRS 13

Answer 1

Fair value is defined as:

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 2

What is meant by: “Fair value is an exit price”?

Answer 2

The price to
- sell an asset (not to acquire it)
- transfer a liability (not to settle it)

Question 3

What is meant by: “orderly transaction”?

Answer 3

An orderly transaction is a transaction that is not rushed or forced. Market participants in have enough time to consider the market.

Question 4

What is meant by: “market participants”?

Answer 4

Refers to the buyers and sellers in either the principal market or most advantageous market.

Question 5

What are the characteristics of market participants.

Answer 5

• must be independent (ignore related parties)
• must be knowledgeable of the asset or liability
• must be able to transaction (i.e no limited due to legal prohibition
• must be willing to transact (not forced).

Question 6

Provide the definition of the principal market.

Answer 6

The market that the entity has access to that has the biggest volume and level of activity for the asset or liability.

Question 7

Provide the definition of the most advantageous market.

Answer 7

The market that:
- maximizes the amount that would be received to sell the asset; or
- minimize the amount that would be paid to transfer the liability;
- after taking into account transaction costs and transport costs

Question 8

List the three primary valuation techniques in terms of IFRS 13.

Answer 8

1. Market approach
2. Income approach
3. Cost approach

Question 9

What is an example of a level 1 input regarding the determination of the fair value of a asset or liability?

Answer 9

Level 1 inputs are the most reliable. They are:
- quoted prices
- in an active market for
- identical assets or liabilities

Question 10

What is an example of a level 2 input regarding the determination of the fair value of a asset or liability?

Answer 10

Observable inputs other than level 1 inputs, for example quoted prices for similar assets in a active market.

Question 11

What is an example of a level 3 input regarding the determination of the fair value of a asset or liability?

Answer 11

These are unobservable inputs for the asset or liability and should only be used to measure fair value to the extent that the relevant observable inputs are not available.