ICPAK

The Financial Reporting WorkshopComfy Hotel, EldoretNovember 10, 2014

Fair Value Measurement- IFRS 13

ICPAK

•Sets out in a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. •It does not introduce any new requirements to measure an asset or a liability at fair value, change what is measured at fair value in IFRSs or address how to present changes in fair value.•IFRS 13 is effective from 1 January 2013. Early application is permitted.

Introduction

ICPAK

The amount for which an asset could be

exchanged, or a liability settled, between

knowledgeable, willing parties in an arm’s length transaction.

The old definition of fair value Its weaknesses

It did not specify whether an entity is buying or selling the asset.

It was unclear about what settling meant because it did not refer to the creditor.

It was unclear about whether it was market-based.

It did not state explicitly when the exchange or settlement takes place.

Old definition of Fair Value

444

ICPAK

Fair Value Definition

• Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction (not a forced sale) between market participants (market-based view) at the measurement date (current price).

• Fair value is a market-based measurement (it is not an entity-specific measurement)

• Consequently, the entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value.

IFRS 13 Fair Value Measurement

55

Assets

Intangible

Financial

Inv Property

PP&E

Inventory

EtcDefinedBenefit

Biological assets

Cost

CM or RM CM or RM

Cost Nil

Nil

Lower

of C

or N

RV

some F

VM

Cost

Cost

CM or FVM

Fair value

AmC or FV

M

Fair value

less costs to

sell

Fair value

less costs to

sell

FV plan assets less PUC plan obligation & arbitrary rulesFV plan assets less

PUC plan obligation & arbitrary rules

Various

Various

Assets: Classification, recognition and measurement

ICPAK

ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION

MODEL BASED ON FAIR VALUE

BASIS OF IMPAIRMENT TEST

IFRS 9 Financial Instruments

Fair value For specified financial assets and for particular business models: fair value

IAS 16 Property, Plant and Equipment

Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management.

Accounting policy choice: revaluation model

Compare carrying amount to recoverable amount.

Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36)IAS 38 Intangible

AssetsPurchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management

Accounting policy choice: revaluation model

IAS 40Investment Property

Cost including transaction costs Accounting policy choice: fair value

IAS 41 Agriculture Fair value less costs to sell Fair value less costs to sell

ICPAK

7

ICPAK

Application guidance

• When measuring fair value use assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk.

• Characteristics of a particular asset or liability that a market participant would take into account when pricing the item at the measurment date, include:

– age, condition and location of the asset– restrictions on the sale or use.

88

ICPAK

Transaction and Price

• Measured using the price in the principal market for the asset or liability (ie the market with the greatest volume and level of activity for the asset or liability) or, in the absence of a principal market, the most advantageous market for the asset or liability.

99

ICPAK

Non-financial assets

• Must reflect the use of a non-financial asset by market participants that maximises the value of the asset

– physically possible – legally permissible– financially feasible• Highest and best use is usually (but not always) the

current use.

The Concept of highest and best useReconsider methods, assumptions , processes / procedures Under IFRS 13, an entity’s current use of an asset is generally taken to be its

highest and best use, unless market or other factors suggest that a different use of that asset by market participants would maximise its value.

If such factors exist, management is required to consider all relevant information in determining whether the highest and best use of a property is different from its current use at the measurement date.

Measurement

ICPAK

Highest and best use non financial assets

• “A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits 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.

Measurement

ICPAK

Highest and best use for non-financial assets• Fair value considers a market participant’s ability to

generate economic benefits by using the asset in its highest and best use.

• Highest and best use considers a use that is:– Physically possible– Legally permissible –Town and Country Planning Act– Financially feasible

• Highest and best use is always considered when measuring fair value, even if the entity intends a different use.

Measurement

ICPAK

Highest and best use for non-financial assets (cont.)

Can be either:(valuation premise)• On a stand-alone basis• In combination with other assets

– Assumed the complementary assets are available to market participants

– Assumptions must be consistent for all assets of the relevant group

Measurement

ICPAK

Example : highest and best use

• In this case, the highest and best use is determined from the higher of: a) The value of the land used in the manufacturing operation b) The value of the land as a vacant site for residential use

• Note that transformation costs (e.g., costs to demolish the manufacturing facility) would be considered in the value of land as a vacant site.

Land acquired in a business combination is currently developed for industrial use as a site for a manufacturing facility. Nearby sites were recently developed for residential high-rise flats. It was determined that the land could be used to develop residential high-rise flats.How is highest and best used determined?

Measurement

ICPAK

Valuation techniques• Use valuation techniques that:

– Are appropriate in the circumstances – Have sufficient available data– Maximise use of relevant observable inputs – Minimise use of unobservable inputs

• IFRS 13 describes three valuation techniques– Market approach (prices and other information for identical or comparable

assets)– Income approach (present value i.e discounted future cash flows; option pricing

models e.g Black Scholes Merton or binomial; excess earnings) (IFRS 13) – Cost approach (current replacement cost)

• One or several valuation techniques might be used– If a range of values are indicated, select the point within that range most

representative of fair value

Measurement

ICPAK

Valuation techniques (cont.) • Apply valuation techniques consistently • Change in valuation technique needed if:

– New markets develop– New information becomes available– Information previously used is no longer available– Valuation techniques improve– Market conditions change

• Change in valuation technique = change in estimate

Measurement

ICPAK

Is there a quoted price in an active market for an identical

asset or liability?(Level 1 input)

Are there any observable inputs* other than quoted

prices for an identical asset or liability?

Use the Level 1 input = Level 1 measurement

No use of significant unobservable

(Level 3) inputs‡ = Level 2

measurement

Use of significant unobservable

(Level 3) inputs‡ = Level 3

measurement

NoYes

Yes No

Must use without adjustment

* Maximise the use of relevant observable inputs. Observable inputs include market data (prices and other information) that is publicly available

‡ Unobservable inputs include the entity’s own data (eg budgets, forecasts), which must be adjusted if market participants would use different assumptions

The fair value hierarchy

ICPAK

1818

ICPAK

Disclosure

• Information about an entity’s valuation processes is required for fair value measurements categorised within Level 3 of the fair value hierarchy.

• A narrative discussion is required about the sensitivity of a fair value measurement categorised within Level 3.

• Quantitative sensitivity analysis is required for financial instruments measured at fair value.

1919

ICPAK

Judgements and estimates• An entity must take all information that is reasonably available to

search for a principal market.

• determining fair value and the highest and best-use.for a non-financial asset.

• Assumptions that a market participant would use (including assumptions about risk).

• Determining the correct valuation technique to use and the inputs to the techniques, particularly on the income approach, require a wide range of estimates as:

• discount rates• future cash flows• risks and uncertainty

2020

ICPAK

Judgements and estimates Cont…

• The inputs used in the valuation techniques should primarily be based on observable inputs (where possible) to minimise the use of unobservable inputs.

Thank you

21ICPAK