IFRS-Chapter 3-Fair Value Measurement

What are unobservable inputs?

Inputs where market data is not available and are developed using the best info available.

How should fair value be applied to a liability with a corresponding asset?

Measurement in the following order: Quoted price of the asset in an active market Quoted price for the asset in an inactive market A valuation under a technique such as the income or market approach

How should fair value be applied to a liability when there is no corresponding asset?

Measurement must be done by applying a valuation technique from the perspective of a market participant that owes the liability. A present value technique could be applied

What criteria must market participants meet?

Must be independent from each other Must be knowledgeable about the asset or liability Must have the ability to enter into the transaction Must not be forced or compelled.

What is the new 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 the exit price?

The price that would be recieved to sell an asset or paid to transfer a liability

Which price should be used for fair value?

The price within a bid-ask spread that is most representative of fair value should be used.

How is fair value applied to an entity's own equity instruments?

The same principles that apply to liabilities also apply to equity instruments. Must measure the fair value of the equity instrument from the perspective of a market participant who holds the instrument as an asset.

What are level three inputs?

Unobservable inputs for the asset or liability Include: cash generating units, trademarks, and a/r

What are the four steps to measure fair value for a non-financial asset?

1.Determine the asset or liability to be measured 2.Determine the valuation premise that is appropriate 3. Determine the principal or most advantageous market 4. Determine the appropriate valuation technique.

What is a non-performance risk in regards to the fair value of a liability?

A non-performance risk is the risk that an entity will not fulfill an obligation.

What is meant by orderly transaction?

A transaction that assumes exposure to the market for a period before the measurement date to allow marketing activities that are usual and customary for transactions involving assets or liabilities.

What are transactions costs?

Costs are incremental direct costs that would not have been incurred had the decisions to sell the asset/transfer the liability not been made.

What are transport costs?

Costs incurred to transport an asset from its current location to its principal market.

What is the in combination valuation premise?

Fair value determined under the premise that market participants would obtain maximum benefit principally by using the asset in combination with other assets and liabilities as a group. The asset will be sold as an individual asset but will be used in conjunction with other assets.

How should the valuation premise that is appropriate be determined?

Fair value is measured by considering the highest and best use of an asset. The uses must be physically possible, legally permissible, and financially possible

What are issues in measuring financial instruments?

Inputs based on bid and ask price Offsetting

What are observable inputs?

Inputs developed using market data such as publicly available info.

What are level two inputs?

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

What are the three valuation techniques?

Market approach Cost approach Income approach

What is the stand alone premise?

Market participants would obtain maximum benefit principally through using the asset on a stand alone basis

What are level one inputs?

Prices quoted in active markets for identical assets or liabilities that the entity can access at measurement date. Must be for identical items.

Why was there a need for a standard on fair value measurement?

Prior to IFRS 13 there were many standards that defined fair value.

What items are included as level 2 inputs?

Quoted prices for similiar assets in active markets Quoted prices for identical items in inactive markets Inputs other than quoted prices that are observable Inputs that are derived from or corroborated by observable market data

How is fair value applied to liabilities according to IFRS 13?

The fair value is the amount to transfer a liability. Assumes that the liability is transferred to another market participant at the measurement date.

What is the most advantageous market?

The market that would maximize the amount received/paid after deducting transaction and transport costs.

What is the principal market?

The market with the greatest volume and level of activity

What is the bid price?

The price a dealer is willing to pay

What is an ask price?

The price a dealer is willing to sell

What is the definition of highest and best use?

The use of a non-financial asset by market participants that would maximize the value of the asset or the group of assets and liabilities within which the asset would be used. This is from the perspective of the market participant, not the holder.

What disclosures does IFRS 13 require?

The valuation techniques and inputs used to develop measurements of assets and liabilities measured at fair value. When using significant unobservable inputs, what are their effects on profit and loss.

How is fair value applied to financial liabilities?

There is often an observable marker and a quoted price may be obtained to measure fair value. Measurement will depend on whether or not a corresponding assets is held by another entity.

How do transaction and transport costs affect fair value?

They affect the determination of fair value and are relevant in determining the most advantageous market. The price used to measure fair value is not adjusted for these costs.

What was the main objective of IFRS ?

To define fair value To establish a framework for measuring fair value To require disclosures about fair value measurement

What are the key elements of the term fair value?

Use of an exit price It is based on the perspective of the entity that holds the asset or liability. Orderly transaction

What relevant questions should be used to determine the asset or liability to be measured?

What is the location of the asset What is the condition of the asset Are there any restrictions on sale or use of the asset Is the asset or liability a stand alone asset or is it a group of assets