IFRS 13
Financial value
in some way, FV accounting will provide a more meaningful representation of the value of an entity. This way it better reflects the benefit and risk that the entity is exposed to.
Unobservable inputs
inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.
level 2 inputs
inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly
market-corroborated inputs
inputs that are derived principally from or corroborated by observable market data by correlation or other means
observable inputs
inputs that are developed using market data, and that reflect the assumptions that market participants would use when pricing the asset or liability
The objectives of IFRS 13
is to provide a single source of guidance for fair value measurement where it is required by a reporting standard
level 1 inputs
quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date
inputs
the assumptions that market participants would use when pricing the asset or liability.
transport costs
the costs that would be incurred to transport an asset from its current location to its principal market
unit of account
the level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes
most advantageous market
the market that maximises the amount that would be received to sell the asset or minimises the amount that would that would be paid to transfer the liability, after taking into account transaction costs and transport costs
There are various approaches to determining the FV of an asset or liability: (3)
- Market approach (valuation based on recent sales price) - Cost approach ( valuation based on replacement cost) - Income approaches ( valuation based on financial forecasts)
IFRS 13 does not apply to
- Share based payment transaction - leases
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.
principal market
the market with the greatest volume and level of activity for the asset or liability
entry price
the price paid to acquire an asset or received to assume a liability in an exchange transaction
exit price
the price that would be received to sell an asset or paid to transfer a liability
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
expected cash flow
the probability-weighted average of possible future cash flows
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
orderly transaction
a transaction that assumes exposures to the market for a period before the measurement date allow for marketing activities that are usual and customary for such transactions
Will the asset eg land need to be legal at measurement date
a use of an asset need not to be leav
cost approach
a valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset
market approach
a valuation technique that uses prices and other relevant information generated by market transactions involving identical assets
The fv of a non financial asset is
based on its highest and best use. This is determined from the perspective of market participants. it does not matter whether the entity intends to use the asset differently.
non-performance risk
the risk that an entity will no fulfil an obligation.
highest and best use
the use of a non-financial asset by market participants that would maximise the value of the asset and liabilities within which the asset would be used
The highest and best use takes into account
the use of the asset which is physically possible, legally permissible and financially feasible. IFRS 13 allows management to presume that the current use of an asset is the highest and best use unless factors suggest otherwise.
International financial report standards that don't use FV
they utilise FV more often that some other accounting framework. But they do not require that all assets and liabilities are measured at FV. The FS of many entities will measure many items such as investors using cost based models.
level 3 inputs
unobservable inputs for the asset or laibility
income approach
valuation techniques that convert future amounts to a single current amount.
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.
example
Even if you discontinue the brand, that is not relevant.
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
more...
IAS 38 intangible asset, allow it to be valued at FV but only if there is an active market and thus a reliable valuation for those assets. FV can be subjective and may be influenced by bias. IFRS 13 was developed to solve the problem in the application of the fv concept. for example when determining fv, ifrs 14 prioritise level 1 inputs. This maximises comparability and verifiability.
FV
IFRS 13 states that fv is a market based measurement, although it understands that's observable market transactions might not be available. Whether it is or not, the aim of IFRS13 is to estimate the price at which an asset would be sold at in an orderly transaction between market participants at the measurement date.
other examples..
IFRS 9 financial instrument used amortised cost and Fv. IAS16 ppe - revaluation to FV IAS 49 investment property allows entities to measure investment properties at fv, however the historical cost basis is still often used by entities that hold investment properties.
Share based payments
IFRS specifically excludes transaction covered by certain other standards including share based payment transaction within the scope of IFRS 2 - share based payment.
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
Non financial assets are
PPE And intangible assets
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
transaction costs
The costs to sell an asset or transfer a liability in the principal market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria: 1. result directly from and are essential to that transaction 2. they would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made
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.
The market approach
This approach takes a transaction price paid for an identical or for a similar instrument and adjust it.
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
active market
a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
market participants
buyers and sellers in the principal market for the asset or liability that have all of the following characteristics: - they are independent - they are knowledgeable - they are able to enter into a transaction for the asset or liability - they are willing to enter into a transaction for the asset or liability
risk premium
compensation sought by risk-adverse market participants for bearing the uncertainty inherent in the cash flows of an asset or liability