IFRS 13 Fair Value Measurement, Review

REVIEW OF IFRS 13
International Financial Reporting Standard 13
Fair Value Measurement

1. New IFRSs Issued in 2011
IFRSs 10, 11, 12, 13 were issued in May 2011.
IFRS 13 Fair Value Measurement
–> Issued in May 2011, “Fair Value Measurement”
IFRS 12 Disclosure of Interests in Other Entities
–> Issued in May 2011, “Disclosure of Interests in Other Entities”
IFRS 11 Joint Arrangements
–> Issued in May 2011, “Joint Arrangements”
–> IFRS 11 changed the title of IAS 28 to “Investments in Associates and Joint Ventures.”
–> IFRS 11 superseded IAS 31, Interests in Joint Ventures.
IFRS 10 Consolidated Financial Statements
–> Issued in May 2011, “Consolidated Financial Statements”
–> IFRS 10 changed the title of IAS 27 to “Separate Financial Statements.”

2. Fair value measurement before IFRS 13
Before the issuance of IFRS 13 in May 2011
–> fair value measurement was addressed in IAS 39.
–> IAS 39.48, 39.49
–> IAS 39.AG69 through 39.AG82

3. Fair value measurement in U.S. GAAP
[IFRS 13 and U.S. GAAP Convergence]
IFRS 13 issued in May 2011 is
–> substantially converged with
–> U.S. GAAP Codification Topic 820
–> as revised by ASU 2011-04 in May 2011.

4. Definition of fair value
Fair value of an asset is the price
–> an entity would receive when an asset is sold
–> in an orderly transaction
–> between market participants.

Fair value of a liability is the price
–> an entity would pay when a liability is transferred
–> in an orderly transaction
–> between market participants.
(1) Fair value is an exit price.
–> The price an entity would receive when an asset is sold.
–> The price an entity would pay when a liability is transferred.
(2) Fair value is a market based measurement.
–> Fair value is not an entity-specific measurement.
(3) Fair value is a price from an orderly transaction.
–> A price from a transaction that is not orderly requires adjustments.

The exchange transaction is assumed to occur
–> in the principal market.

If the principal market does not exit,
–> the transaction is assumed
–> in the most advantageous market.

Principal market is the market that has
–> the greatest volume and level of activity.

Most advantageous market is the market that provides
–> the maximum amount for the sale of an asset and
–> the minimum amount for the transfer of a liability.

In determining the most advantageous market
–> both transaction costs and transport costs are considered.

In determining the fair value
–> transaction costs are not considered but
–> transport costs are considered.

5. An example of fair value
What is the fair value of the asset in the following case?
Price in the principal market = € 7,000
Transport cost to move the asset to the principal market = € 200
Transaction cost to sell the asset = € 150

Fair value of the asset = € 7,000 – € 200 = € 6,800
Note: Transport cost is considered in the fair value calculation.
Note: Transaction cost is not considered in the fair value calculation.

6. An example of the most advantageous market
Which market is the most advantageous market for an asset?
Price in Market A = € 8,200
Price in Market B = € 8,000
Transport cost to move the asset to Market A = € 700
Transport cost to move the asset to Market B = € 600
Transaction cost in Market A = € 500
Transaction cost in Market B = € 300
Adjusted price in Market A = € 8,200 – € 700 – € 500 = € 7,000
Adjusted price in Market B = € 8,000 – € 600 – € 300 = € 7,100

Market B is the most advantageous market
–> Adjusted price in Market B > Adjusted price in Market A
–> € 7,100 > € 7,000

Fair value of the asset is measured based on the price in Market B.
–> Fair value = Price in Market B – Transport cost
= € 8,000 – € 600 = € 7,400

Note: Transport cost is considered in determining the most advantageous market.
Note: Transaction cost is considered in determining the most advantageous market.
Note: Transport cost is considered in the fair value calculation.
Note: Transaction cost is not considered in the fair value calculation.

7. Highest and best use for non-financial assets
Fair value of a non-financial asset  is measured assuming
–> the “highest and best use” of the asset
–> by market participants.

Highest and best use is
–> the use
–> that provides the maximum value
–> to market participants.

An entity’s current use is
–> assumed to be the highest and best use
–> unless other factors suggest that
–> the value of the asset will be maximized by a different use.

8. Fair value of liabilities and equity instruments
(1) If a quoted price of an identical or a similar instrument is not available
–> use the identical instrument
–> held by another party as an asset.

(2) If identical instrument is not held by another party as an asset
–> use a valuation technique
–> from the perspective of a market participant
–> who issues such instruments.

Fair value of a liability reflects
–> the effect of non-performance risk.
Non-performance risk includes
–> an entity’s own credit risk.

Fair value of a liability reflects
–> an entity’s own credit risk

Fair value of a liability does not reflect
–> the effect of a third-party credit enhancement (i.e., guarantee of debt)
Non-performance risk is
–> the risk that an entity will not perform the obligation.

Fair value of a financial liability with a demand feature, such as demand deposit,
–> is not less than the present value of the amount payable on demand.
Market risk
–> Risk due to the changes in market price
(1) interest rate risk
(2) currency risk
(3) other price risk
Credit risk
–> Risk due to the failure of performing an obligation

Fair value of a group of financial assets and financial liabilities
–> can be measured on based on the net exposure
–> to market risk or credit risk.

Fair value of a group of financial assets
–> can be measured
–> based on the price to be received
–> to sell a net long position.

Fair value of a group of financial liabilities
–> can be measured
–> based on the price to be paid
–> to transfer a net short position.

If an asset or a liability is initially measured at fair value
–> and the transaction price is different from fair value,
–> the difference is recognized in profit or loss.

Transaction price is
–> the price an entity pays to acquire an asset or
–> the price an entity receives to assume a liability.
Transaction price is an entry price.
Fair value is an exit price.

9. Conditions for fair value measurement to be based on net exposure
(1) The group of financial assets and financial liabilities are
–> managed based on net exposure.
(2) Information to key management personnel is
–> provided based on net exposure.
(3) Financial assets and financial liabilities in the group are
–> measured at fair value.

10. Valuation techniques
What is the objective of valuation techniques?
–> To estimate fair value.
Three approaches of valuation techniques
(1) Market approach
(2) Cost approach
(3) Income approach

Market approach
–> uses information from market transactions.

Cost approach
–> uses the cost required to replace an asset or a liability.
–> Current replacement cost

Income approach
–> uses the present value of future cash flows.

In using valuation techniques,
–> maximize the use of observable inputs and
–> minimize the use of unobservable inputs.

11. Fair value hierarchy
Inputs to valuation techniques are grouped into three levels.
(1) Level 1 inputs
(2) Level 2 inputs
(3) Level 3 inputs

Level 1 inputs are
–> quoted prices of identical assets or liabilities
–> in an active market.

Level 2 inputs are
–> observable inputs other than level 1 inputs

Level 3 inputs are
–> unobservable inputs.

Examples of level 2 inputs:

 (1) Quoted prices of identical assets or liabilities
–> in a market that is not active
(2) Quoted prices of similar assets or liabilities
–> in an active market
(3) Quoted prices of similar assets or liabilities
–> in a market that is not active
(4) Observable inputs other than quoted prices

Active market is a market
–> that provides pricing information on an ongoing basis.

In an active market,
–> the frequency and volume of transitions are sufficient
–> to provide pricing information on an ongoing basis.

If the volume and level of activity significantly decrease,
–> further analysis of quoted prices is necessary.

If quoted prices do not represent fair value or
–> transactions are not orderly,
–> quoted prices are adjusted in measuring fair value.

 

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IFRS 13 Fair Value Measurement, U.S. GAAP Comparison

COMPARISON WITH U.S. GAAP

U.S. GAAP Codification Topic
820 Fair value measurements and disclosures
–> Updated by ASU No. 2011-04, May 2011, Amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs
–> Updated by ASU No. 2009-12, September 2009, Investments in certain entities that calculate net asset value per share (or its equivalent)
–> Updated by ASU No. 2009-05, August 2009, Measuring liabilities at fair value

[U.S. GAAP before the Codification]
SFAS 157, September 2006, Fair value measurements and disclosures
FSP FAS 157-4, April 2009, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

 

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IFRS 12 Disclosure of Interests in Other Entities, Review

REVIEW OF IFRS 12
International Financial Reporting Standard 12
Disclosure of Interests in Other Entities

First issued in May 2011

Disclosure of information about an entity’s interests in
(1) subsidiaries
(2) joint agreements and associates
(3) unconsolidated structured entities

IFRS 10 Consolidated Financial Statements
–> A parent entity prepares consolidated financial statements.
IFRS 11 Joint Arrangements
–> A venturer applies equity method to the investment in a joint venture.

IFRS 12 Disclosure of Interests in Other Entities
(1) Interests in subsidiaries
(2) Interests in joint arrangements and associates
(3) Interests in unconsolidated structured entities

Structured entity is an entity where
–> voting rights are not the dominant factor
–> to decide who controls the entity.

An example of a structured entity:
–> Administrative tasks are determined by voting rights and
–> other activities are directed by contractual arrangements.

Significant judgments and assumptions
Disclose information about significant judgments and assumptions made
–> in determining whether an entity has control, joint control or significant influence.

Interests in subsidiaries
Disclose information helping users
(1) to understand the composition of the group and non-controlling interests
(2) to evaluate
–> the nature and extent of significant restrictions
–> the nature of the risks associated with its interests
–> the consequences of changes in its ownership, not a loss of control
–> the consequences of losing control of subsidiary

Interests in joint arrangements and associates
Disclose information helping users
(1) to evaluate the nature, extent and effects of its interests
(2) to evaluate the nature of the risks associated with its interests

Interests in unconsolidated structured entities
Disclose information helping users
(1) to understand the nature and extent of its interests
(2) to evaluate the nature of the risks associated with its interests

 

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