1. Fair value measurement for assets
Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB
30 April to 4 May 2012

2. What is fair value? WU
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3. 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 WU
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4. When are assets measured at fair value?WU
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5. Assets Classification, recognition and measurement Assets 5 5 CM or RM
Nil
Cost
Cost
Nil
Lower of C or NRV
some FVM
CM or FVM
Cost
PP&E
Intangible
Cost
Inv Property
Inventory
Assets
Etc
Financial
Defined
Benefit
Biological assets
Fair value
Various
AmC or FVM
Various
FV plan assets less PUC plan obligation & arbitrary rules
Fair value less costs to sell
FV plan assets less PUC plan obligation & arbitrary rules
Fair value less costs to sell
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6. MEASUREMENT AT INITIAL RECOGNITION MODEL BASED ON FAIR VALUE
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 Assets
Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management
IAS 40
Investment Property
Cost including transaction costs
Accounting policy choice: fair value
IAS 41 Agriculture
Fair value less costs to sell
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7. IAS 41 Agriculture WU
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8. Measurement
Biological assets (and agricultural produce at the point of harvest) are measured at fair value less costs to sell (initial and subsequent measurement)
changes in fair value less costs to sell are presented in profit or loss.
Biological assets that are attached to land (eg trees in a plantation forest) are measured separately from the land. If owner-occupied the land is accounted for in accordance with IAS 16. MW
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9. Why fair value measurement?
The value accretion of agricultural assets is unique
Fair value measurement provides relevant, reliable, comparable and understandable measurement of future economic benefits
consider a plantation forest with a 30 year harvesting cycle: fair value measurement reflects the biological growth using current fair values
Historical cost cannot accurately portray the value of an accreting asset
consider the plantation forest: no income would be reported until harvest and sale (30 years)
what is the cost of a fifth generation calf? MW
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10. Exceptions from fair value measurement
Measure using cost-depreciation-impairment:
IAS 41: only when on initial recognition of a biological asset for which quoted market prices are not available and other estimates of fair value are determined to be clearly unreliable
IFRS for SMEs: only for those biological assets whose fair value is not readily determinable without undue cost or effort MW
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11. Judgements and estimates
When using the most recent market transaction price to measure fair value: identifying the most recent market transaction price and evaluating whether economic circumstances have changed significantly.
When using market prices for similar assets: adjusting the prices to reflect differences.
When using sector benchmarks (eg the value of cattle expressed per kilogram of meat): adjusting to reflect differences.
When using DCF model: estimating the expected future net cash inflows and the discount rate. MW
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12. Judgements and estimates continued
A PwC study of standing timber valuation practices observed that when applying DCF- models management made several important assumptions including:
expected income at harvest—variables included growth rate and price per unit of volume
expected costs during growth—including silvicultural costs, eg maintenance and thinning
expected point-of-sale-cost—including harvesting and transport to market
determining the appropriate discount rate. MW
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13. IAS 16 Property, Plant and EquipmentWU
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14. Measurement at fair value
After initial recognition, an entity chooses to measure PP&E either at:
(i) cost less accumulated depreciation and accumulated impairment (cost model); or
(ii) fair value less subsequent accumulated depreciation and accumulated impairment (revaluation model).
Revaluations must occur with sufficient regularity to ensure that the carrying amount of an asset does not differ materiality from that which would be determined with a fair value at the end of the period. WU
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15. Measurement at fair value continued
Revaluation increases are recognised in other comprehensive income and are accumulated in equity (Revaluation surplus)
Revaluation decrease should first reduce the credit balance of revaluation surplus to zero and are then recognised in profit or loss
Depreciation and impairment considerations are similar to those of the cost model WU
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16. Comparison to the IFRS for SMEs
Section 17 Property, Plant and Equipment of the IFRS for SMEs does not permit the use of a revaluation model for property, plant and equipment
Generally, there is less fair value measurement for SMEs WU
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17. Judgements and estimates
Revaluation model requires measuring fair value (see IFRS 13 for estimates and judgements)
Impairment testing requires many estimates (see IAS 36). MW
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18. IAS 38 Intangible Assets WU
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19. Measurement
Intangible assets are usually measured using the cost model
An entity may choose to revalue (measure the asset at fair value), only if fair value can be determined by reference to an active market.
If an intangible asset is revalued, all assets within that class of intangible assets must be revalued.
The principles of the revaluation model in IAS 16 apply to IAS 38. WU
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20. Measurement continued
An intangible asset with a finite useful life is amortised.
An intangible asset with an indefinite useful life
is not amortised
is tested annually for impairment. WU
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21. Comparison to the IFRS for SMEs
Section 18 Intangible Assets of the IFRS for SMEs does not permit the use of a revaluation model for intangible assets
There are no indefinite useful life intangible asset in the IFRS for SMEs. WU
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22. IAS 40 Investment PropertyWU
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23. Subsequent measurement
For subsequent measurement an entity must adopt either the fair value model or the cost model for all investment property
All entities must estimate the fair value of investment property, either for measurement (if the entity uses the fair value model) or for disclosure (if it uses the cost model)
highly unlikely that an entity can change from fair value model to cost model because the change would not satisfy the IAS 8 criteria (more relevant information) for a voluntary change in accounting policy MW
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24. Fair value model
Investment property is remeasured to its fair value at the end of each reporting period
Changes in fair value are recognised in profit or loss in the period they occur.
In rare cases (exceptional circumstances) when fair value is not from inception reliably measurable on a continuing basis, the entity measures that property on the cost basis.
this does not affect the measurement of other investment properties. MW
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25. Comparison to the IFRS for SMEs
IFRS for SMEs does not have an accounting policy choice for measurement.
The accounting for investment property is driven by circumstance
If an entity can measure the fair value of an item without undue cost or effort on an ongoing basis, it must use the fair value model
It uses the cost model for all other investment property MW
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26. IFRS 9 Financial InstrumentsWU
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27. Classification model: financial assets
Business model test
Amortised cost
(one impairment method)
FVO for accounting mismatch (option)
Contractual cash flow characteristics
Reclassification required when business model changes
All other instruments:
Equities
Derivatives
Some hybrid contracts …
Fair Value
(No impairment)
Equities: OCI presentation available
(alternative)
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28. Measurement
If a financial asset is not measured at amortised cost, it is measured at fair value
Gains or losses in financial assets are recognised in profit or loss unless:
The financial asset is part of a cash-flow hedging relationship
The financial asset is an equity instrument and the entity has elected to present its gains and losses in other comprehensive income (see paragraph 5.7.5) WU
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29. Comparison to the IFRS for SMEs
The applicable sections of the IFRS for SMEs are significantly different from IFRS 9. MW
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30. IFRS 5 Non-current Assets Held for Sale and Discontinued OperationsWU
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31. Non-current assets held for sale
Non-current assets held for sale are measured at the lower of fair value less costs to sell and carrying amount (on the date of classification as held for sale)—they are not depreciated
If still on hand at the end of a reporting period, remeasured to fair value less cost to sell at that date. Changes are recognised in profit or loss (IFRS 5.21). WU
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32. IAS 2 Inventories WU
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33. Measurement exception
Commodity broker-traders may measure inventories at fair value less costs to sell
Changes in fair value less costs to sell are recognised in profit or loss MW
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34. IFRS 3 Business CombinationsWU
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35. Principles
The Standard includes recognition and measurement principles.
Recognition (IFRS 3.10–17):
Separate recognition of identifiable assets acquired and liabilities assumed (link to Conceptual Framework)
Measurement (IFRS 3.18–20):
Assets and liabilities that qualify for recognition are measured at their acquisition-date fair values MW
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36. Exceptions Exceptions to measurement principle Reacquired rights
Measured at FV based on remaining contractual term ignoring the FV effect of renewal
Share-based payment transactions
Replacement awards: measured in accordance with IFRS 2
Assets held for sale
Measured in accordance with IFRS 5 (ie FV less costs to sell) MW
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37. Exceptions continued Exceptions to both recognition and measurement
Income taxes
Deferred tax assets or liabilities arising from acquired assets or liabilities accounted for in accordance with IAS 12
Employee benefits
Accounted for in accordance with IAS 19
Indemnification assets
May not be recognised at FV if it relates to an item not recognised or measured in accordance with IFRS 3 MW
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38. Recognition and Measurement
Goodwill (asset) is measured initially indirectly as the difference between:
the consideration transferred (IFRS 3.37–40) not including transaction costs in exchange for the acquiree and
the acquiree’s identifiable assets and liabilities MW
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39. Recognition and Measurement continued
Consideration transferred
Measured at fair value of sum of assets transferred and liabilities assumed
Acquisition-related costs are not included
Contingent consideration included at its fair value at acquisition date (changes are not included in the consideration transferred at acquisition-date) MW
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40. Other fair values IAS 19 Employee Benefits
The plan assets associated with a funded defined benefit plan are measured at their fair value at reporting date
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
Grants (including some non-monetary grants) are recognised at fair value
IAS 27 Separate Financial Statements
Investments in subsidiaries, joint ventures and associates may be measured at fair value in accordance with IFRS 9. MW
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41. When does IFRS 13 not apply?41
Excluded from the scope
IFRS 2 and IAS 17
Disclosures in IFRS 13 not required for
Plan assets (IAS 19)
Retirement benefit plan investments (IAS 26)
Assets for which recoverable amount is fair value less cost of disposal (IAS 36)
Not required for measurements similar to fair value
IAS 2 (net realisable value)
IAS 36 (value in use)
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42. IFRS 13 Fair Value MeasurementWU
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43. Introduction
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 Early application is permitted. WU
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44. The old definition of fair value
Its weaknesses
The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
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. ?
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45. 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. WU
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46. 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. WU
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47. 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. WU
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48. 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. WU
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49. The fair value hierarchy49
Is there a quoted price in an active market for an identical asset or liability?
(Level 1 input)
Yes No
Are there any observable inputs* other than quoted prices for an identical asset or liability?
Use the Level 1 input = Level 1 measurement
Must use without adjustment
Yes No
* 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
No use of significant unobservable
(Level 3) inputs‡ =
Level 2 measurement
Use of significant unobservable
(Level 3) inputs‡ =
Level 3 measurement

50. 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. WU
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51. 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 WU
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52. Judgements and estimates continued
The inputs used in the valuation techniques should primarily be based on observable inputs (where possible) to minimise the use of unobservable inputs. WU
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53. Questions or comments?
Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.
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54. 54 54
The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.
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