Presentation on theme: "IFRS 13 Fair Value Measurement"— Presentation transcript:
1 IFRS 13 Fair Value Measurement IFRS / IVS UPDATEIFRS 13 Fair Value Measurement
2 Learning objectives Fair Value Measurement – IFRS 13 and IVSC Definitions –IFRS/ IVSConcept of highest and best use/valuation premiseValuation techniquesFair value hierarchyRequired disclosuresKey Takeaways
4 IFRS 13 Fair value definition A single framework for determining FVIAS 40 basis replacedEffective 1 January 2013, and applied prospectivelyIntroduces concepts of highest and best use, valuation premise , and application offair value hierarchy
5 IFRS 13 FVFair 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 (an exit price).Hypothetical and orderly transactionThis differs from revised IVS Framework:“Fair value is the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.”Respective advantages and disadvantages -IVS
6 IFRS 13 FAIR VALUE Valuation uncertainty IFRS 13 – Fair value measurement Valuation uncertaintyProperties sold within +/- 10% of valuationCountryFrance 40% 49% 63% 40%Germany 48% 60% 53% 50%The Netherlands 50% 62% 65% 64%UK 60% 60% 55% 57%
7 IFRS 13 (cont.) Properties sold within +/- 20% of valuation CountryFrance 64% 79% 86% 52%Germany 73% 77% 69% 75%The Netherlands 82% 85% 88% 80%UK 85% 83% 82% 82%
8 Framework for non-financial assets Source: RICS/IPD ‘Valuation and sale price report’Sample sizesCountryFranceGermanyNetherlandsUK
10 Fair Value Measurement IFRS 13 requires any advantages that would not be available to marketparticipants generally to be disregarded. Accordingly,management needs to be aware of this difference in concept in order to ensure any values used for financial reporting that are obtained from appraisals, whether external or internal, are consistent with the objective of a fair valuemeasurement i
11 The Concept of highest and best use Reconsider methods, assumptions , processes / proceduresUnder 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.
12 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 generateeconomic benefits by using the asset in its highest and best use or by selling it to another market participant thatwould use the asset in its highest and best use.
13 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 possibleLegally permissible –Town and Country Planning ActFinancially feasibleHighest and best use is always considered when measuring fair value, even if the entity intends a different use.
14 Highest and best use for non-financial assets (cont.) Can be either:(valuation premise)On a stand-alone basisIn combination with other assetsAssumed the complementary assets are available to market participantsAssumptions must be consistent for all assets of the relevant group
15 Example : highest and best use In this case, the highest and best use is determined from the higher of:The value of the land used in the manufacturing operationThe value of the land as a vacant site for residential useNote 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?
16 Valuation techniques Use valuation techniques that: Are appropriate in the circumstancesHave sufficient available dataMaximise use of relevant observable inputsMinimise use of unobservable inputsIFRS 13 describes three valuation techniquesMarket approachIncome approachCost approachOne or several valuation techniques might be usedIf a range of values are indicated, select the point within that range most representative of fair value
17 Valuation techniques (cont.) Apply valuation techniques consistentlyChange in valuation technique needed if:New markets developNew information becomes availableInformation previously used is no longer availableValuation techniques improveMarket conditions changeChange in valuation technique = change in estimate
18 Fair value hierarchyIFRS 13 includes a fair value hierarchy for disclosure purposes which prioritises the inputs in a fair value measurement:Level 1 – Quoted prices (unadjusted) in an active market for identical assets that the entity can access at the measurement dateLevel 2 – Observable inputs other than quoted pricesLevel 3 – Unobservable inputsAmount of disclosures depends on Level Classification
20 Disclosure principles Disclose information that helps users assess the following:For assets measured at fair value on a recurring or non-recurring basis after initial recognition, valuation techniques and inputs used to develop those measurementsFor recurring fair value measurements using significant unobservable inputs (Level 3), the effect of measurements on profit or loss or other comprehensive income for the periodFair value disclosures are required separately for each class of assetsQuantitative disclosures are presented in a tabular format unless another format is more appropriate.
21 Fair value hierarchy and disclosures Recurring fair value measurementNon-recurring fair value measurement(after initial recognition)Fair value disclosure (for items not measured at fair value)Fair value at end of reporting periodLevel in fair value hierarchyIf highest and best use differs from current use, that fact, and why being used that way
22 Fair value hierarchy and disclosures (cont.) Recurring fair value measurementNon-recurring fair value measurement(after initial recognition)Fair value disclosure (for items not measured at fair value)For Level 2 and 3, adescription of valuation technique(s) and inputs usedFor Level 2 and 3, any changes in valuation technique(s), and reasons for changeFor Level 3, quantitative information about significant unobservable inputsFor Level 3, description of valuation processes
24 Key takeawaysIFRS 13 is effective 1 January 2013 and is applied prospectively.It introduces new concepts in valuation of non-current assetsBasis of IFRS FV conceptually different from IVSManagement responsibility not reduced by appraisers and will need to evaluate the impact of IFRS 13 on its existing valuation processes , procedures and where possible adjust the appraised values in line with IFRS 13