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#CPACONGRESS C1: AASB13: Fair value measurement Dean Ardern CPA National Technical Accounting Manager Moore Stephens Australia Pty Ltd Thursday 20 November.

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Presentation on theme: "#CPACONGRESS C1: AASB13: Fair value measurement Dean Ardern CPA National Technical Accounting Manager Moore Stephens Australia Pty Ltd Thursday 20 November."— Presentation transcript:

1 #CPACONGRESS C1: AASB13: Fair value measurement Dean Ardern CPA National Technical Accounting Manager Moore Stephens Australia Pty Ltd Thursday 20 November 2014 3:30PM - 4:20PM

2 AASB 13: Fair Value Measurement Will cover… AASB 13 refresher Common application issues for non-financial entities Classification in hierarchy Implications for NFP entities Won’t cover… Applying measurement models, incl. portfolio basis for financial instruments Entity’s own equity instruments Pricing in bid-ask spread Dealing with significant decrease in the volume/level of activity in a market

3 Components of AASB 13 Unit of Account Principal (most advantageous) market Market participants TransactionPrice 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. (AASB 13, Appendix A)

4 When does AASB 13 apply? When another AAS requires FV measurement or disclosure (incl. FV less costs to sell) When another AAS permits FV measurement and the entity adopts the policy When an entity voluntarily discloses FV in respect of an item not measured at FV in its statement of financial position General principle Equity-settled share-based payments (AASB 2) Finance leases (AASB 117) [except for initial measurement of finance leases acquired in business combinations (AASB 3)] Measurements similar to but not FV [eg, net realisable value (AASB 102) and value in use (AASB 136)] Scope exclusions (measurement and disclosure) Defined benefit plan assets (AASB 119) Assets for which recoverable amount is fair value less costs of disposal (AASB 136) Assets and liabilities not measured or disclosed on a ‘recurring’ basis or ‘non- recurring’ basis Disclosure exceptions

5 Accounting StandardItemRecognised or Disclosed?Required or Permitted? AASB 1: First-time Adoption of Australian Accounting Standards Various, including PPE, subsidiaries, JVs, associates RecognisedPermitted AASB 3: Business Combinations Acquisition consideration Most assets and liabilities acquired Recognised and disclosedRequired AASB 5: Non-current Assets Held for Sale and Discontinued Operations Non-current assets and disposal groups held for sale RecognisedRequired AASB 12: Disclosure of Interests in Other EntitiesInterest in listed JV or associateDisclosedRequired AASB 116: Property, Plant and EquipmentProperty, plant and equipmentRecognisedPermitted AASB 128: Investments in Associations and Joint Ventures Investment in associate or JV held by venture capital organisation RecognisedPermitted AASB 138: Intangible AssetsIntangible assets for which there is an active market RecognisedPermitted AASB 139: Financial Instruments: Recognition and Measurement Financial instruments at fair value through profit or loss Financial instruments at amortised cost Recognised Disclosed when specified criteria met Required for some instruments, permitted for others Required when specific criteria met AASB 140: Investment PropertyInvestment propertyRecognisedPermitted AASB 141: AgricultureBiological assets and agricultural productsRecognisedRequired AASB 1004: ContributionsAssets received by NFPs as contributionsRecognisedRequired

6 Unit of account  Defines what is being measured – level of aggregation (disaggregation)  FV unit of account – generally determined by Standard that requires/ permits fair value, except that AASB 13: requires FV = price x quantity for single asset traded in active market (ie, ignore ‘blockage’ factors) permits ‘net’ positions for specific entities that manage groups of financial assets/ liabilities with offsetting market or credit risks  Restrictions on sale/use – characteristic of entity or asset?  Interaction between unit of account and valuation premise (market participants) concepts

7 Unit of account issues  Shares in listed company pledged as collateral in 3 rd party borrowing  Shares in unlisted company that can only be sold to specified parties or at specified period  Lease incentives  Not-for-profit-specific issues property vs. right to use property donor restrictions over use of property

8 Principal (most advantageous) market  From entity’s perspective, but: question of fact not determined by managements’ intentions  Principal market – market with greatest volume and level of activity for asset/liability market entity would normally utilise for specific asset/liability  When principal market for asset/liability exists, FV is market price at measurement date  When no principal market exists, then most advantageous market - market that maximises/minimises amount received/paid to sell/transfer asset/liability (incl. transaction and transport costs) entity must have access, but no need to be able to transact on measurement date only transport costs included in FV (transaction costs excluded)  If both types of markets exist, must use principal market  In many cases principal market = most advantageous market

9 Principal (most advantageous) market issues  Same goods/services sold in two different markets at different prices and principal market is not the market in which net proceeds are maximised  Same goods/services sold in multiple markets and availability of volume/activity of some or all markets not readily available

10 Market participants  Provide basis for FV assumptions - market-focused, not entity specific  Identify based on principal or, if applicable, most advantageous market  Need not identify specific market participants characteristics of market participants that would generally transact for items (incl. entity’s competitors) ignore advantages (eg, synergies) that particular market participants might have  Market participants have all of the following characteristics: independent (not related) knowledgeable and sufficiently informed on asset/liability able to enter into a transaction willing to enter into a transaction act in their own economic interest

11 Highest and best use Characteristics of the asset, including: age and remaining economic life condition location restrictions on use/sale contractual terms Alternative uses: physically possible legally permissible financially feasible Valuation premise (unit of valuation) – maximise value: in combination with other assets/ liabilities on stand-alone basis  Only applicable to non-financial assets  Current use presumed highest and best, but need to consider all uses (including strategic non-use)  If alternative use is highest and best, must generate sufficient return for market participants  For not-for-profits, alternative use generally higher and better use (from market perspective)

12 Market participant/highest and best use issues  Identifying all potential alternative uses/market participants  Potential for re-zoning property  Holding assets for strategic/defensive (non-operating) purposes

13 Transaction  With respect to the item subject to FV measurement, it is a hypothetical transaction. Therefore, ignore: whether management actually intends to transact entity has the ability to enter into transaction  Transaction assumed to: occur in principal (or most advantageous) market occur on measurement date be orderly (not forced or liquidation related) involve market participants (see previous slide) take place under measurement date conditions

14 Price  Conceptually, exit (rather than entry) price  Initial transaction (entry) price could represent FV provided that: both transactions occur in the same market both transactions are for similar or the same units of account both transactions are not between related parties seller is not distressed or forced Exclude transaction costs Include transportation costs if location is relevant characteristic Priority given to quoted market price in active market for identical item, otherwise maximise use of observable inputs For non-financial assets, highest and best use establishes valuation premise, which in turn determines FV of asset

15 Transaction/price issues  Transaction/price matches unit of account  Extent of adjustments to prices arising from related party transactions  Agreement to sell property subsequent to year end at discount to FV  Implications of using entity-specific inputs for recoverable amounts

16 Fair value of liabilities  FV measurement of liability contemplates transfer (not settlement or extinguishment) to market participant on measurement date: assume liability remains outstanding and market participant transferee fulfil obligation reflects effect of ‘non-performance risk’  Non-performance risk – credit standing or likelihood that obligation will not be fulfilled includes, but not limited to, entity’s own credit risk considered from perspective of liability, not entity assumed same before and after transfer of liability adjusted in all periods liability is FV measured

17 Fair value of liabilities  Quoted transfer prices generally unavailable for liabilities  If identical item held by another entity as asset available, measure FV of liability from perspective of market participant holding asset  When quoted price not available, and identical item not held by another party as asset, FV liability using valuation technique from perspective of market participant owing liability using: 1.a present value technique, taking account of: o market participants’ expectations about the costs of fulfilling obligation o compensation that market participant would require for taking on obligation, including return required for:  undertaking the activity (opportunity cost)  risk premium 2.amount market participant would receive to issue an identical liability, using assumptions market participants would use when pricing the identical item in principal (most advantageous) market  Per AASB 139, FV of financial liability with demand feature not less than amount payable on demand, discounted from first date amount required to be paid

18 Fair value hierarchy Quoted price in active market? Adjusted? Level 1 Replicate quoted price in active market using another valuation technique yes no yes no Any significant unobservable inputs? Level 2 Level 3 yes no

19 Examples of Level 2 and Level 3 inputs Level 2 transaction prices in markets that that are not active for identical items quoted prices in active markets for similar items transaction prices in markets that are not active for similar items interest rates derived from quoted bond prices quoted foreign exchange and interest rates (forward currency and swap rates) implied volatilities derived from quoted option prices credit spreads derived from quoted credit default swap prices Level 3 interest rates in a currency that are not observable and cannot be confirmed by observable market data for the term of the item volatility for a share option derived from historical share prices credit risk based on historical data on credit losses observable inputs used as proxies for unobservable inputs

20 Fair value hierarchy input examples  Prices derived from a third-party pricing service or brokers  Units in an unlisted investment fund are regularly bought and sold but only between the fund manager and related parties  Closing price of a share on a national stock exchange that is impacted by a public announcement subsequent to the close of the market but still on the measurement date  Subscription to shares through initial public offering  Item of PPE that is measured using CPI as a proxy for a more specific price index

21 NFP-specific fair value issues  Highest and best use legally permissible (statutory protections) public sector-specific assets price adjustment for restrictions over use that transfer with asset  Current/depreciated replacement cost fair value hierarchy level use of indexes disclosures re unobservable inputs  Interaction between quality of asset register, hierarchy categorisation and level of disclosures

22 AASB project on NFP public sector implementation issues  NFP constituent (local government) feedback primarily relating to Level 3 measurements of non-financial assets  Constituent concerns included: grouping assets into broader classes is difficult (different nature and risks), which increases extent of FV disclosures cost and complexity of disclosures, particularly sensitivity analyses and disclosures about interrelationships between inputs arguably not beneficial to users (complexity and length of disclosures) consistency of categorisation of inputs across entities  AASB decided at September 2014 meeting to undertake project to review whether disclosures under AASB 13 be modified for NFP public sector entities

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