1. The fair value standard and its audit impacts

2. Current state of play Shortage of liquidity Interest rates up
Asian demand for commodities
UK and US Property markets down
Risk Appetite?
Volatility

3. What does “fair value” mean?
IFRS
The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction
Number of different FV measurements throughout A-IFRS

4. AASB 2 Share based payments AASB 3 Business combinations
IFRS & Fair value
Standard
What is being measured?
Guidance Suggests
AASB 2 Share based payments
Equity settled share based payment
Valuation technique for options. Diverse models
Cash settled share based payment (liability)
Valuation technique for liability. Diverse models
AASB 3 Business combinations
Cost of combination
Based on valuation of components. Currently includes transaction costs
Assets and liabilities acquired
Valuation technique (except AASB 5)

5. IFRS & Fair Value Standard What is being measured? Guidance Suggests
AASB 5 Non current assets held for sale
Assets held for sale
Exit value (less costs to sell)
AASB 102 Inventories
Inventory (measured at the lower of cost and net realisable value)
Lower of cost and net realisable fair value
AASB 116 Property plant and equipment
Revaluation model PPE, land
Market value or depreciated replacement cost
Revaluation model Specialised PPE
Could be an exit price, value in use or a depreciated replacement cost

6. AASB 119 Employee Benefits
IFRS & Fair Value
Standard
What is being measured?
Guidance Suggests
AASB 119 Employee Benefits
Plan assets
Specific guidance overrides standard use of fair value
AASB 136 Impairment
Assets
Fair value or value in use with fundamentally different assumptions
AASB 138 Intangible
Revaluation of intangible assets
Quoted market price (bid, ask, average??)
Initial recognition of financial assets or liabilities
Fair value hierarchy. Ask for liabilities and bid for assets.

7. AASB 140 investment property
IFRS & Fair Value
Standard
What is being measured?
Guidance Suggests
AASB 140 investment property
Fair value model
Market valuation less costs to sell
AASB 141 Agriculture
Biological assets
Market value or valuation less estimated point-of-sale costs

8. The problems with current IFRS & FV
Piecemeal development of IFRS
Guidance incomplete and dispersed over many IFRS
Inconsistent measurement bases
Subjectivity in estimates
Complexity and diversity in practice

9. The solution? IASB fair value measurement project which seeks to
To establish a single source of guidance for all fair value measurements
Clarify the FV definition and enhance disclosures

10. Key Requirements of ASA 545
Auditor’s consideration based on information available at time of audit
Understand the entity’s process for determining FV
Client’s control activities over determination of FV
Expertise of those determining FV
Accounts & transactions requiring FV measurement
Extent to which the client relies on a service organisation or an expert to provide FV measurements
Significant management assumptions, methods used to develop and documentation to support them

11. Key Requirements of ASA 545
Appropriateness of FV measurements and disclosures
Method for measuring stipulated by AASB?
Eg marketable securities
Valuation method to be utilised
Evidence to support management’s intent to carry out a specific course of action and it’s ability to do so
Consistent application of valuation methods and assumptions

12. Key Requirements of ASA 545
Using an expert (ASA 620)
Consistent assumptions with those of management
Substantive procedures
Testing management’s significant assumptions
Appropriateness of model used
Relevance of information
Comparison to accuracy of valuations made in prior periods
Considering the effects of subsequent events

13. Key Requirements of ASA 545
Substantive procedures
Discounted cash flow analysis
Length of forecast period
Number of significant and complex assumptions
Degree of subjectivity and uncertainty
Availability of subjective data
Sensitivity analysis

14. Implications for Audits at June 2008
Understanding relevant measurement bases and challenging assumptions used
Is the market active or non-active or has this changed?
External environment
Higher interest rates
Decreasing consumer sentiment
Volatility in earnings
Impairment events (ie. Related party transaction propping up the price)
Independent external valuation or internal (ASA XXX)

15. Case Study
Pools-R-Us