Accounting standard for measuring the value of assets and liabilities

1. ICPAK
The Financial Reporting Workshop
Comfy Hotel, Eldoret
November 10, 2014
Fair Value Measurement- IFRS 13

2. ICPAK
•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 2013. Early
application is permitted.
Introduction

3. ICPAK
The amount for which an
asset could be
exchanged, or a liability
settled, between
knowledgeable, willing
parties in an arm’s
length transaction.
The old definition of fair value Its weaknesses
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.
Old definition of Fair Value

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Fair Value 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

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Assets
Intangible
Financial
Inv
Property
PP&E
Inventory
Etc
Defined
Benefit
Biological
assets
Cost
CM or RM CM or RM
Cost
Nil
Nil
Low
erofC
orNRV
som
e
FVM
Cost
Cost
CM
orFVM
Fair value
Am
C
orFVM
Fair value
less costs to
sell
Fair value
less costs to
sell
FV plan assets less
PUC plan obligation& arbitrary rulesFV plan assets less
PUC plan obligation &arbitrary rules
Various
Various
Assets: Classification, recognition and measurement
ICPAK

6. 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
Accounting policy choice:
revaluation model
IAS 40
Investment Property
Cost including transaction costs Accounting policy choice:
fair value
IAS 41 Agriculture Fair value less costs to sell Fair value less costs to sell
ICPAK

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ICPAK
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.

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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.

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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.

10. The Concept of highest and best use
Reconsider methods, assumptions , processes /
procedures
Under 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.
Measurement
ICPAK

11. 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 generate economic benefits by using
the asset in its highest and best use or by
selling it to another market participant that
would use the asset in its highest and best
use.
Measurement
ICPAK

12. 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 possible
– Legally permissible –Town and Country Planning Act
– Financially feasible
• Highest and best use is always considered when
measuring fair value, even if the entity intends a
different use.
Measurement
ICPAK

13. Highest and best use for non-financial assets (cont.)
Can be either:(valuation premise)
• On a stand-alone basis
• In combination with other assets
– Assumed the complementary assets are available
to market participants
– Assumptions must be consistent for all assets of
the relevant group
Measurement
ICPAK

14. Example : highest and best use
• In this case, the highest and best use is determined from the higher of:
a) The value of the land used in the manufacturing operation
b) The value of the land as a vacant site for residential use
• Note 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?
Measurement
ICPAK

15. Valuation techniques
• Use valuation techniques that:
– Are appropriate in the circumstances
– Have sufficient available data
– Maximise use of relevant observable inputs
– Minimise use of unobservable inputs
• IFRS 13 describes three valuation techniques
– Market approach (prices and other information for identical or
comparable assets)
– Income approach (present value i.e discounted future cash flows;
option pricing models e.g Black Scholes Merton or binomial; excess
earnings) (IFRS 13)
– Cost approach (current replacement cost)
• One or several valuation techniques might be used
– If a range of values are indicated, select the point within that range
most representative of fair value
Measurement
ICPAK

16. Valuation techniques (cont.)
• Apply valuation techniques consistently
• Change in valuation technique needed if:
– New markets develop
– New information becomes available
– Information previously used is no longer available
– Valuation techniques improve
– Market conditions change
• Change in valuation technique = change in estimate
Measurement
ICPAK

17. Is there a quoted price in an
active market for an identical
asset or liability?
(Level 1 input)
Are there any observable
inputs* other than quoted
prices for an identical
asset or liability?
Use the Level 1 input =
Level 1 measurement
No use of significant
unobservable
(Level 3) inputs‡
=
Level 2
measurement
Use of significant
unobservable
(Level 3) inputs‡
=
Level 3
measurement
NoYes
Yes No
Must use without
adjustment
* 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
The fair value hierarchy
ICPAK

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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.

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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

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ICPAK
Judgements and estimates Cont…
• The inputs used in the valuation techniques should
primarily be based on observable inputs (where
possible) to minimise the use of unobservable inputs.

21. Thank you
21ICPAK