CHAPTER 37 PFRS 13 FATR VALUE MEASUREMENT TECHNICAL KNOWLEDGE To define fair value of asset or liability. To understand the meaning of active market, principal market and most advantageous market. To describe the valuation techniques in measuring fair value. To know the fair value hierarchy, Scanned with CamScannerFAIR VALUE Fair value of an asset is the pric i sell an asset in an orderly tranenatieould be pataariee aa ats. etween market Fair value of liability is the price th . ransfer a liability in an o; . hat would be paid to participants. rderly transaction between market Based on the new definition, the following should be noted: a. Fair value refers to an "exit price" or nr he market pri current market conditions at measur ee ‘ement date. b. Fair value is the price in an orderly transaction. An orderly transaction is a transaction that allows for normal marketing activities that are usual and customary. c. Fair value is the price agreed upon by market participants. Market participants The market participants are the buyers and sellers in the principal market who are: a. Independent or unrelated parties b. Knowledgeable or having a reasonable understanding of the transaction c. Willing or motivated but not forced and compelled to enter into the transaction Principal or most advantageous market arket in which transactions for the asset or liability take place with sufficient regularity and volume to provide pricing information on an ongoing basis. A principal market is the market with ne greatest volume and level of activity for the asset or liabi ity. In the absence of a principal market, the ‘entity should consider the most advantageous market. “het is the market that maximizes The moet advantageous mart fool tans minimis ¢ amount that woul be paid to transfer the liability. ys when it sells an Generally the market, that Sal markt othe mod asset or transfers a liability 18 advantageous market. An active market is a mi 711 Scanned with CamScannerValuation premise In determining the fair value of an asset or a liability, an entity may refer to information that is directly observable or readily available. The entity can also estimate the fair value by using a valuation method. The fair value shall not be adjusted for transaction cost. If location is a characteristic of an aséet, the fair value shall be adjusted for transport cost that would be incurred to transport the asset from its current location to the principal or most advantageous market. Highest and best use In measuring the fair value of nonfinancial asset, an entity must take into consideration the highest and best use of the asset. Highest and best use is defined as thé use of nonfinancial asset by market participants that would maximize the value of asset. The highest and best use of the asset should Possess the following: a. Physically possible, meaning, it reflects the physical characteristics of an asset. b, Legally permissible, meaning, it reflects any legal restrictions on the use of the asset. c. Financially feasible, meaning, it reflects whether the use would generate sufficient income or cash flows. The highest and best use of the asset might provide maximum value either on a stand-alone basis, or as a group in combination with other asset and liability, 712 Scanned with CamScannervaluation method Three valuation techniques can be used to measure fair value: a. Market approach — uses pr: for market transactions for and liability, ‘ices and relevant information identical and comparable asset b. Income approach — Focuses e on converting future amounts into discounted cash flows, c. Cost approach — relies on the current replacement cost to replace the asset with a comparable asset. Fair value hierarchy The fair value hierarchy or best evidence of fair value is enumerated as follows: 1. Level 1 inputs are the quoted prices in an active market for identical asset or liability. A quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment. re . Level 2 inputs are inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar asset or liability in an active market and quoted prices for identical or similar asset or lability in an inactive market. 3. Level 3 inputs are unobservable inputs for the asset or liability. . Unobservable inputs are usually developed by the entity i i information from the entity's own using the best available information data. Level 3 inputs include the present value of estimated cash flows 713 Scanned with CamScanner —problem 37-1 Multiple choice (IFRS) ay » |. Which of the following is an assumption used in Fair value of an asset should be based upon a. The replacement cost of an asset. b. The price that would be received to sell the measurement date. Bell the asset at c. The original cost of the asset, d. The price that would be paid to acquire the asset. . Which of the following describes a principal market for establishing fair value of an asset? a. The market that has the greatest volume and level of activity for the asset b. Any broker or dealer market c. The most observable market d. The market in which the amount received would be maximized . Which statement is true for measuring an asset at fair value? a. The price of the asset should be adjusted for transaction cost. | b. The fair value of the asset should be adjusted for cost of disposal. ; c. The fair value is based upon an entry price to purchase the asset. d. The price should be adjusted for cost to transport the asset to the principal market. fair value measurement? in-use The asset must be in-use , | ; The asset must be considered in-exchange . The most conservative estimate must be used . The asset is in the highest and best use aes 715 ‘ Scanned with CamScanner5. a Which of the following would meet the qualifications as market participants? a. A liquidation market in which sellers are compelled to sell. . b. A subsidiary of the reporting unit interested in purchasing assets similar to those being valued. c. An independent entity that is knowledgeable about the asset. a. A broker or dealer that wishes to establish new market for the asset. ‘ . The fair value at initial recognition is . The price paid to acquire the asset. a b. The price paid to acquire the asset less transaction cost. c. The price paid to transfer or sell the asset. d. The carrying amount of the asset acquired. . Which of the following is not a valuation technique used in fair value measurement? a. Income approach b. Residual value approach c. Market approach d. Cost approach . Valuation techniques for fair value that include the Black-Scholes formula, a binomial model, or discounted cash flow are examples of which valuation technique? Income approach Market approach Cost approach Exit value approach ee re 716 Scanned with CamScanner9. The market approach for y measuri i i which of the following? Ting fair value requires a. Present value of future cash flows b. Prices and other relevant information of transactions from identical or comparable assets The price to replace the Service capacity of the asset d. The weighted average of the present value of future cash flows . ° 10. Which of the following would be considered a Level 2 input for fair value measurement? a. Quoted market price on a stock exchange for an identical asset ; b. Quoted market price available from a business broker for a similar asset Historical performance. and return on the investment d. All of these would be considered Level 2 input for fair value measurement P 17 Scanned with CamScanner