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Title
IFRS 13 Fair Value Measurement

Coverage
This session will cover IFRS 13 Fair Value
Measurement. This standard was introduced at FR but
at SBR we also need to consider its wider application.
We shall explore how it relates to goodwill.

Exam context
Fair values can pop up in the exam in lots of different
contexts. It is an important accounting standard to be
able to understand and to apply.

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IFRS13 Fair Value Measurement

Background

The objective of the standard is to provide a single

source of guidance for fair value measurement where it
is required by a reporting standard.

The standard does not extend the use of fair value,

rather it provides guidance on how it should be
determined when an initial or subsequent fair value
measurement is required by a reporting standard.

It creates a uniform framework for measurement of fair

value for entities around the world who apply either US
GAAP or this standard.

Note that the standard does not apply

IFRS 2 Share based Payments
IFRS 16 Leases
IAS 2 Inventories
IAS 36 Impairment

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Reasons for the issue of IFRS 13 FVM

To standardise the definition of fair value.

To improve consistency of reported information.

To help users by providing additional disclosures

relating to how fair value has been determined.

To increase the extent of convergence with US GAAP

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Definition of fair value

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Measuring fair value

Fair value is defined as "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".

The standard defines fair value on the basis of an 'exit

price' notion and uses a 'fair value hierarchy', which
results in a market-based, rather than entity-specific,
measurement.

The fair value of a non-financial asset is based upon

highest and best use of that asset that would maximise
its value, based upon uses which are physically
possible, legally permissible and financially feasible.

The measurement should reflect the characteristics of

the asset or liability e.g. age, condition, location,
restrictions on use or sale etc.

The measurement should reflect the price at which an

orderly transaction between willing market participants
would take place under current market conditions.

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Fair value is not adjusted for transaction costs – they are

not a feature of the asset or liability. If location, for
example, is a characteristic of the asset, then price may
need to be adjusted for any costs that may be incurred
to transport an asset to or from a market.

Which Market?

This will be the principal market or, failing that, the most
advantageous market that an entity has access to at the
measurement date. They will often, but not always, be
the same.

Unless there is evidence otherwise, the market that an

entity would normally enter into is presumed to be the
principal or most advantageous market.

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Q Markets – IFRS 13 FVM

An asset is sold in two different active markets at

different prices. A company enters into transactions in
both markets and can access the price in those markets
for the asset at the measurement date as follows:

Market 1 Market 2
$ $
Price 36 35
Transactions cost (3) (1)
Transport cost (2) (2)
Net price received 31 32

Required

a) Determine b) Determine
the fair value of the fair value of
the asset the asset
assuming that assuming that
the market 1 is the neither
the principal market is the
market. principal
market.

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Fair Value Hierarchy

The standard seeks to increase consistency and
comparability in fair value measurements and related
disclosures through a 'fair value hierarchy'.
Level 1 inputs
Level 1 inputs are quoted prices in active markets for
identical assets or liabilities that the entity can access at
the measurement date.
A quoted market price in an active market provides the
most reliable evidence of fair value and is used without
adjustment to measure fair value whenever available,
with limited exceptions.

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Level 2 inputs
Level 2 inputs are inputs other than quoted market
prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly.
Level 2 inputs include, quoted prices for similar assets
or liabilities in active markets or quoted prices for
identical or similar assets or liabilities in markets that are
not active

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Level 3 inputs
Level 3 inputs are unobservable inputs because no
market exists for the asset or liability.
Unobservable inputs are used to measure fair value to
the extent that relevant observable inputs are not
available, thereby allowing for situations in which there
is little, if any, market activity for the asset or liability at
the measurement date.
An entity develops unobservable inputs using the best
information available in the circumstances, which might
include the entity's own data, taking into account all
information about market participant assumptions that is
reasonably available e.g. present value of the future
cash flow.

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Q Squeeze’s fair value of a liability

Squeeze has been named as a co-defendant in a class

action launched by customers in its industry. It is
estimated that if the case is successful then Squeeze
could be liable for damages for $100 million. Legal
advice suggests that there is only a 5% chance of the
case being successful. If the matter goes to court then it
will take three years to resolve. In accordance with IAS
37 Provisions Contingent Liabilities and Assets,
Squeeze has not recognised any liability on the grounds
that there is no probable out flow of economic benefits.

Required
Discuss how the liability could be measured at fair
value. (4 marks)

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Q Nairn’s fair value of land

Nairn has owned some land for many years adjacent to

its head office in the centre of the city. It is currently
used as parking for staff. The land is carried at its
original cost of $2 million in the financial statements of
Nairn in accordance with its accounting policy. Nairn has
just been acquired by Ness. Ness is conducting a fair
value exercise on the assets of Nairn. On the basis that
the land is used as a car park then it is estimated that it
has a value of $3 million. If the land were to be sold then
a buyer might be expected to pay $10 million because of
the development potential.

Required
Discuss the fair value of the land of Nairn in the
context of the Ness group accounts. (4 marks)

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Goodwill!

Goodwill arises on consolidation when the aggregate of

the fair value of the consideration paid by the parent,
together with the Non-Controlling Interest exceeds the
fair value of the net assets of the subsidiary at the date of
acquisition.

Fair Value and goodwill

Goodwill arises in the group accounts on the

consolidation of a subsidiary and is determined as

1 FV of investment in the subsidiary X

(the controlling interest)

2 NCI X

3 FV of the net assets of the subsidiary (X)

Goodwill at acquisition X

Impairment loss (X)

Goodwill at reporting date X

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1. FV of Parent’s investment

The parent's investment (the controlling interest) has to

be recorded at the fair value of the consideration given at
the date of acquisition.

Form of consideration Fair value

Cash consideration

Shares issued by the parent

Deferred consideration

Contingent consideration

Transaction costs are expensed and not capitalised.

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2. NCI

There is a choice as to how to measure NCI at

acquisition.

This accounting policy is made on an acquisition by

acquisition basis

NCI @ FV
The non-controlling interest at acquisition may be initially
measured at fair value – based on the subsidiary’s share
price.

NCI @ Proportion of net assets

The non-controlling interest may be initially measured as
a proportion of net assets

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The consequences on goodwill of how NCI is measured.

NCI @ FV NCI @
Proportion of net
assets

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3. Net assets of the subsidiary

The net assets of the subsidiary at the date of

acquisition have to be reviewed and if necessary for
consolidation purposes adjusted to their fair values.

These fair values can be revised if new information

about the fair value at the date of acquisition is received
within 12 months.

Typically fair value adjustments are positive revaluations

for PPE, which in turn creates a post-acquisition
depreciation adjustment (unless it is land).

It is even possible that additional assets and liabilities

may be recognised as a fair value adjustment that were
not recognised at the individual company stage by the
subsidiary.

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Q Rama one

Parent has purchased 80% of the 10,000 equity shares

in Subsidiary and gave two considerations.

Firstly a share exchange of three shares in Parent for

every five shares in Subsidiary. The market price of
Parent’s shares at the date of acquisition were $6 per
share. Secondly Parent agreed to pay a further amount
of $2 per share acquired two years after the acquisition
date. The relevant discount rate to use is 10%.

The policy of the group is to measure the non-controlling

interest at acquisition at fair value. The market price of
Subsidiary’s shares at the date of acquisition were
$3.20.

The fair value of the net assets of the subsidiary at

acquisition was provisionally assessed at $900. Shortly
after the date of acquisition a revised valuation was
received which revealed that fair value of certain assets
at the date of acquisition were $100 more than originally
measured.

Required
Calculate the goodwill arising at acquisition.

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Answer Rama one

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Recap on goodwill

FV of 500 FV of 500
parents parents
investment investment

NCI 100 NCI 100

FV of net (200) FV of net (1,000)

assets assets

Goodwill Goodwill

Comments Comments

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A. Markets

If Market 1 is the principal market for the asset (i.e. the

market with the greatest volume and level of activity for
the asset), the fair value of the asset would be
measured using the price that would be received in that
market, after taking into account transport costs is ($36
– $2) $34. Transactions costs are ignored as they are
not a characteristic of the asset.

If neither market is the principal market for the asset, the

fair value of the asset would be measured using the
price in the most advantageous market. The most
advantageous market is the market that maximises the
amount that would be received to sell the asset, after
taking into account transaction costs and transport costs
(i.e. the net amount that would be received in the
respective markets).

Because the maximum net amount that the entity would

receive is $32 in Market 2 ($35 – $3), the fair value of
the asset would be measured using the price in that
market ($35), less transport costs of $2, resulting in a
fair value measurement of $33. Although transaction
costs are taken into account when determining which
market is the most advantageous market, the price used
to measure the fair value of the asset is not adjusted for
those costs (although it is adjusted for transport costs).

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A. Squeeze Fair value of a liability IFRS 13 FVM

In the context of a liability fair value is the amount that

Squeeze would pay to transfer a liability in an orderly
transaction between market participants.

There is no market to observe so we fall back on level 3

fair value i.e. an estimate of techniques.

The fair value could therefore be measured using

expected values (5% x 100) $5 million, and further this
should be then discounted for three years to reflect the
time value of money

A. Fair value Nairn’s land IFRS 13 FVM

Fair value in the context of an asset is the amount that

the asset can be sold for in an orderly transaction
between market participants at the measurement date.

With a non-financial asset the fair value should consider

alternative uses. On the open market the land would be
valued with its development potential in mind.

In the group accounts, the fair value of this land at the

date of acquisition is $10 million resulting in a fair value
adjustment of $8 million.

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A. Rama one

FV of parent's $
investment
Shares issued (3/5 x 80% x 10,000 x 28,800
$6)
Deferred ($2 x 80% x 10,000 x 13,222
consideration 0.8264)
42,022
FV of the NCI ($3.20 x 20% x 6,400
10,000)
FV of the net assets (1,000)
Goodwill at 47,422
acquisition

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