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IFRS 13

FAIR VALUE MEASUREMENT

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This material is the property of Department of Accounting and
Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction

Learning Objectives
At the completion of studying this chapter, you will be
able to:
Understand

conceptual underpinnings for fair value measurement


Understand how fair value is measured for:
non-financial assets
financial assets
financial liabilities
Understand the judgments in measuring the fair value of an item
identify the disclosure requirements of IFRS 13
distinguish between fair value measurement under US GAAP and IFRS
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List of Applicable IFRS


Topic List

Standards

Financial Instruments
Property, Plant and Equipment
Investment Property
Intangible Assets

IFRS 9
IAS 16
IAS 40
IAS 38

Agriculture

IAS 41

Business combination

IFRS 3

The objective of IFRS 13

The objective of IFRS 13


IFRS 13 establishes how to measure fair value. It does not prescribe:
what should be measured at fair value;
when to measure fair value (i.e. the measurement date); or
how (or whether) to account for any subsequent changes in fair
value (e.g. in profit or loss or in other comprehensive income).

Apply IFRS 13:

When another IFRS requires or permits fair value measurements


or disclosures about fair value measurements

Assets

Classification, recognition and


measurement

Cost

Cost

st

Intangible
Inv Property

Inventory

M
FV
or

Co

Ni l

CM

PP&E

Ni l

st
Co

Lo
w
er
so of
m C
e or
FV N
M RV

CM

CM or RM

or R M

Assets

FV pl
a
plan o n assets le
bligat
s
ion & s PUC
rules arbitrary

FV pl
an
obliga assets les
sP
tion &
arbitr UC plan
ary ru
les

s
lue les
a
v
r
i
a
F
to sell
s
t
s
o
c
s
ue les
l
a
v
r
i
Fa
sell
o
t
s
t
s
co

i
Fa

al
v
r

ue

VM

Biological
assets

or
F

Defined
Benefit

us

Financial

Etc

Am

Va
r io

Va
r io
us

THE SCOPE OF IFRS 13


Excluded from the scope

Disclosures in IFRS 13 not


required for

IFRS 2 (Share based payment)


IFRS 16(leases)
IAS 2 (net realisable value)
IAS 36 (value in use)
Plan assets (IAS 19)
Retirement benefit plan investments
(IAS 26)
Assets for which recoverable amount
is fair value less cost of disposal (IAS
36)

Who would transact for the item?

Market participants are buyers and sellers in the principal (or most
advantageous) market who are:

Independent

Knowledgeable

Able to enter into a


transaction

Willing to enter into a


transaction

Market participants act in their economic best interest


Maximise the value of the asset
Minimise the value of the liability
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perspective
application guidance: how to measure
fair value

To measure fair value determine:


all characteristics of the asset or liability being measured
(exclude things that are not characteristics of the asset or
liability);
for non-financial assets, the valuation premise and the highest
and best use;
the principal (or most advantageous) market;
the appropriate valuation technique/s and inputs that market
participants would use when pricing the asset or liability and the
level of the fair value hierarchy within which the inputs are
categorised.(see paragraph B2 of IFRS 13)
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point
application guidance: characteristic
of an asset or liability

Fair value measurement is for a particular asset or liability


it captures all characteristics of the asset or liability being
measured that market participants would take into account when
pricing the item
Location
age and remaining economic life
Condition
restrictions on use or sale that are a characteristic of the item
it excludes things that are not characteristics of the asset or
liability
transactions costs
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restrictions on use or sale that are not a characteristic
of the

Transaction and transport costs


Description

Included in fair
value?

Transaction
costs

The costs to sell the


No
asset or transfer the
liability that are directly
attributable to the
disposal of the asset or
the transfer of the
liability

Transport
costs

The costs that would be Yes Transport changes a


incurred to transport12 an
characteristic of the
asset from its current
asset

(Although they are


considered in the
assessment of which
market is most
advantageous)
They are a characteristic
of the transaction, not of
the asset or liability

test your understanding:


transaction costs
Example: FV Company has an asset that is sold in two different
markets, Market A and Market B, with similar volumes of activities,
but with different prices. FV Company enters into transactions in
both markets and can access the price in those markets for the
asset at the measurement date. There is no principal market for the
asset. Information from both markets is presented as follows.
Market A
Market B
Price
Br. 30
Br.28
Transport costs
(5)
(4)
Br. 25
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Br.24

Where would the transaction take


place?
Fair value is the price in the
Or, if no principal market, the
most advantageous market

Principal market
The market with the greatest
volume and level of activity for the
asset or liability

The market that maximises the


amount that would minimises be
received to sell the asset and the
amount that would be paid to
transfer the liability
In most cases, these markets will be the same
arbitrage opportunities will be competed away
The entity must have access to the principal (or most
advantageous) market
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Fair value: which market?


Determining the principal market

The following three markets exist for Sugar Corporations fleet of


vehicles. The corporation has the ability to transact in all three
markets (and has historically done so). As at the measurement
date, the corporation has 100 vehicles (same make, model and
mileage) that it needs to measure at fair value. Volumes and prices
in the respective markets are as follows:
Market

price

The corporation's volume for


the asset in the market
(based on history
and/or intent)

Total marketbased
volume for the
asset

490,000

60%

15%

500,000

25%

75%

550,000

15%

10%

Which of the market is the principal market for the corporation's

How do we arrive at a market-based


measurement?
Is there a quoted price in an active market for an identical asset or liability?
Yes

Use this quoted price to measure fair


value (Level 1)

Must use without adjustment

No
Replicate a market price through a valuation
technique* (using observable+ and unobservable
inputs: Levels 2 and 3)

No significant unobservable
(Level 3) inputs =

Use of significant
unobservable
(Level 3) inputs =

* Valuation techniques include the market


Level 2 measurement
Level 3 measurement
approach, income approach and cost
approach.
+ Maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Observable
inputs include market data (prices and other information that is publicly available).
Unobservable inputs include the entitys own data (budgets,
forecasts), which must be adjusted if market
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participants would use different assumptions.

Fair Value: Hierarchy

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Fair value: Valuation Techniques

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Valuation techniques
When determining fair value, an entity shall use
valuation techniques:

Appropriate in the circumstances


For which sufficient data are available to measure fair value
Maximizing the use of relevant observable inputs
Minimizing the use of unobservable inputs.

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Fair value: non-financial asset

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Highest and best use

Fair value assumes a non-financial asset is used by market


participants at its highest and best use
the use of a non-financial asset by market participants
that maximises the value of the asset
physically possible
legally permissible
financially feasible

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Highest and best use

continued

Highest and best use is determined from the perspective of market


participants, even if the entity intends a different use.
However, an entitys current use of a non-financial asset is
presumed to be its highest and best use unless market or other
factors suggest that a different use by market participants would
maximise the value of the asset.
Highest and best use is usually (but not always) the current use
if for competitive reasons an entity does not intend to use the
asset at its highest and best use, the fair value of the asset
should still be measured assuming its highest and best use by
market participants (defensive value)
Does not apply to financial instruments
or liabilities
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Valuation premise

A non-financial asset either:


provides maximum value through its use in combination with
other assets and liabilities as a group
is its value influenced by it being operated with other
assets?
an example: equipment used in production facility
market participants are assumed to hold complementary
assets
provides maximum value through its use on a stand-alone basis
is its value independent of its use with other assets?
an example: a vehicle or an investment property
Does not apply to financial instruments or liabilities
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Valuation premise

continued

Example: a manufacturer has unique work in progress inventory


which market participants would convert into finished goods. To
measure the fair value of the unique work in progress the
manufacturer assumes that market participants have the machinery
necessary to convert the unique work in progress inventory into
finished goods
this assumption applies even when the necessary equipment is
bespoke and unique to the entity holding the inventory

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Example : highest and best use


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?

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

FV of a non-financial asset-Highest
and Best Use : test your
understanding
For example, at Sene 30 you are valuing your factories land use right.
Land rights with a similar factory of the same age, same condition
and same square area as yours are sold for Br. 7 million of which the
value of the factory is 4 million. At the same date a bare land
homogeneous(identical) with your factorys plot of land are sold for
alternate use for Br. 5 million. what is the highest and best use of
your land right?
Choose one
A. Br. 3 million
B. Br. 5 million
C. Br. 4 million
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D. Br. 7 million

Fair value of a non-financial asset


test your understanding: example 2

Your factory is built on Plot 900 in a recently developed industrial


development zone on the outskirts of Addis Ababa where the land
that is divided into one hundred two acre plots that before their
further development were essentially homogenous. Factories, like
yours, are the highest and best use for the land rights.
On 31 December 2000 two of the plots adjoining your plot were sold
(ie sale of the land rights and the buildings, if any, constructed
thereon):
Plot 901 sold for Br. 30 million: land rights with a similar factory of
the same age, same condition and same floor area as yours.
Plot 899 sold for Br. 10 million because it is undeveloped (yet to
be built on).
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Fair value of a non-financial asset


test your understanding: example 2
On 31 December 2000 what is the fair value of your land rights (ie
excluding the factory building)?
Choose 1 of:
1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70
million; 6) Br. 80 million; 7) Br. 100; million; or 8) another amount
On 31 December 2000 what is the fair value of your factory building (ie
excluding the land rights)?
Choose 1 of:
1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70
million; 6) Br. 80 million; 7) Br. 100; million; or 8) another amount

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Fair value of a non-financial asset


test your understanding: example 3

The facts are the same as Example 1, except that in this example
(fifteen years later), on 31 December 2015:
high-rise commercial development is now the highest and best
use for your land rights because the rapidly expanding financial
district of Addis Ababa has grown to the boundary of plots 899,
900 and 901.
Consequently, on 31 December 2015 Plots 899 and 901 each sold
for Br. 100 million.

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test your understanding: example


3
On 31 December 2015 what is the fair value of your land rights (ie
excluding the factory building)?
Choose 1 of:
1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70
million; 6) Br. 80 million; 7) Br.100; million; or 8) another amount
On 31 December 2015 what is the fair value of your factory building (ie
excluding the land rights)?
Choose 1 of:
1) Br. 0; 2) Br. 10 million; 3) Br. 20 million; 4) Br. 30 million; 5) Br. 70
million; 6) Br. 80 million; 7) Br.100; million; or 8) another amount
Does your estimate of the fair value of your factory building (ie
excluding the land rights) depend on which model you use for your land
rights (cost model or revaluation model)?
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Fair value of a non-financial asset


what do you think? example 4

In Examples 1 and 2 fair value was determined with reference to the


sale of similar assets at the measurement date (31 December 2000
and 2015).
The facts are the same as in Example 2, except that there have
been no recent sales of similar assets (ie Plots 899 and 901 are
unsold).
How could the fair value of the factory building on Plot 900 be
measured at 31 December 2015?
What judgements would be made in measuring such a Level 3 fair
value?
Can such a Level 3 fair value measurement be faithfully
represented?
Is such a Level 3 fair value measure verifiable?
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Fair value: restriction on use


test your understanding
Example: A donor of land specifies that the land must be used by the
corporation for cultivation of sugar cane. Upon review of relevant
documentation, the corporation determines that the donors restriction
would not transfer to market participants if the corporation sold the
asset (i.e. the restriction on the use of the land is specific to the
association). Furthermore, the corporation is not restricted from selling
the land. Without the restriction on the use of the land, the land could
be used as a site for coffee plantation. In addition, the land is subject
to an easement (a legal right that enables a utility to run power lines
across the land).
Under these circumstances, what is the effect of the restriction and
the easement on the fair value measurement of the land?
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Fair value: restriction on use


test your understanding

You own land use rights to Plot A that is zoned green beltwhich
prohibits the construction of buildings on that land.
Similar neighbouring plots with the same land use rights and subject to
the same restrictions sold recently:

for Br. 950,000 on 30 October 2015 (Plot B); and


for Br. 30,000,000 on 31 December 2015 (Plot C).

The difference in the selling price of Plots B and C is attributable


primarily to the press leaked confidential government dossier setting
out the governments plans for proposing an amendment to the law
to allow for the construction of high-rise buildings on some (but
unspecified which) green belt land.

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Fair value: restriction on use


test your understanding
You employ a reputable property valuation expert to value the land
use rights to Plot A at 31 December 2015 under each of the following
hypothetical scenarios:
Scenario 1: the land is rezoned allowing for the construction of a
high-rise building: Br. 100,000,000
Scenario 2: market participants believe there is no prospect of
the zoning laws changing: Br. 1,000,000
What is the fair value of the land use rights to Plot A at 31 December
2015? Choose one of:
1) Br. 950,000; 2) Br. 1,000,000; 3) Br. 30,000,000; 4) Br.
100,000,000; or 5) another amount.
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Fair value: location


test your understanding
On Sene 1, 2008 your firm buys a machinery for 90 million in china
to increase its productivity. Additionally the firm paid 10 million
agent commission and 5 million to transport the machine from
China to its production site. The seller of the machine incurred
6million selling costs. Assuming that the market at which the firm
purchased the machine is its principal market (should the firm choose
to sell the machine).
What is the fair value of the machine at Sene 30, 2008 (in )?
Choose one:
A. 75 million
B. 80 million
C. 85 million
D. 74 million
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E. 69 million

Fair value: financial asset

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Specific requirements for financial


instruments

The highest and best use concept does not apply to financial
instruments
The unit of account for financial instruments in the scope of IAS 39
and IFRS 9 is typically the individual financial instrument
an exception, if certain conditions are met, IFRS 13 permits an
entity to measure the fair value of a group of financial assets and
financial liabilities with offsetting risk positions on the basis of its
net exposure (the portfolio measurement exception) (see
paragraphs 48 and 49 of IFRS 13).
Specific guidance for financial liabilities with demand features the
fair value of such liabilities cannot be less than the amount payable
on demand, discounted from the first date that the amount could be
required to be paid (see paragraph 47 of IFRS 13).
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Measuring fair values of financial


instruments

Generally measure fair value using:


market approach (for example, quoted market prices and market
multiples for comparable assets); and/or
income approach (for example, present value techniques and optionpricing models)
Generally do not use the cost approach
Considerations that affect the fair value of financial instruments include:
the time value of money
non-performance / credit risk
liquidity risk
Effect of risk: (i) variable expectations of future cash flows, (ii) price for
bearing this uncertainty (see paragraphs B15 to B17 of IFRS 13)
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Fair value: liabilities

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Fair value: a liability


the concept

The fair value of a liability is


the price that would be 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). (IFRS 13 Appendix A)
Market participant perspective: consequently, the entitys intention
to settle or otherwise fulfil a liability is not relevant when measuring
fair value.
The market value of a liability is:
the amount for which the liability could be settled between
knowledgeable, willing parties in an arms length transaction
(IFRS for SMEs and IPSASBs Conceptual Framework)
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Fair value: liability decision tree


application guidance: liabilities
Is there an observable market
price to transfer the
instrument?

Yes

Fair value =
observable
market price of
instrument

Yes

Fair value = fair value of


the corresponding asset

Yes

Fair value =
observable
market price of

Is there an observable
market price for the
instrument traded as an
asset?

No

Does somebody
hold the
corresponding
No
asset?
Fair value =
another valuation
technique
Level 2 or
3
Fair value =
another
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valuation

No

Disclosure
IFRS 13 requires extensive disclosure of sufficient information to asses:
Valuation techniques and inputs used to develop fair value
measurement for both recurring and nonrecurring measurements
The effect of measurements on profit or loss or other
comprehensive income for recurring fair value measurements using
significant Level 3 inputs.
Recurring fair value measurements are those presented in the
statement of financial position at the end of each reporting period (for
example, financial instruments).
Nonrecurring fair value measurements are those presented in the
statement of financial position in particular circumstances (for
example, an asset held for sale in line with IFRS 5).42
.

Disclosure
As the disclosures are really extensive, here, the
examples of the minimum requirements are listed:
Fair value measurement at the end of the reporting period
The reasons for measurement (for nonrecurring)
The level in which they are categorized in the fair value
hierarchy,
Description of valuation techniques and inputs used
And many others

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Questions or comments?

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