Fair Value Measurement For Assets: International Financial Reporting Standards

International Financial Reporting Standards
Fair value measurement

for assets
Joint World Bank and IFRS Foundation train the
trainers workshop hosted by the ECCB
30 April to 4 May 2012
The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What is fair value?

presenter, not necessarily those of the IASB or IFRS Foundation

Definition 3
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 entitys 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

When are assets measured

at fair value?


Assets 5
Classification, recognition and

measurement
CM or RM
RM
CM or Ni l
Cost
M RV
Cost Ni l
FV N
CM
e or
m C
or
so of
PP&E
Co
Intangible
FV
st
er
st
Inv
Co
w
M
Inventory
Lo
Property
Assets
Etc Financial
Va ue
r io Defined Biological val
VM
Va us ir
r io Benefit assets Fa
F
us FV pl
or
an lue
PUC p assets le Fair va to
C
lan ob ss
Am
s ts
& arb
itrary
ligatio
n less co
FV pl rules sell
a
n ass lue
PUC
plan o ets less Fair va to
sts
arbitr bligation & less co
ary ru sell
le s

ASSET TYPE MEASUREMENT AT MODEL BASED BASIS OF
INITIAL ON FAIR VALUE IMPAIRMENT
RECOGNITION 6
TEST
IFRS 9 Financial Fair value For specified financial
Instruments assets and for particular
business models: fair
value
IAS 16 Property, Purchase costs + Accounting policy Compare carrying

Plant and construction costs + costs to choice: revaluation amount to recoverable
Equipment bring to the location and model amount.
condition necessary to be
capable of operating in the Recoverable amount is
manner intended by greater of value in use
management. and fair value less
disposal costs (IAS 36)
IAS 38 Intangible Purchase costs + Accounting policy
Assets development costs + costs to choice: revaluation
bring to the location and model
condition necessary to be
capable of operating as
intended by management
IAS 40 Cost including transaction Accounting policy
Investment costs choice: fair value
Property
IAS 41 Agriculture Fair value less costs to sell Fair value less costs to
sell
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org
IAS 41
Agriculture


Measurement 8
Biological assets (and agricultural produce at the point

of harvest) are measured at fair value less costs to sell
(initial and subsequent measurement)
changes in fair value less costs to sell are
presented in profit or loss.
Biological assets that are attached to land (eg trees in a
plantation forest) are measured separately from the
land. If owner-occupied the land is accounted for in
accordance with IAS 16.

Why fair value measurement? 9
The value accretion of agricultural assets is unique

Fair value measurement provides relevant,
reliable, comparable and understandable
measurement of future economic benefits
consider a plantation forest with a 30 year harvesting
cycle: fair value measurement reflects the biological
growth using current fair values
Historical cost cannot accurately portray the
value of an accreting asset
consider the plantation forest: no income would be
reported until harvest and sale (30 years)
what is the cost of a fifth generation calf?
Exceptions from fair value
measurement 10
Measure using cost-depreciation-impairment:

IAS 41: only when on initial recognition of a
biological asset for which quoted market
prices are not available and other estimates
of fair value are determined to be clearly
unreliable
IFRS for SMEs: only for those biological
assets whose fair value is not readily
determinable without undue cost or effort

Judgements and estimates 11
When using the most recent market transaction price

to measure fair value: identifying the most recent
market transaction price and evaluating whether
economic circumstances have changed significantly.
When using market prices for similar assets:
adjusting the prices to reflect differences.
When using sector benchmarks (eg the value of
cattle expressed per kilogram of meat): adjusting to
reflect differences.
When using DCF model: estimating the expected
future net cash inflows and the discount rate.
Judgements and estimates continued 12
A PwC study of standing timber valuation

practices observed that when applying DCF-
models management made several
important assumptions including:
expected income at harvestvariables included
growth rate and price per unit of volume
expected costs during growthincluding silvicultural
costs, eg maintenance and thinning
expected point-of-sale-costincluding harvesting
and transport to market
determining the appropriate discount rate.
IAS 16
Property, Plant and
Equipment


Measurement at fair value 14
After initial recognition, an entity chooses to measure

PP&E either at:
(i) cost less accumulated depreciation and accumulated
impairment (cost model); or
(ii) fair value less subsequent accumulated depreciation
and accumulated impairment (revaluation model).
Revaluations must occur with sufficient regularity to
ensure that the carrying amount of an asset does not
differ materiality from that which would be determined
with a fair value at the end of the period.

Measurement at fair value continued 15
Revaluation increases are recognised in other

comprehensive income and are accumulated in equity
(Revaluation surplus)
Revaluation decrease should first reduce the credit
balance of revaluation surplus to zero and are then
recognised in profit or loss
Depreciation and impairment considerations are similar
to those of the cost model

Comparison to the IFRS for SMEs 16
Section 17 Property, Plant and Equipment of the IFRS

for SMEs does not permit the use of a revaluation
model for property, plant and equipment
Generally, there is less fair value measurement for
SMEs

Revaluation model requires measuring fair value (see

IFRS 13 for estimates and judgements)
Impairment testing requires many estimates (see IAS
36).

IAS 38
Intangible Assets


Measurement 19
Intangible assets are usually measured using the cost

model
An entity may choose to revalue (measure the asset at
fair value), only if fair value can be determined by
reference to an active market.
If an intangible asset is revalued, all assets within that
class of intangible assets must be revalued.
The principles of the revaluation model in IAS 16 apply
to IAS 38.

Measurement continued
20
An intangible asset with a finite useful life is amortised.

An intangible asset with an indefinite useful life
is not amortised
is tested annually for impairment.

Section 18 Intangible Assets of the IFRS for SMEs

does not permit the use of a revaluation model for
intangible assets
There are no indefinite useful life intangible asset in the
IFRS for SMEs.

IAS 40
Investment Property


Subsequent measurement 23
For subsequent measurement an entity must

adopt either the fair value model or the cost
model for all investment property
All entities must estimate the fair value of
investment property, either for measurement (if
the entity uses the fair value model) or for
disclosure (if it uses the cost model)
highly unlikely that an entity can change from fair value
model to cost model because the change would not
satisfy the IAS 8 criteria (more relevant information) for
a voluntary change in accounting policy
Fair value model 24
Investment property is remeasured to its fair value at

the end of each reporting period
Changes in fair value are recognised in profit or loss in
the period they occur.
In rare cases (exceptional circumstances) when fair
value is not from inception reliably measurable on a
continuing basis, the entity measures that property on
the cost basis.
this does not affect the measurement of other
investment properties.

IFRS for SMEs does not have an accounting policy

choice for measurement.
The accounting for investment property is driven by
circumstance
If an entity can measure the fair value of an item
without undue cost or effort on an ongoing basis, it
must use the fair value model
It uses the cost model for all other investment
property

IFRS 9
Financial Instruments


Classification model: financial
assets
Business model test

Amortised cost FVO for
(one impairment accounting
method) mismatch
Contractual cash (option)
flow characteristics
Reclassification required when business model changes
All other
instruments:
Equities Equities:
Derivatives
Fair Value OCI presentation
Some hybrid (No impairment) available
contracts (alternative)
27
Measurement 28
If a financial asset is not measured at amortised cost, it

is measured at fair value
Gains or losses in financial assets are recognised in
profit or loss unless:
The financial asset is part of a cash-flow hedging
relationship
The financial asset is an equity instrument and the
entity has elected to present its gains and losses in
other comprehensive income (see paragraph 5.7.5)

The applicable sections of the IFRS for SMEs are

significantly different from IFRS 9.

IFRS 5
Non-current Assets Held for
Sale and Discontinued
Operations


Non-current assets held for sale 31
Non-current assets held for sale are measured at the

lower of fair value less costs to sell and carrying amount
(on the date of classification as held for sale)they are
not depreciated
If still on hand at the end of a reporting period,
remeasured to fair value less cost to sell at that date.
Changes are recognised in profit or loss (IFRS 5.21).

IAS 2
Inventories


Measurement exception 33
Commodity broker-traders may measure inventories at

fair value less costs to sell
Changes in fair value less costs to sell are recognised
in profit or loss

IFRS 3
Business Combinations


Principles 35
The Standard includes recognition and measurement

principles.
Recognition (IFRS 3.1017):
Separate recognition of identifiable assets acquired
and liabilities assumed (link to Conceptual
Framework)
Measurement (IFRS 3.1820):
Assets and liabilities that qualify for recognition are
measured at their acquisition-date fair values

Exceptions 36
Exceptions to measurement principle

Reacquired rights
Measured at FV based on remaining contractual
term ignoring the FV effect of renewal
Share-based payment transactions
Replacement awards: measured in accordance with
IFRS 2
Assets held for sale
Measured in accordance with IFRS 5 (ie FV less
costs to sell)

Exceptions continued 37
Exceptions to both recognition and

measurement
Income taxes
Deferred tax assets or liabilities arising from
acquired assets or liabilities accounted for in
accordance with IAS 12
Employee benefits
Accounted for in accordance with IAS 19
Indemnification assets
May not be recognised at FV if it relates to an item
not recognised or measured in accordance with
IFRS 3
Recognition and Measurement 38
Goodwill (asset) is measured initially indirectly as the

difference between:
the consideration transferred (IFRS 3.3740) not
including transaction costs in exchange for the acquiree
and
the acquirees identifiable assets and liabilities

Recognition and Measurement continued 39
Consideration transferred
Measured at fair value of sum of assets transferred and
liabilities assumed
Acquisition-related costs are not included
Contingent consideration included at its fair value at
acquisition date (changes are not included in the
consideration transferred at acquisition-date)

Other fair values 40
IAS 19 Employee Benefits

The plan assets associated with a funded defined
benefit plan are measured at their fair value at
reporting date
IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance
Grants (including some non-monetary grants) are
recognised at fair value
IAS 27 Separate Financial Statements
Investments in subsidiaries, joint ventures and
associates may be measured at fair value in
accordance with IFRS 9.
When does IFRS 13 not apply? 4141
Excluded from the

IFRS 2 and IAS 17
scope
Plan assets (IAS 19)

Retirement benefit plan investments
Disclosures in IFRS 13 (IAS 26)
not required for
Assets for which recoverable amount is fair
value less cost of disposal (IAS 36)
Not required for IAS 2 (net realisable value)

measurements similar
IAS 36 (value in use)
to fair value

IFRS 13
Fair Value Measurement


Introduction 43
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.

The old definition of fair value 44
The old definition of fair value Its weaknesses
It did not specify whether an entity

The amount for which is buying or selling the asset.
an asset could be It was unclear about what settling
meant because it did not refer to
exchanged, or a liability the creditor.
settled, between It was unclear about whether it
knowledgeable, willing was market-based.
parties in an arms? It did not state explicitly when the
length transaction. exchange or settlement takes
place.

Definition 45
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 entitys intention to hold an asset
or to settle or otherwise fulfil a liability is not relevant
when measuring fair value.

Application guidance 46
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.

Transaction and Price 47
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.

Non-financial assets 48
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.

The fair value hierarchy 49
49
Is there a quoted price in an

active market for an identical
Yes No
asset or liability?
(Level 1 input)
Are there any observable
Use the Level 1 input = inputs* other than quoted
Level 1 measurement prices for an identical
Must use without asset or liability?
adjustment Yes No
* Maximise the use of relevant No use of significant

observable inputs. Observable
inputs include market data unobservable Use of significant
(prices and other information) (Level 3) inputs = unobservable
that is publicly available
Level 2 (Level 3) inputs =
Unobservable inputs include measurement Level 3

the entitys own data (eg measurement
budgets, forecasts), which
must be adjusted if market
participants would use
different assumptions
Disclosure 50
Information about an entitys 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.

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
Judgements and estimates continued 52
The inputs used in the valuation techniques should

primarily be based on observable inputs (where
possible) to minimise the use of unobservable inputs.

Questions or comments? 53
Expressions of individual
views
by members of the IASB and
its staff are encouraged. The
views expressed in this
presentation
are those of the presenter.
Official positions of the IASB
on accounting matters are
determined only after
extensive due process and
deliberation.
2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
54
The requirements are set out in International Financial

Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

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International Financial Reporting Standards

Fair value measurement

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What is fair value?

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value is the price that would be received to sell an

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

When are assets measured

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Classification, recognition and

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IAS 16 Property, Purchase costs + Accounting policy Compare carrying

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Biological assets (and agricultural produce at the point

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The value accretion of agricultural assets is unique

Measure using cost-depreciation-impairment:

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

When using the most recent market transaction price

A PwC study of standing timber valuation

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

After initial recognition, an entity chooses to measure

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Revaluation increases are recognised in other

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Section 17 Property, Plant and Equipment of the IFRS

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Revaluation model requires measuring fair value (see

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Intangible assets are usually measured using the cost

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

An intangible asset with a finite useful life is amortised.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Section 18 Intangible Assets of the IFRS for SMEs

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

For subsequent measurement an entity must

Investment property is remeasured to its fair value at

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IFRS for SMEs does not have an accounting policy

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Business model test

If a financial asset is not measured at amortised cost, it

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The applicable sections of the IFRS for SMEs are

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Non-current assets held for sale are measured at the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The views expressed in this presentation are those of the

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Commodity broker-traders may measure inventories at