IFRS Training

Fair Value Measurement

(IFRS 13)
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 Objectives and Scope
 sets out, in a single IFRS, a framework for measuring fair
value and the required disclosures.
 applies to IFRSs that require or permit fair value
measurements or disclosures about fair value
measurements (except for IFRS 2, IAS 2, IAS 17/IFRS
16 and IAS 36)
 IFRS 13 does not mandate when fair value measurements
should be used – this is dealt with in other IFRSs

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 Many Measurement Bases
IFRS Impairment
necessary?

Historical cost ✔ ✔

Modified historical cost ✔ ✔

Fair value ✔ ✘

Fair value less costs to sell ✔ ✘

an impairment
Value in use ✔
measurement

often an impairment
Net realisable value ✔
measurement

Other measurements ✔ ✔
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Mixed measurement model source of measurement bases indicated
Assets IFRS measure Equity IFRS measure

Unimpaired land Historical cost (HC) or Residual What does it

(PPE) & indefinite fair value (FV) (choice) (assets minus mean?
life intangibles liabilities)
Other PPE, Modified (M)HC or Liabilities IFRS measure
intangibles and modified FV (choice)
bearer plants
Investment property MHC or FV (choice) Bank loan Amortised cost
(AC)
Biological assets FV less costs to sell Trade payable AC
Investments in Equity method Derivatives and FV
associates others when FV
option is used
Other financial MHC or FV (depends on Provisions Amount to settle
instruments cash flow characteristics or transfer today
and business model)
Inventories Lower of HC and net Defined benefit Projected unit
realizable value; employee credit method
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 What is fair value?
 Fair value is 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 fair value of an asset is:
 the price that would be received to sell an asset (exit price)
 in an orderly transaction (not a forced sale)
 between market participants (market-based view)
 at the measurement date (current price)
 Market participant perspective: consequently, the
entity’s intention to hold an asset is not relevant when
measuring fair value.
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 Characteristics of fair value
a market value (not entity-specific value)
 an exit value
 reflects all changes that market participants
factor into pricing at the measurement date
 requires judgement to measure (especially
Level 3 measurements)
determine the appropriate valuation technique/s
and inputs that market participants would use
when pricing the asset or liability

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What the IASB says about fair value

Has predictive value and confirmatory value

(provides relevant information)
◦ fair value reflects expectations about the amount,
timing and uncertainties of the cash flows
(reflecting market participants’ expectations).
Provides comparable information (between
entities and within an entity)
◦ market participant perspective, identical assets
(absent estimation error) measured at the same
amount irrespective of when and for what
purpose they are acquired
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 Fair value: non-financial asset
When determining the fair value of non-
financial assets, it is important to consider the
following fair value concepts:
 Selecting the appropriate market
 Identifying market participants
 Using market participant assumptions
 Determining the highest and best use
 Applying appropriate valuation techniques

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 Which market?
Principal market and when we cannot identify principal market, most
advantageous market can be used.
Principal market: has the greatest volume and level of
activity for the asset or liability
Most advantageous market
maximises the amount that would be received to sell an asset
minimises the amount that would be paid to transfer the liability
after taking into account transactions costs and transport costs.
Other considerations:
 absent evidence to the contrary use the market the reporting
entity usually accesses
 reporting entity must have access to the market at the
measurement date

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Which market?

N.B. In determining FV we don’t consider transaction

costs, only transport cost.
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 Which market?
Test your understanding: transaction costs
You have access to two active markets to sell an
asset:
◦ Market (M)1: price = Br100; transaction costs = Br10
◦ M2: price = Br95; transaction costs = Br3.
What is the fair value of the asset? Choose one of:
1) Br100 if M1 is the principal market, otherwise Br95;
2) Br90 if M1 is the principal market, otherwise Br92;
3) Br95 because the most advantageous market (M2)
must be the principal market;
4) Br92 because the most advantageous market (M2)
must be the principal market.
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 Which market?
Test your understanding: transport costs

You have access to two active markets to sell an asset:

◦ Market (M)1: price = Br100; transport costs = Br10

◦ M2: price = Br95; transport costs = Br3.

What is the fair value of the asset? Choose one of:

1) Br100 if M1 is the principal market; otherwise Br95

2) Br90 if M1 is the principal market; otherwise Br92

3) Br95 because the most advantageous market (M2) must be the principal market

4) Br92 because the most advantageous market (M2) must be the principal market

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 Fair value market participants
Characteristics of market participants (ie
buyers and sellers in principal market (or
most advantageous market)):
independent
knowledgeable
diligent
use all available information
willing to transact for the asset or liability
able to transact for the asset or liability
Assumption: market participants act in their
economic best interest
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 Fair value hierarchy
 Level 1 – Quoted Prices - highest priority is
given to quoted prices in active markets for
identical assets or liabilities.
 Level 2 – observable inputs not included in
level 1 (e.g. quoted prices for similar assets or
liabilities in active markets, quoted prices for
identical or similar assets or liabilities in
markets that are not active)
 Level 3 – unobservable inputs developed using
best information available (e.g. entity’s own
data)
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 Fair value hierarchy
Level 2 inputs:
 Quoted prices for similar assets or liabilities in active markets.
 Quoted prices for identical or similar assets or liabilities in markets that are
not active.
 Inputs other than quoted prices that are observable for the asset or liability.
Examples:-
 interest rates and yield curves observable at commonly quoted intervals;
 Implied volatilities;
 prepayment speeds;
 loss severities;
 credit risks; a
 default rates
 Inputs that are derived principally from or corroborated by observable
market data that, through correlation or other means, are determined to be
relevant to the asset or liability being measured (market-corroborated
inputs).
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 Fair value hierarchy…
Adjustments made to Level 2 inputs necessary
to reflect fair value, if any, will vary depending
on an analysis of specific factors associated with
the asset or liability being measured. These
factors include:
 Condition
 Location
 Extent to which the inputs relate to items
comparable to the asset or liability.
 Volume and level of activity in the markets in
which the inputs are observed.
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Fair value hierarchy ...
 Valuation techniques used to measure fair
value should maximise the use of relevant
observable inputs and minimise the use of
unobservable inputs
 Observable inputs – developed using market
data such as publicly available information
about actual events or transactions
 Unobservable inputs – market data not
available and developed using best
information available about assumptions
that market participants would use
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 Fair value measurement techniques
 When transactions are directly observable in a
market, the determination of fair value can be
relatively straightforward. In other
circumstances, a valuation technique is used.
 IFRS 13 describes three valuation techniques:
1. Market approach – uses prices generated by
market transactions
2. Cost approach – determines the value that
reflects current replacement cost
3. Income approach – converts future amounts to a
single (present value) amount
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Fair value measurement techniques…
Guidance from the educational material:
1. Market approach:
a) Transaction price paid for an identical or a
similar instrument in an investee.
b) Comparable company valuation multiples.
2. Cost approach (For non financial assets):
c) Replacement Cost
d) Adjusted net asset method.
3. Income approach:
e) Discounted cash flow method.
f) Dividend discount model.
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 Highest and best use of Asset
Fair value measurement logically assumes
that a market participant would put a non-
financial asset to its highest and best use
because that maximises the value of the asset.
The highest and best use must be
 Physically possible (e.g. property location or
size)
 Legally permissible (e.g. property zoning laws)
 Financially feasible (e.g. adequate return
generated)

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Fair value of a non-financial asset: Example 1
 ABC Company’s 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 one hectare plots that before their
further development were essentially homogenous.
Factories, like ABC’s, are the highest and best use for
the land rights.
 On 31 December 2000 two of the plots adjoining ABC’s
plot were sold (i.e. 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
ABC.
 Plot 899 sold for Br10 million because it is undeveloped (yet
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Fair value of a non-financial asset : Example 1
On 31 December 2000 what is the fair value of ABC’s
land rights (i.e. excluding the factory building)?
Choose 1 of:
1) Br0; 2) Br10 million; 3) Br20 million; 4) Br30 million;
5) another amount
On 31 December 2000 what is the fair value of ABC’s
factory building (i.e. excluding the land rights)?
Choose 1 of:
1) Br0; 2) Br10 million; 3) Br20 million; 4) Br30 million;
5) another amount

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Fair value of a non-financial asset : Example 2
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 ABC’s 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 Br100 million.
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Fair value of a non-financial asset : Example 2
On 31 December 2015 what is the fair value of ABC’s
land rights (ie excluding the factory building)?
Choose 1 of:
1) Br0; 2) Br10 million; 3) Br20 million; 4) Br30 million;
5) Br100 million; or 6) another amount
On 31 December 2015 what is the fair value of ABC’s
factory building (ie excluding the land rights)?
Choose 1 of:
1) Br0; 2) Br10 million; 3) Br20 million; 4) Br30 million;
5) Br100; million; or 6) another amount

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Fair value of a non-financial asset : Example 3
 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 (i.e.
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 (?) fair value?
 Can such a Level (?) fair value measurement be
faithfully represented?
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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
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
restrictions on use or sale that are not a characteristic of the
item
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 Restriction on use:
Test your understanding
 You own land use rights to Plot A that is zoned ‘green
belt’—which 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 Br950,000 on 30 October 2015 (Plot B); and
 for Br30,000,000 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 government’s plans
for proposing an amendment to the law to allow for
the construction of high-rise buildings on some (but
unspecified) green belt land.
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 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: Br100,000,000
◦ Scenario 2: market participants believe there is no
prospect of the zoning laws changing: Br1,000,000
What is the fair value of the land use rights to Plot A at
31 December 2015? Choose one of:
1) Br950,000; 2) Br1,000,000; 3) Br30,000,000; 4)
Br100,000,000; or 5) another amount.

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Transaction costs: Test your understanding
A building is used as a factory but is in a newly residential
area. Other industrial and commercial buildings have been
converted into residential use in the area.
Based on expected future cash flows from use as a factory, the
entity estimates a value of Br20m. However, the building could
be sold for conversion to residential property for Br 21m,
incurring transaction costs of Br1.5m (surveys, fees etc). Prior
to sale, the building would require repairs costing Br 500,000
to return site to safe for human dwelling.
What is the Fair Value of the building?
a) Br19m b) Br19.5m c) Br20.5m d) Br21m

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 Fair Value: Financial Assets
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
option-pricing 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
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Fair Value: Financial Assets

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Restriction on sale of a financial asset : Example 1
Entity A pledges 100,000 Awash International Bank shares
that it owns as collateral in a borrowing arrangement.
 Consequently, Entity A cannot sell its Awash International
Bank shares until it settles the borrowing.
 Awash International Bank shares are issued without such a
restriction and trade on Ethiopian Stock Exchange market.
Is the restriction relevant to measuring the fair value of the
Awash International Bank shares held by Entity A? Choose
one of:
1) Yes
2) No
3) It depends (specify)

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Fair value: a large holding
Midroc holds 10% of the (1 million shares) share capital in
Entity Z
 Entity Z’s shares trade actively in a deep and liquid market
◦ at 31 December 2015 trading in Entity Z shares closes at Br100
per share
Midroc believes that it would be able to sell its 10% stake
in Entity Z in a single transaction for Br 9,500,000 at 31
December 2015
At 31 December 2015 the fair value of Midroc’s 10%
holding in Entity Z (Choose one of) is:
1) Br 9,500,000;
2) Br10,000,000 ; or
3) it depends on an assessment of all facts and circumstances?

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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).
Market participant perspective: consequently, the
entity’s 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 arm’s
length transaction
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Fair value: liability decision tree

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 Disclosure

An entity shall disclose information that helps users of

its financial statements assess both of the following:
 For assets and liabilities that are measured at fair
value on a recurring or non-recurring basis in the
SFP after initial recognition, the valuation techniques
and inputs used to develop those measurements.
 For recurring fair value measurements using
significant unobservable inputs (Level 3), the effect
of the measurements on profit or loss or other
comprehensive income for the period.

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Questions/ Suggestions

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