Samara university

Collage of Business and Economics

Department of Accounting and Finance
INDIVIDUAL ASSIGNMENT
Corse title ; intermediate financial accounting
Course code ; Acfn3021
Student name ; Reshid seid
ID. 1300507
 CHAPTER TWO
Fair value measurement and Impairment
Definition of Fair value measurement
 Fair value is the estimated price at which an asset is bought or
sold when both the buyer and seller freely agree on a price.
Individuals and businesses may compare current market value,
growth potential, and replacement cost to determine the fair value
of an asset.
 fair value focuses on assets and liabilities because they are a
primary subject of accounting measurement. In addition, this IFRS
shall be applied to an entity’s own equity instruments measured at
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.
 Conti..
• Fair value refers to the actual value of an asset – a product, stock,
or security – that is agreed upon by both the seller and the buyer.
Fair value is applicable to a product that is sold or traded in the
market where it belongs or under normal conditions – and not to
one that is being liquidated. It is determined in order to come up
with an amount or value That is fair to the buyer without putting
the seller on the losing end.
• For example, Company A sells its stocks to company B at $30 per
share. Company B’s owner thinks he could sell the stock at $50 per
share once he acquires it and so decides to buy a million shares at
the original price. Despite the large profit potential for Company
B, the sale is considered fair value because the price was agreed
by both sides and they both benefit from the sale.
 Fair value measurement
A fair value measurement assumes that the asset or liability is exchanged in an
orderly transaction between market participants to sell the asset or transfer the
liability at the measurement date under current market conditions. Therefore,
when measuring fair value an entity shall take into account the characteristics of
the asset or liability if market participants would take those characteristics into
account when pricing the asset or liability at the measurement date. Such
characteristics include, for example, the following:

(i) the condition and location of the asset; and

(ii) (ii) restrictions, if any, on the sale or use of the asset

 Fair Value At Initial Recognition

• fair value at initial recognition equals the transaction

price unless one of the factors described elsewhere in
the document (related parties, duress, different unit of
account, different market) applies
• When an asset is acquired or a liability is assumed in an
exchange transaction for that asset or liability
• , the transaction price is the price paid to acquire the
asset or received to assume the liability (an entry price).
 For example
The transaction price might not represent the fair value of an asset or a
liability at initial recognition if any of the following conditions
exist:
(a) The transaction is between related parties, although the price in a
related party transaction may be used as an input into a fair value
measurement if the entity has evidence that the transaction was
entered into at market terms.
(b) The transaction takes place under pressure or the seller is forced to
accept the price in the transaction. For example, that might be the
case if the seller is experiencing financial difficulty.
(c) The unit of account represented by the transaction price is different
from the unit of account for the asset or liability measured at fair
value. For example, that might be the case if the asset or liability
measured at fair value is only one of the elements in the transaction
 CONTI…

• d) The market in which the transaction takes place is

different from the principal market. For example, those
markets might be different if the entity is a dealer that
enters into transactions with customers in the retail
market, but the principal market for the exit transaction
is with other dealers in the dealer market.
 Valuation techniques
An entity shall use valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to
measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.
This Standard requires entities to apply valuation techniques
consistent with any of the following three methods:
a. Market approach - uses prices and other relevant information
generated by market transactions involving identical or
comparable (i.e. similar) assets, liabilities or a group of assets and
liabilities, such as a business
b. Cost approach - reflects the amount that would be required
currently to replace the service capacity of an asset (often
referred to as current replacement cost).
 CONTI…
C. Income approach - converts future amounts (e.g. cash
flows or income and expenses) to a single current (i.e.
discounted) amount. The fair value measurement is
determined on the basis of the value indicated by current
market expectations bout those future amounts
• If the transaction price is fair value at initial recognition
and a valuation technique that uses unobservable inputs
will be used to measure fair value in subsequent periods,
the valuation technique shall be calibrated so that at
initial recognition the result of the valuation technique
equals the transaction price.
 Fair value hierarchy
• The fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities (Level
1), and the lowest priority to unobservable inputs (Level 3).

Level 1 inputs

Level 1 inputs are quoted prices (unadjusted) in active markets for

identical assets or liabilities that the entity can access at the

measurement date. An entity shall not make adjustments to quoted

prices, only under specific circumstances, for example when a quoted

price does not represent the fair value (i.e. when a significant event

takes place between the measurement date and market closing date).
 Level 2 inputs
Level 2 inputs are inputs other than quoted prices included within Level 1 that are

observable for the asset or liability, either directly or indirectly. Adjustments to

Level 2 inputs will vary depending on factors specific to the asset or liability.

Level 2 inputs include the following:

a. quoted prices for similar assets or liabilities in active markets.

b. quoted prices for identical or similar assets or liabilities in markets that are not

active.

c. inputs other than quoted prices that are observable for the asset or liability, for

example:

d. market-corroborated inputs
 Level 3 inputs
• Level 3 assets can only be valued based on internal
models or "guesstimates" and have no observable
market prices.
• Level 3 inputs are unobservable inputs for the asset or
liability. An entity shall use Level 3 inputs to measure
fair value only when relevant observable inputs are not
available.
• Level 3 assets are financial assets and liabilities that are
considered to be the most illiquid and hardest to value.
Their values can only be estimated using a combination
of complex market prices, mathematical models, and
subjective assumptions.
 Presentation and disclosure
• Presentation and disclosure are the meta terms used to describe
how information about assets, liabilities, equity, income and
expenses is provided in financial statements.
• Presentation and disclosure concept include guidance on
including income and expenses in profit or loss and other
comprehensive income. The revised conceptual framework
describes how information should be presented and disclosed in
the financial statements.
• Disclosure is the process of making facts or information known
to the public. Proper disclosure by corporations is the act of
making its customers, investors, and any people involved in doing
business with the company aware of pertinent information.
 IMPAIRMENTS

• The general accounting standard of lower-of-cost-or-market for

inventories does not apply to property, plant, and equipment.
Even when property, plant, and equipment has suffered partial
obsolescence, accountants have been reluctant to reduce the
asset’s carrying amount.
• The impairment may be caused by a change in the company's
legal or economic circumstances or by a casualty loss from an
unforeseeable disaster. For example, a construction company
may face extensive damage to its outdoor machinery and
equipment due to a natural disaster.
 Measurement of impairment
• The An impairment loss is the amount by which the carrying
amount of an asset or a cash-generating unit exceeds its
recoverable amount. The recoverable amount of an asset or a
cash-generating unit is the higher of its fair value less costs of
disposal and its value in use.
• measurement requirements for an impairment loss (once a
loss event has been identified) depend on whether the
impaired asset is one that is measured at amortised cost or at
cost.
 Reversal of impairment
• The reversal of an impairment loss reflects an increase in the
estimated service potential of an asset (either from use or from
sale) since the date when an entity last recognised the
impairment loss for the asset
• An impairment loss for goodwill is never reversed. For other
assets, when the circumstances that caused the impairment loss
are favourably resolved, the impairment loss is reversed
immediately in profit or loss (or in comprehensive income if the
asset is revalued under IAS 16 or IAS 38).
• Reversal of impairment is a situation where a company can declare
an asset to be valuable where it has previously been declared a
liability. In general, asset impairment indicates that an asset costs
more to a business than it is worth. There are times, however,
when this situation changes and the asset becomes valuable
 CONTI…
• that want to declare an asset impaired. These rules are
different for different classes of assets. For instance, a
trademark or patent has its own cost and profit factors
that will determine whether it is impaired. Generally,
there are specific protocols according to national finance
laws for companies he criteria for physical machinery or
large physical assets are much different.
 disclosure
• disclosures made by entities are often too general to
enable a user of financial statements to assess how an
entity calculated the recoverable amount (e.g.
value in use) in its impairment test. Entities often
mistakenly believe that disclosing the value of WACC
and PGR along with generic discussion relating to
evolution of business activities is sufficient (it’s not!).
• Disclosure relating to impairment tests is also the
place where IFRS meet climate-related disclosures.
Entities need to comment on climate-related
assumptions if those were significant in determining
the recoverable amount of the CGU.