IFRS 13

FAIR VALUE MEASUREMENT

This material is the property of Department of Accounting and Finance, CoBE, AAU. Permission must be obtained
1

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

2
List of Applicable IFRS

Topic List Standards

Financial Instruments IFRS 9
Property, Plant and Equipment IAS 16
Investment Property IAS 40
Intangible Assets IAS 38
Agriculture IAS 41
Business combination IFRS 3

3
The objective of IFRS 13

4
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

5
Assets 6
Classification, recognition and measurement

CM or RM
RM
CM or Nil

Cost
M RV

Cost Nil
FV N

CM
e or
m C

or
so of

PP&E

Co
Intangible

FV
st
r
we

st
Inv Property
Co

M
Inventory
Lo

Assets
Va Etc Financial
Va ri o ue
us Defined Biological al

M
ri o v

FV
us Benefit assets i r
FV pl Fa

or
a
plan o n assets le s
lue les

C
bligat s
i o n & s P UC v a

Am
Fa i r
rules arbitrary o st s to s e l l
FV pl c
an
obliga assets les v a l ue les
s
tion & sP Fa i r
arbitr UC plan st s t o sel l
ar y r u co
l es
 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)
7
8
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 Willing to enter into a

transaction transaction

 Market participants act in their economic best interest

 Maximise the value of the asset

 Minimise the value of the liability 9

Fair value: market participant 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;

10
Fair value: market participants’ view 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

 restrictions on use or sale that are not a characteristic of the item

11
 Restrictions on use, sale or transfer of assets
Example
Would the following restrictions impact fair value?

Impacts fair
Scenario
value
1. entity holds an equity instrument (financial asset) for which sale is legally restricted for a
Yes
specified period and restriction is embedded in the terms of the instrument
2. entity holds an equity instrument (financial asset) and has agreed with another entity
No
not to sell for at least 12 months

3. charity holds land donated for use only as a playground but which could be sold to raise
No
funds and the restriction would not transfer to the buyer

4. entity holds a piece of land that is subject to an enduring legal right of the utility
Yes
company to run power cables across the land
 Where would the transaction taken place?
Fair value is the price in the …
Principal market
The market with the greatest volume and
level of activity for the asset or liability
Or, if no principal market, the
most advantageous market
The market that maximises the amount
that would be received to sell the asset and
minimize the amount that would be paid to
transfer the liabilityafter considering
transaction costs and transport
costs.
13
Fair value: which market?
Determining the principal market
 The following three markets exist for Ethiopian Construction Corporation’s 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 Total market-

the asset in the market based
(based on history volume for the
and/or intent) asset
A 490,000 60% 15%
B 500,000 25% 75%
C 550,000 15% 10%

Which of the market is the principal market for the corporation's Vehicle?
IFRS 13 Fair Value Measurement
Transaction and transport costs
Fair value: which market?
test your understanding: transaction costs
Example: Lion International Bank S.C. has an asset that is sold in two different
markets, Market A and Market B, with similar volumes of activities, but with different
prices. LIB enters into transactions in both markets and can access the price in those
markets for the asset at the measurement date. Information from both markets is
presented as follows.
Market A Market B
Price Br. 30 Br.28
Transport costs (5) (4)
Br. 25 Br.24
Transaction costs (3) (1)
Net amount received Br. 22 Br.23
How should LIB measure the fair value of the asset? Or how much is the fair value
16
of the asset?
IFRS 13 Fair Value Measurement
Example
Price less
Transport Transaction
Market Price transport Net
costs costs
costs
A 27 3 24 3 21

B 25 2 23 1 22

Scenario Fair value

market A is the principal market 24
market B is the principal market 23
neither market is the principal market (Most Advantageous Market) 23
 IFRS 13 Fair Value Measurement
Example

Market 1 2
Daily trade volume 100,000 20,000
Price 100 108
Price less transport costs 95 101
Transaction costs 4 4
Net 91 97

Entity A has an access to the two markets.

Entity A sells in Market 2.
Which Market will determine the fair value in accordance with IFRS 13?
 IFRS 13 Fair Value Measurement
The unit of account
When measuring fair value under IFRS 13, the item to be measured is based on
the unit of account specified by the IFRS or IAS that requires/permits fair value
e.g. a:
•stand-alone asset or liability (e.g. financial asset or liability)
•group of assets or liabilities (e.g. cash generating unit)
•group of assets and liabilities (e.g. business)

The unit of account is the level at which an asset or a liability is aggregated

or disaggregated in an IFRS for recognition purposes.
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 No
Replicate a market price through a valuation
Use this quoted price to measure fair
technique* (using observable+ and unobservable
value (Level 1) inputs: Levels 2 and 3)

Must use without adjustment Use of significant

No significant unobservable
unobservable
(Level 3) inputs‡ =
(Level 3) inputs‡ =
* Valuation techniques include the market Level 2 measurement
approach, income approach and cost Level 3 measurement
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 entity’s own data (budgets,
21
forecasts), which must be adjusted if market
participants would use different assumptions.
 Fair value hierarchy
IFRS 13 establishes a three level fair value hierarchy for inputs to measure fair value:
 Fair value hierarchy
Example
• Entity A measures the fair value of its investment property using the price per square metre
derived from market transactions for similar buildings in similar locations. The assets in the
observed transactions are sufficiently comparable so that no significant adjustments to
the inputs are required
• Entity B measures the fair value of its investment property using the price per square metre
derived from market transactions for similar buildings. The assets and the location in the
observed transactions are not sufficiently comparable so a significant adjustments to the
inputs are required.

What is the fair value hierarchy for both entities?

 Valuation techniques
•When a price for an identical asset or liability is not observable, an entity measures fair value
using another valuation technique that:
•maximises the use of relevant observable inputs and
•minimises the use of unobservable inputs

•Appropriate in the circumstances

•For which sufficient data are available to measure fair value
•IFRS 13 provides guidance on the use of valuation techniques when measuring fair value and
states that there are three widely used valuation techniques:
the market approach
the cost approach
the income approach

•An entity should use valuation techniques consistent with one or more of those approaches to
measure fair value.
Fair value: non-financial asset

25
 Highest and best use
•The fair value of non financial asset should reflect the highest and
best use from market participant perspective.
 HBU: the use of a non-financial asset by market participants that
maximises the value of the asset:
– physically possible

– legally permissible

– financially feasible

26
 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

27
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

28
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 vacant site.
 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).

31
 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

32
 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.

33
 Fair value of a non-financial asset
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)?
34
 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?

35
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 donor’s 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?

36
 Fair value: 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 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 government’s 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.

37
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.

38
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

E.69 million
39
Fair value: financial asset

40
 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).

41
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 (see paragraphs B15 to B17 of IFRS 13)

42
Fair value: liabilities

43
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 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
 (IFRS for SMEs and IPSASB’s Conceptual Framework)

44
 Fair value: liability decision tree
application guidance: liabilities
Is there an observable market price No
Yes to transfer the instrument?
Does somebody hold the
Fair value = corresponding asset?
observable market Yes
price of instrument No

Fair value = fair value of the Fair value = another

corresponding asset valuation technique

Is there an observable market

Level 2 or 3
Yes
price for the instrument No

Fair value = traded as an asset?

Fair value = another
observable market valuation technique
price of asset 45
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).
.
46
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

47
Questions or comments?

48