Transcript Fair value measurement for assets

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
International Financial Reporting Standards
What is fair value?
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
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 entity’s 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
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International Financial Reporting Standards
When are assets measured
at fair value?
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presenter, not necessarily those of the IASB or IFRS Foundation
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Assets
5
Classification, recognition and
measurement
PP&E
Intangible
Inventory
Assets
Inv
Property
Financial
Etc
Defined
Benefit
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Biological
assets
ASSET TYPE
MEASUREMENT AT
INITIAL
RECOGNITION
MODEL BASED
ON FAIR VALUE
IFRS 9 Financial
Instruments
Fair value
For specified financial
assets and for particular
business models: fair
value
IAS 16 Property,
Plant and
Equipment
Purchase costs + construction
costs + costs to bring to the
location and condition
necessary to be capable of
operating in the manner
intended by management.
Accounting policy
choice: revaluation
model
IAS 38 Intangible
Assets
Purchase costs +
development costs + costs to
bring to the location and
condition necessary to be
capable of operating as
intended by management
Accounting policy
choice: revaluation
model
IAS 40
Investment
Property
Cost including transaction
costs
Accounting policy
choice: fair value
IAS 41 Agriculture
Fair value less costs to sell
Fair value less costs to
sell
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BASIS OF
IMPAIRMENT
TEST 6
Compare carrying
amount to recoverable
amount.
Recoverable amount is
greater of value in use
and fair value less
disposal costs (IAS 36)
International Financial Reporting Standards
IAS 41
Agriculture
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presenter, not necessarily those of the IASB or IFRS Foundation
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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.
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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?
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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
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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.
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Judgements and estimates continued
12
• A PwC study of standing timber valuation
practices observed that when applying DCFmodels management made several
important assumptions including:
• expected income at harvest—variables included
growth rate and price per unit of volume
• expected costs during growth—including
silvicultural costs, eg maintenance and thinning
• expected point-of-sale-cost—including harvesting
and transport to market
• determining the appropriate discount rate.
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International Financial Reporting Standards
IAS 16
Property, Plant and
Equipment
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presenter, not necessarily those of the IASB or IFRS Foundation
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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.
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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
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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
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Judgements and estimates
17
• Revaluation model requires measuring fair value (see
IFRS 13 for estimates and judgements)
• Impairment testing requires many estimates (see IAS
36).
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International Financial Reporting Standards
IAS 38
Intangible Assets
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presenter, not necessarily those of the IASB or IFRS Foundation
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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.
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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.
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Comparison to the IFRS for SMEs
21
• 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.
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International Financial Reporting Standards
IAS 40
Investment Property
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presenter, not necessarily those of the IASB or IFRS Foundation
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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
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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.
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Comparison to the IFRS for SMEs
25
• 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
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International Financial Reporting Standards
IFRS 9
Financial Instruments
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presenter, not necessarily those of the IASB or IFRS Foundation
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Classification model: financial
assets
Business model test
Contractual cash
flow characteristics
Amortised cost
(one impairment
method)
FVO for
accounting
mismatch
(option)
Reclassification required when business model changes
All other
instruments:
• Equities
• Derivatives
• Some hybrid
contracts
•…
Fair Value
(No impairment)
27
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Equities:
OCI presentation
available
(alternative)
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)
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Comparison to the IFRS for SMEs
• The applicable sections of the IFRS for SMEs are
significantly different from IFRS 9.
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29
International Financial Reporting Standards
IFRS 5
Non-current Assets Held for
Sale and Discontinued
Operations
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presenter, not necessarily those of the IASB or IFRS Foundation
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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).
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International Financial Reporting Standards
IAS 2
Inventories
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presenter, not necessarily those of the IASB or IFRS Foundation
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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
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International Financial Reporting Standards
IFRS 3
Business Combinations
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation
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Principles
35
• The Standard includes recognition and measurement
principles.
• Recognition (IFRS 3.10–17):
• Separate recognition of identifiable assets acquired
and liabilities assumed (link to Conceptual
Framework)
• Measurement (IFRS 3.18–20):
• Assets and liabilities that qualify for recognition are
measured at their acquisition-date fair values
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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)
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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
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Recognition and Measurement
38
• Goodwill (asset) is measured initially indirectly as the
difference between:
• the consideration transferred (IFRS 3.37–40) not
including transaction costs in exchange for the acquiree
and
• the acquiree’s identifiable assets and liabilities
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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)
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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.
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When does IFRS 13 not apply?
Excluded from the
scope
• IFRS 2 and IAS 17
• 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
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41
International Financial Reporting Standards
IFRS 13
Fair Value Measurement
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation
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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.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
The old definition of fair value
The old definition of fair value
The amount for which an
asset could be
exchanged, or a liability
settled, between
knowledgeable, willing
parties in an arm’s?
length transaction.
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44
Its weaknesses
It did not specify whether an
entity is buying or selling the
asset.
It was unclear about what
settling meant because it did not
refer to the creditor.
It was unclear about whether it
was market-based.
It did not state explicitly when the
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 entity’s intention to hold an asset
or to settle or otherwise fulfil a liability is not relevant
when measuring fair value.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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.
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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.
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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.
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The fair value hierarchy
Yes
Is there a quoted price in an
active market for an identical
asset or liability?
(Level 1 input)
* Maximise the use of relevant
observable inputs.
Observable inputs include
market data (prices and other
information) that is publicly
available
‡
Unobservable inputs include
the entity’s own data (eg
budgets, forecasts), which
must be adjusted if market
participants would use
different assumptions
49
No
Are there any observable
inputs* other than quoted
prices for an identical
asset or liability?
Use the Level 1 input =
Level 1 measurement
Must use without
adjustment
49
Yes
No use of significant
unobservable
(Level 3) inputs‡ =
Level 2
measurement
No
Use of significant
unobservable
(Level 3) inputs‡ =
Level 3
measurement
Disclosure
50
• Information about an entity’s 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.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
51
• 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
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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.
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Questions or comments?
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.
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© 2012 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
53
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.
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