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IFRS 13, Fair Value Measurement [Completed]

Effective date: Fiscal years beginning on or after January 1, 2013 with early adoption permitted

Transitional provisions:

IFRS 13 is effective for fiscal years beginning on or after January 1, 2013. Earlier application is permitted. It applies prospectively from the beginning of the annual period in which it is adopted.

Last updated:

December 2012

Overview

IFRS 13 is a new standard that defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. IFRS 13 does not determine when an asset, a liability or an entity’s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value (with limited exceptions).

This project was carried out jointly with the FASB.  As a result of concurrent changes approved by the FASB to Topic 820, US GAAP will have the same definition and meaning of fair value and the same disclosure requirements about fair value measurements.

Key Features

Scope

IFRS 13 applies to all transactions and balances (whether financial or non-financial), with the exception of share-based payment transactions accounted for under IFRS 2, Share-based Payment, and leasing transactions within the scope of IAS 17, Leases.

Definition of fair value

Fair value is defined as “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 (i.e. an exit price)”.

Determination of fair value

IFRS 13 indicates that an entity must determine the following to arrive at an appropriate measure of fair value: (i) the asset or liability being measured (consistent with its unit of account); (ii) the principal (or most advantageous) market in which an orderly transaction would take place for the asset or liability; (iii) for a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a stand-alone basis. (iv) the appropriate valuation technique(s) for the entity to use when measuring fair value, focussing on inputs a market participant would use when pricing the asset or liability; and (v) those assumptions a market participant would use when pricing the asset or liability.

Fair value of liabilities and equity 

IFRS 13 requires that the fair value of a liability or equity instrument of the entity be determined under the assumption that the instrument would be transferred on the measurement date, but would remain outstanding (i.e., it is a transfer value not an extinguishment or settlement cost.).  Accordingly, the fair value of a liability must take account of non-performance risk, including the entity’s own credit risk

Offsetting positions

The new Standard allows a limited exception to the basic fair value measurement principles for a reporting entity that holds a group of financial assets and financial liabilities with offsetting positions in particular market risks as defined in IFRS 7, Financial Instruments: Disclosures, or counterparty credit risk (also as defined in IFRS 7) and manages those holdings on the basis of the entity’s net exposure to either risk. The exception allows the reporting entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position.

Valuation techniques

When transactions are directly observable in a market, the determination of fair value can be relatively straightforward, but when they are not, a valuation technique is used. IFRS 13 describes three valuation techniques that an entity might use to determiner fair value, as follows: (i) the market approach. An entity 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”; (ii) the income approach. An entity converts future amounts (e.g., cash flows or income and expenses) to a single current (i.e., discounted) amount; and (iii) the cost approach.

IFRS 13 requires that a valuation technique should be selected, and consistently applied, to maximize the use of relevant observable inputs (and minimize unobservable inputs).

Premiums and discounts

IFRS 13 permits a premium or discount to be included in a fair value measurement only when it is consistent with the unit of account for the item. This means that premiums or discounts that reflect size as a characteristic of the entity’s holding (e.g. a blockage factor reducing the price which could be achieved on disposal of an entire large equity holding) rather than as a characteristic of the asset or liability (e.g. a control premium when measuring the fair value of a controlling interest) are not included.

Disclosures

IFRS 13 requires a number of quantitative and qualitative disclosures about fair value measurements. Many of these are related to the following three-level fair value hierarchy on the basis of the inputs to the valuation technique: Level 1 inputs are fully observable (e.g. unadjusted quoted prices in an active market for identical assets and liabilities that the entity can access at the measurement date); Level 2 inputs are those other than quoted prices within Level 1 that are directly or indirectly observable; and Level 3 inputs are unobservable.

An asset or liability is included in its entirety in one of the three levels on the basis of the lowest-level input that is significant to its valuation.

Disclosures based on this hierarchy are already required for financial instruments under IFRS 7, but IFRS 13 extends them to cover all assets and liabilities within its scope. Some disclosure requirements differ depending on whether the fair value calculation is performed on a recurring or non-recurring basis.

Recent activities

December 2012

On December 21, 2012, the IASB issued the first chapter of educational material to accompany IFRS 13, Fair Value Measurement.  The chapter covers the application of the principles in IFRS 13 when measuring the fair value of unquoted equity instruments within the scope of IFRS 9, Financial Instruments.

May 2011

On May 12, 2011, the IASB issued IFRS 13, Fair Value Measurement. IFRS 13 is a new standard that defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. A Basis for Conclusions has also been issued by the IASB.

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