Post-implementation review of IFRS 13

Date recorded:

Feedback summary: cover paper – Agenda Paper 7

This was an education session and contained no questions for the Board.

As part of phase 2 of the post-implementation review (PIR) of IFRS 13, the Board published a request for information (RFI) in May 2017 and also tasked a group of academics to conduct an academic literature review on IFRS 13.

The objective of this session was for the Board to consider the RFI feedback as well as the results of the academic literature review. The papers for this meeting were as follows:

  1. Academic literature review:
    1. cover note (AP 7A)
    2. summary of the literature review (AP 7B)
    3. full paper of the literature review (AP 7C)
  2. Background on the IFRS 13 PIR (AP 7D)
  3. Review of the feedback received on the RFI:
    1. summary of feedback received (AP 7E)
    2. detailed review of feedback by RFI topics (AP 7F)
  4. Summary of other research conducted by the Staff (AP 7G)

Next steps

The staff will ask the Board to decide on how to respond to the feedback at a future meeting. The Staff do not intend to perform any additional analysis or outreach unless specifically requested by the Board.

Effect of Implementation of IFRS 13 Fair Value Measurement: Summary of the Literature Review – Agenda Paper 7B


The literature review focused on fair value literature that was relevant to the questions raised in the RFI, where available. Half of the review team members were academics from business schools in Canada and most of the literature reviewed drew on data from the United States.

Fair value measurement disclosures (Request for Information (RFI) question 2)

Several studies showed that, in general, Level 3 fair value measurement disclosures are beneficial as they:

  • restrain managers from using aggressive assumptions, and
  • provide investors with added assurance that reduces their perception of risk in fair value estimates, thereby increasing their confidence in the reported numbers as they can better judge and process the management estimates.

The research also discussed value relevance. This refers to the relationship between an accounting estimate and a company’s market share price, future earnings as forecasted by financial analysts or actual future earnings and cash flows. The concept of value relevance is important as it indicates whether financial reporting captures information that is relevant to investors.

Overall, the studies showed that assets measured at fair value are value relevant. This is irrespective of the level of the fair value hierarchy in which they are categorised, albeit generally in descending order, with Level 1 being the most value relevant. The value relevance of Level 3 measurements appears to be contextual, for example, markets with more sophisticated institutional investors assign greater value relevance to Level 3 than other markets.

Research also showed that managers take advantage of their discretion in determining fair value measurements either positively to enhance the usefulness of the fair value information, or negatively to manipulate numbers to achieve desired results.

Fair Value Measurement of Non-financial Assets: Highest and Best Use and Other Judgements (RFI questions 4 and 5)

There was scant research on the application of the concept of highest and best use. However, the paper referred to an interesting study in which managers of various large European firms admitted that they manage the difficulty in applying the fair value measurement requirements for non-financial assets as follows:

  1. finding a suitable result by strategically adapting IFRS 13 requirements;
  2. narrowing the problem to make it manageable (e.g. supply auditors with limited information in order to reduce any disagreements on this topic); and
  3. outsourcing the problem to external valuers.

Auditors also found the auditing of fair value measurements challenging because of the complexity of the underlying models, inputs and assumptions. This in turn led auditors to place more reliance on external specialists and to require clients to make additional disclosures.

Biological Assets (RFI question 6A)

A study showed that the use of fair value measurement raises a firm’s cost of debt, especially if the underlying assets are bearer plants. Another work-in-progress study showed that fair value measurement for biological assets is more useful when the asset will be realised through sale (agricultural produce) rather than through use (bearer plants). This may indicate that the use of fair value for bearer plants raises some challenges for investors and creditors.

Costs Related to Fair Value Measurement (RFI question 7)

The accounting literature discussed two types of costs related to fair value measurement: (1) audit fees, and (2) information processing costs.

Only three studies addressed the correlation between the extent of fair value measurements and audit fees. The results from these studies were inconclusive.

Regarding information processing costs, one work-in-progress study found that the higher the reporting complexity (i.e. having lots of fair value measurements, derivatives and pension obligations), the lower the coverage by analysts. The study suggested that this may be due to the specialisation required to understand complex accounts.


A couple of Board members commented on the US- and Euro-centric nature of the study and the insufficient coverage of non-English speaking countries, particularly emerging markets. They believed that it is important to understand the level 3 fair value measurement experience of emerging markets if the Board was to address the challenges adequately in that regard.

The discussion also indicated that there is value relevance in good fair value measurement disclosures, especially if preparers provide entity-specific information relating to level 3 fair value measurements. These disclosures are beneficial for the capital markets and there is a positive correlation between good disclosures and a company’s share price. One Board member said that this supports the Board providing education material on how to do a better job in providing the information required by IFRS 13 rather than dispensing with the disclosure requirements.

Feedback summary: Request for Information on IFRS 13 Post-implementation Review – Agenda Paper 7E


In this paper, the Staff summarised the feedback received on the RFI on the IFRS 13 PIR, including feedback from the Board’s consultative bodies.

Summary of feedback received

Respondents generally believed that IFRS 13 works well and has achieved its objectives. Their main areas of concern were consistent with those identified in phase 1 of the PIR.

All types of respondents (i.e. preparers, accounting firms, users, regulators etc.) asked the Board to clarify the unit of account issue for quoted investments. This is also known as the ‘PxQ’ issue, which refers to the determination of fair value of a quoted investment in subsidiary, associate or joint venture – should the unit of account be each individual share or the investment as a whole? While users prefer the fair value of the investment to be based on the quoted price regardless of the unit of account, preparers prefer the measurement to be based on the unit of account.

Most respondents commented on the usefulness of the IFRS 13 disclosure requirements. Users continued to request for further improvements, e.g. by ensuring appropriate disaggregation and transparency, and to require additional disclosures for level 2 measurements. In contrast and as expected, most preparers thought that the existing requirements are excessive and some are not useful from a cost-benefit perspective. Regulators and accounting firms expressed similar views as the preparers and both asked for improving usefulness without reducing disclosure requirements.

The determination of highest and best use for a non-financial asset remains an area of concern for some preparers. Many preparers also requested further guidance in areas concerning the application of judgement, measurement of biological assets and unquoted equity instruments, albeit to a lesser extent. However, they had different views about what that guidance should entail and who should provide it. Users of financial statements expressed little concern in these areas.

Almost all respondents commented that maintaining convergence with US GAAP is important to them and that it is a main driver for achieving comparability across the globe.


The Board spent a significant amount of time discussing the usefulness of IFRS 13 disclosures, especially on what could be done to help relieve preparers’ frustration and to align the interests of preparers and users.

The discussion centred on the usefulness of the quantitative sensitivity analysis for significant unobservable inputs in Level 3 measurements. This disclosure is not required under US GAAP and one Board member questioned whether and how such a disclosure provides useful information if stakeholders in the US are not seeking the same information on a converged Standard. Another problem is that the usefulness of the sensitivity analysis is often masked by over aggregation. Some Board members suggested providing education and real life examples to preparers on what good disclosures look like; however, others doubted the benefits of such activities because of the challenge of providing just the right level of disaggregation without cluttering the financial statements. This is where the disclosure initiative projects become relevant and several Board members suggested that they should do more to promote the use of the Materiality Practice Statement and that they could illustrate how it could be applied in the context of IFRS 13 disclosures.

There was also some discussion on providing more disclosures for level 2 measurements similar to those for level 3 measurements. This is because it is often a fine line distinguishing between these two levels and yet the disclosure requirements for them differ significantly.

Overall, given that there is general consensus that IFRS 13 is working well, the Chair asked that the Staff propose only changes that are absolutely necessary and not to waste time on nice-to-have improvements.

Research conducted during Phase 2 of the PIR – Agenda Paper 7G


This paper summarised other desk-based research conducted by the Staff as part of phase 2 of the IFRS 13 PIR.

The Staff searched through company financial reports and other publications to assess the following:

  • whether there are any voluntary disclosures of quantitative sensitivity analysis for Level 3 fair value measurements;
  • whether there are any instances where the highest and best use differs from current use; and
  • the nature of disclosures on valuation adjustments.

Research purpose and findings

Voluntary disclosures of sensitivity analysis

Preparers have often questioned the usefulness of the quantitative sensitivity analysis for Level 3 measurements because it is the most costly disclosure to prepare. This disclosure is not required under US GAAP. It is also not required for non-financial instruments under IFRS. The Staff therefore conducted research to see whether there are any voluntary disclosures in this regard because this may indicate that the information is perceived as being useful.

The Staff found a few companies (not an exhaustive search) that voluntarily disclosed a sensitivity analysis for investment properties. However, they did not find any American listed companies reporting under US GAAP in the past 12 months that voluntarily provided this disclosure.

Highest and best use differing from current use

Some stakeholders were concerned that the highest and best use concept may not be appropriate for operating assets, because some such assets could be assigned a nil value under the residual method when it is valued as part of a group of assets. The Staff therefore conducted research to assess how frequent it is that companies report a highest and best use that differs from the current use.

Out of a sample of 60 companies, the Staff found one such instance.

Disclosures about valuation adjustments

Several stakeholders have informed the Staff that some entities include credit valuation adjustments (CVA) and debit valuation adjustments (DVA) in the fair value measurements of financial instruments. However, the quality of the measurement of these adjustments varies depending on the entity’s sophistication and the availability of valuation skills and resources.

The Staff conducted research with the aim of understanding the nature of information, both quantitative and qualitative, that is disclosed about CVA and DVA adjustments.

The Staff reviewed over 15 companies’ financial statements with such adjustments. About half of these companies provided narrative disclosures and some form of numerical value for the adjustments. Some of these companies also indicated that CVA/DVA is a significant unobservable input.


No comments were raised on this paper.


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