Question

Explain two challenges in implementing MFRS13 Fair Value Measurement standard. Then, suggest ways to improve the existing standard.

Answer 1

Fair value reporting is by very nature a difficult financial reporting standard, because financial reporting likes to present hard facts and valuation in just about every case will be based on known facts, but it still requires expression of an opinion and not simply reporting a fact.

IFRS 13 requires three levels of input or valuation basis or methods when determining fair value. Level 1 which is the primary method that should be used because it is based on there being an established market with quoted prices for the asset or liability being valued. Level 2 while somewhat more difficult and "nebulous" is still based on there being an established market and the only thing lacking from a Level ! input is the existense of a quoted price, but still there is an established market to help establish a fair value.

I believe the greatest difficulty in implementation comes with Level 3 input which is where there is no established market for the financial item being valued. In reality Level 3 input would probably apply to some degree to a majority of assets or liabilities that might need to be valued for financial reporting purposes.

Finally reporting fair value under IFRS 13 by definition requires making certain assumptions. It does require disclosure of the basis for those assumptions, but once again you are not dealing with facts when you make assumptions.