In: Accounting
IFRS 13 Fair Value Measurement 1 Introduction 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, also referred to as
the willing buyer-willing seller principle. It is important to note
that fair value is a market-based measurement and not an
entity-specific measurement. This guidance paper expands on the
concept of fair value, provides some theoretical information to the
valuation techniques prescribed in IFRS 13 Fair Value Measurement
and highlights some common misinterpretations of the Standard. This
guidance paper should be read with the IFRS Summary – IFRS 13 Fair
Value Measurement, which is available on http://www.pkf.com/ifrs
or, for PKF member firms, from PKF365. Effective date and
transition An entity shall apply this Standard for annual periods
beginning on or after 1 January 2013. Earlier application is
permitted. If an entity applies this IFRS for an earlier period, it
shall disclose that fact. This Standard shall be applied
prospectively as of the beginning of the annual period in which it
is initially applied. Amendment from Annual Improvements Cycle
2011–2013 issued in December 2013: An entity shall apply that
amendment for annual periods beginning on or after 1 July 2014. An
entity shall apply that amendment prospectively from the beginning
of the annual period in which IFRS 13 Fair Value Measurement was
initially applied. Earlier application is permitted. If an entity
applies that amendment for an earlier period it shall disclose that
fact. Understanding the fair value concept When determining fair
value of an asset or liability, cognisance must be given to what
the market participants would consider when determining an
appropriate price to pay or receive for that asset or liability.
Matters that market participants would consider include the
condition and location of the asset as well as the restrictions on
the sale or use of the asset. This Standard is very clear that
transaction costs should not be included in the fair value of the
asset or liability as these costs are not a characteristic of the
asset or liability, however the fair value must be adjusted to
consider any transport costs. Generally, the fair value of
non-financial assets proves to the be most difficult to determine,
given the fact that it may be difficult to determine the correct
market as well as the characteristics that market participants
would consider when determining an acceptable price. The Standard
states that the fair value of non-financial assets must be
determined regarding the highest and best use of the asset, even
when the counter-party to the transaction will not use the asset in
the same manner as the seller. However, the seller’s current use of
the asset is the highest and best use of the asset. When performing
the fair value calculation, entities must use valuation techniques
that are appropriate in the circumstances and for which sufficient
data are available to measure fair value, maximising the use of
relevant observable inputs and minimising the use of unobservable
inputs. IFRS 13 Fair Value Measurement 2 To increase the
consistency and comparability in fair value measurements and
related disclosures, this Standard established a fair value
hierarchy that categorises the inputs to valuation techniques into
three levels: • Level 1: Quoted (unadjusted) market prices in
active markets for identical assets or liabilities • Level 2:
Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly
observable • Level 3: Valuation techniques for which the lowest
level input that is significant to the fair value measurement is
unobservable This Standard requires entities to apply valuation
techniques consistent with any of the following three methods:
Market approach The market approach 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, such as a business. For example, valuation
techniques consistent with the market approach often use market
multiples derived from a set of comparables. Multiples might be in
ranges with a different multiple for each comparable. The selection
of the appropriate multiple within the range requires judgement,
considering qualitative and quantitative factors specific to the
measurement. Valuation techniques consistent with the market
approach include matrix pricing. Matrix pricing is a mathematical
technique used principally to value some types of financial
instruments, such as debt securities, without relying exclusively
on quoted prices for the specific securities, but rather relying on
the securities’ relationship to other benchmark quoted securities.
Income approach The income approach converts future amounts (e.g.
cash flows or income and expenses) to a single current (i.e.
discounted) amount. When the income approach is used, the fair
value measurement reflects current market expectations about those
future amounts. Those valuation techniques include, for example,
the following: (a) present value techniques; (b) option pricing
models, such as the Black-Scholes-Merton formula or a binomial
model (i.e. a lattice model), that incorporate present value
techniques and reflect both the time value and the intrinsic value
of an option; and (c) the multi-period excess earnings method,
which is used to measure the fair value of some intangible assets.
Cost approach The cost approach reflects the amount that would be
required currently to replace the service capacity of an asset
(often referred to as current replacement cost). From the
perspective of a market participant seller, the price that would be
received for the asset is based on the cost to a market participant
buyer to acquire or construct a substitute asset of comparable
utility, adjusted for obsolescence. That is because a market
participant buyer would not pay more for an asset than the amount
for which it could replace the service capacity of that asset.
Obsolescence encompasses physical deterioration, functional
(technological) obsolescence and economic (external) obsolescence
and is broader than depreciation for financial reporting purposes
(an allocation of historical cost) or tax purposes (using specified
service lives). In many cases the current replacement cost method
is used to measure the fair value of tangible assets that are used
in combination with other assets or with other assets and
liabilities. IFRS 13 Fair Value Measurement 3 Practical guidance
Determining the fair value of a financial asset or liability can be
a complicated process. The following illustrations highlight some
of the more common misinterpretations when applying the
requirements of IFRS 13, especially regarding categorisation into
the fair value hierarchy. They address aspects of IFRS 13 but are
not intended to provide interpretative guidance. Intangible assets
Generally, intangible assets cannot be traded in an active market.
An active market is defined as a market in which transactions for
the asset or liability take place with sufficient frequency and
volume to provide pricing information on an ongoing basis. Based on
this, the sale (and purchase) of intangible assets should be at the
very least categorised as a level 2 fair value measurement. Further
to this, the disclosure required will most likely only be included
on the acquisition date as subsequent to purchase, the asset would
be measured at cost (less accumulated amortisation and impairment).
Debt instruments Debt issuers must consider the extent of actively
trading in an active market; if trade is not active, it is
incorrect to classify their own debt instruments as being with the
level 1 hierarchy. Investment properties The inputs used to
determine fair value of investment properties are often not
observable, in which case they cannot be included in the level 2
hierarchy. Observable inputs are defined as inputs that are
developed using market data, such as publicly available information
about actual events or transactions, and that reflect the
assumptions that market participants would use when pricing the
asset or liability. Operational financial instruments Operational
financial instruments, such as trade receivables and trade
payables, finance leases, loans receivable and loans payable,
cannot be included in the level 2 hierarchy due to the inputs not
being observable. Interim financial statements Entities that are
required to prepare interim statements in accordance with IAS 34
Interim Financial Reporting are reminded that the disclosure
requirements contained in IFRS 13 Fair Value Measurement are also
required in the interim statements, where items are measured at
fair value and the fair values of those items were also determined
at the interim period. Conclusion IFRS 13 Fair Value Measurement is
a single source of fair value measurement guidance that clarifies
the definition of fair value, provides a clear framework for
measuring fair value and enhances the disclosures about fair value
measurements. It is also the result of the efforts of the IASB and
the FASB to ensure that fair value has the same meaning in IFRSs
and in US GAAP and that their respective fair value measurement and
disclosure requirements are the same (except for minor differences
in wording and style). IFRS 13 Fair Value Measurement applies to
IFRSs that require or permit fair value measurements or
disclosures. It does not introduce new fair value measurements, nor
does it eliminate practicability exceptions to fair value
measurements. In other words, IFRS 13 Fair Value Measurement
specifies how an entity should measure fair value and disclose
information about fair value measurements. It does not specify when
an entity should measure an asset, a liability or its own equity
instrument at fair value.
Fair Value Accounting
PART A
GanJee Pty Limited (GanJee) owns and develops properties in the
Gosford CBD on the Central Coast of NSW. Upon completion of
construction the company leases the apartments and retail space and
provides tennants services including waste removal, maintenance and
shared facilities like airconditioning. All leases are signed for a
period of less than 5 years and are then reviewed before renewal or
extension.
You wish to establish the fair value of one of GanJee’s Gosford
properties using AASB 13/IFRS 13. GanJee purchased the property in
2001 when the Gosford CBD was in decline. At the time, GanJee was
able to snap up the property for $0.5 million. In 2015, existing
property was demolished and GanJee constructed two impressive tower
block buildings with retail space below. The property also includes
a hotel, office space and apartments. Construction was expensive,
costing $400 million.
You have ascertained the following information for your
assessment:
• The company commissioned the expert opinion of two reputable
independent expert appraisers. These appraisers delivered valuation
A and valuation B.
Valuation A contained the appraiser’s opinion that the property
value for GanJee’s Gosford holding had a fair value of $1.3 billion
based upon earnings before interest and tax multiplied by a
conservative earnings multiple of 6 which is more likely to be
considered fair by a potential buyer for the properties.
The second valuer in providing valuation B expressed the opinion
that the properties had a fair value of $2.75 billion based upon
earnings before interest and tax multiplied by an earnings multiple
of 8 which is more likely to be considered fair by a potential
seller of the property. Both appraisers acknowledged that valuing
the property in the current economic climate was difficult as
generally there are very few sales of comparable properties. The
appraisers communicated that they used their experience in
observing valuations of residential rather than commercial and
residential properties.
The directors estimate that the current cost of replacing the
property would be $1.8 billion based on the current design with
today’s construction costs, including labour, materials and
overheads. Property prices in the Gosford CBD have increased
substantially since 2001. The CBD went through a rapid growth phase
in 2017 but there is currently a lull as the City Council does not
wish to have new development. The GanJee property is surrounded by
fairly derelict buildings which makes valuation difficult.
• Present value of future cash flows: The directors have calculated
net cash inflows over the next 20 years estimated to be $300
million per year, based on projected cash flows from rental income,
tax savings and expenditures. The directors expect that the
building will need substantial renovation in 20 years’ time. The
directors based their valuation on the following factors:
✓ discount rate of 11.5% to 14.5%;
✓ average subsequent tenure period of ten years for retail units
(ILU) and four years for serviced apartments (SA).
Required
Discuss each of the above four values as a basis for establishing a
fair value for the property. In accordance with AASB 13/IFRS 13
which methodology do you believe is most appropriate? What
additional information if any would you wish to obtain to make a
better estimate?
PART B
Walkabout Park wants to determine fair value of the animals in
their zoo. They hold the animals primarily for breeding and
preservation of native species but also for the benefit of the
local population and school group visits.
Required
Provide your recommendation for how the entity should go about
measuring the biological assets’ fair value. In your response
provide an explanation of possible alternatives and justify your
recommendation.
1.Fair value measurement:
its also known as exit price.It defines the price that would be
received to sell or paid to transfer of a liabulity.
its a financial reporting approach known as mark to market accounting practice.changes in values of assets or liabulities over time to generate wither profit or losses as well as in balance sheet.
Values as basis of establishing a fair value of the property accordance to IFRS:
a.Income transparency:
it limits the companies ability to manipulate its net income.using fair value accounting,losses or any gains from change of asset or liabulity will be reported in period when ever it occurs.if its increase in asset value then it adds to net income and vice versa.
b.Valuation:
fair value accounting provides accurate asset and liabulity valuations for the users of the companies financial statements.the company marks doen the valuation of income or loss to reflect in its statements.
2.Biological Assets:
Assets that are living,example trees animals etc.companies will value them by classifying by type and attributing its value.
these are measured as Fair value -Selling costs.
biological costs also include crops that are grown by farmers.
Measurement:
1.Agriculture produce is measured as Fair value less estimated costs to sell at harvesting time.
2.changes in initial recognition during the period are included in profit or loss
3.All costs related to these assets at fair value will be recognised as expenses other that costs to purchase tghem.
4.Gain or loss whatever it is that have to be included in profit and loss account for the period in which it arises.
its also known as exit price.It defines the price that would be
received to sell or paid to transfer of a liabulity.
its a financial reporting approach known as mark to market accounting practice.changes in values of assets or liabulities over time to generate wither profit or losses as well as in balance sheet.
Values as basis of establishing a fair value of the property accordance to IFRS:
a.Income transparency:
it limits the companies ability to manipulate its net income.using fair value accounting,losses or any gains from change of asset or liabulity will be reported in period when ever it occurs.if its increase in asset value then it adds to net income and vice versa.
b.Valuation:
fair value accounting provides accurate asset and liabulity valuations for the users of the companies financial statements.the company marks doen the valuation of income or loss to reflect in its statements.
2.Biological Assets:
Assets that are living,example trees animals etc.companies will value them by classifying by type and attributing its value.
these are measured as Fair value -Selling costs.
biological costs also include crops that are grown by farmers.
Measurement:
1.Agriculture produce is measured as Fair value less estimated costs to sell at harvesting time.
2.changes in initial recognition during the period are included in profit or loss
3.All costs related to these assets at fair value will be recognised as expenses other that costs to purchase tghem.
4.Gain or loss whatever it is that have to be included in profit and loss account for the period in which it arises.