Question

Give a detailed overview of accounting standard IFRS 13 fair value measurement and the topics involved in it. Also give two numericals examples related to the standard

Answer 1

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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

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.

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.

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.