1 / 6

IFRS 13 Fair Value Measurement- Part 1

Under IFRS, fair value is one of the vital measurement basis for the measurement or disclosure of few assets and liabilities. Some of the IFRSs contained limited guidance about how to measure fair value, whereas others contained extensive guidance and that guidance was not always consistent and sometimes ambiguous. Inconsistencies in the requirements for measuring fair value and for disclosing information about fair value measurements have contributed to diversity in practice and have reduced the comparability. This resulted in the issue of IFRS 13 u2013 Fair value measurements, providing single s

finpro
Télécharger la présentation

IFRS 13 Fair Value Measurement- Part 1

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. IFRS 13: FairValueMeasurement- Part1 UnderIFRS,fairvalueisoneofthevitalmeasurementbasisforthemeasurementordisclosureoffewassetsandliabilities.SomeoftheIFRSscontainedlimitedguidanceabouthowtomeasurefairvalue,whereasotherscontainedextensiveguidanceandthatguidancewasnotalwaysconsistentandsometimesambiguous.Inconsistenciesintherequirementsformeasuringfairvalueandfordisclosinginformationaboutfairvaluemeasurementshavecontributedtodiversityinpracticeandhavereducedthecomparability.ThisresultedintheissueofIFRS13– Fairvaluemeasurements,providingsinglesourceofguidanceonallfairvaluemeasurement,clarityindefinition,reducingearlierambiguityandenhancingdisclosuresetc. IFRS13providesframeworkformeasuringfairvalue,enhancingconsistencyandcomparabilityinfinancialreporting.Inthisblogwe’lldiscuss,evaluatethedefinitionoffairvalueanditskeyaspectsanddeterminehowtoapplythesameinarrivingatthefairvalueunderIFRS13.IFRS13definesfairvalueandprovidesthevariousapproachestoarriveatthefairvalueofanassetoraliabilityusingdifferentlevelsofinputs. DefinitionofFairValue(FV) IFRS 13 defines fair value as: Thepricethatwouldbereceivedtosellanassetorpaidtotransferaliability; Inanorderlytransaction;3.Betweenmarketparticipants;4.Atthemeasurementdate. Fairvalueistheexitpriceandisamarket-basedmeasurementandnotentityspecificmeasurement.Thus,FVisnotaffectedbyanentity’sintentionstowardstheasset,liabilityorequityitemthatisbeingfairvalued. Fairvalueisan estimate of pricebasedonthe exit pricefromtheperspective of marketparticipantsinanorderlytransactionwhoholdtheassetorowetheliabilityatthemeasurementdate.

  2. Suchanestimateofpriceforanassetoraliabilityshallbebasedonidenticalorsimilarassetoraliability.However,whensuchpriceisnotobservable,thenestimateshallbebasedonanothervaluationtechniquewhichmaximisestheuseofobservableinputsandminimisestheuseofunobservableinputs.Suchanestimateofpriceforanassetoraliabilityshallbebasedonidenticalorsimilarassetoraliability.However,whensuchpriceisnotobservable,thenestimateshallbebasedonanothervaluationtechniquewhichmaximisestheuseofobservableinputsandminimisestheuseofunobservableinputs. IFRS13requiresmanagementtodeterminefouraspectswhiledeterminingFV: 1.Assetorliabilitysubjecttomeasurement(unitofaccount);2.The(orderly)transaction 3.Marketparticipants;4.The(exit)price. Wewillnowcheckeachoneoftheaboveaspectswhichwillcontributetoarriveatthefairvalueoftheassetoraliability. 1.Assetorliabilitysubjecttomeasurement(Unitofaccount) ThefairvalueisforaparticularassetorliabilityorgroupofassetsorliabilitiesdependingontherequirementsofrespectiveIFRSforwhichentityiscalculatingfairvalue.Oneshouldalsoconsiderphysicalcharacteristicsoftheassetsubjecttofairvalue. Thisessentiallydefinesthelevel of aggregationordisaggregationwhilecalculatingfairvaluesoftheassets/liabilities. Example1-EntitySpecificrestrictions AnentityABCishavingalandwhichhasarestrictiontodevelopintoacommercialhousebecauseofrestrictedbusinessobjectiveinwhichcurrentlytheentityoperates.Theentitywantstosellthelandandtherewouldnotbeanyrestrictionforabuyerofthelandtodevelopacommercialhouse,sincethisrestrictionisentityspecific.Hence,itwillnotbeconsideredwhilecalculatingfairvalueoftheland.

  3. Examples2-Asset/Liabilityspecificrestrictions • Acarhasbeenboughtforprivateuseandthereisarestrictionofnottousethecarforanycommercialpurposes.Commercialvehicleishavingmorefairvaluethanprivatevehicle.Sincetherestrictiontousethevehicleisassetspecificandmarketparticipantwillalsoconsidertheassetspecificrestrictionswhilecalculatingfairvaluesforsuchasset,hencethisconditionwillbeconsideredwhileevaluatingfairvalueofthecar. • 2.The(orderly)transaction • Afairvaluemeasurementassumesthattheassetorliabilityisexchangedinanorderlytransaction. • Anorderlytransactionisthetransactionwhichtakesplaceintheprincipalmarketorincaseofabsenceofprincipalmarket,the most advantageous market. • Principal market – • Itisthemarketwithgreatestvolumeandlevelofactivityfortheassetorliability. • Fore.g.StockpriceofTMLonNSEisINR600(Volume– 1.5million)andstockpriceonBSEisINR610(Volume– 1million);thus,principalmarketisNSE,thusfairvaluewouldbeINR600. • Most advantageous market – • Itisthemarketthatmaximisestheamounttobereceivedforselloftheassetorminimisestheamounttobetransferredofliability. • Whiledeterminingthismarket– entitywouldreduce transaction costsfromtheexitpriceonlytoevaluatemaximumcashrecoveryamongstavailablemarkets.Afterdeciding‘mostadvantageousmarket’,fairvalueofthatmarketwouldbearrivedbyaddingbackthetransactioncosttotheexitprice. • Transportationcostisnotatransactioncost,itisaphysicalattributeoftheassetundermeasurement. • Anentityneednotundertakeanexhaustivesearchforallpossiblemarketstodeterminetheprincipalmarketormostadvantageousmarket. • Most advantageous market is to be consideredforfairvaluedeterminationonly whenthere is noinformationavailablefortheprincipal market. • Theentitymusthaveaccesstotheprincipal(ormostadvantageous)marketatthemeasurementdateasdifferententitieswithdifferentbusinessactivitiesmayhaveaccesstothedifferentmarkets. • Althoughanentitymustbeabletoaccessthemarket,theentitydoesnotneedtobeabletoselltheparticularassetortransfertheliabilityonthemeasurementdatetobeabletomeasurefairvalue. • Itisahypotheticalsaletransactiononameasurementdatethatestablishesabasisforestimatingthepricewhichwillbeconsideredasafairvalueofanassetoraliability. • Example3 • SharesofacompanywhichislistedatBSEandNSEhavedifferentclosingpricesattheyearend.ThepriceatBSEhasgreatestvolumeandactivitywhereasatNSEitislessintermsofvolumetransactedintheperiod.SinceBSEhasgothighestvolumeandsignificantlevelofactivity

  4. comparingtoothermarketalthoughtheclosingpriceishigheratNSE,theclosingpriceatBSEwouldbetaken.comparingtoothermarketalthoughtheclosingpriceishigheratNSE,theclosingpriceatBSEwouldbetaken. Example4 Diamond(acommodity)hasgotadomesticmarketwherethepricesarelesscomparedtothepriceavailableforexportofsimilardiamonds.TheGovernmenthasapolicytocaptheexportofDiamond,maximumupto10%oftotaloutputbyanysuchmanufacturer.Thenormalactivitiesofdiamondarebeingdoneinthedomesticmarketonlyi.e.90%andbalance10%onlycanbesoldviaexport.Thehighestlevelofactivitieswiththehighestvolumeisbeingdoneinthedomesticmarket.Hence,theprincipalmarketfordiamondwouldbethedomesticmarket.Exportpricesaremorethanthepricesintheprincipalmarket,anditwouldgivethehighestreturnascomparedtothedomesticmarket.Therefore,theexportmarketwouldbeconsideredasthemostadvantageousmarket.However,ifprincipalmarketisavailable,thenitspriceswouldbeusedforfairvaluationofassets/liabilities. 3.Marketparticipants Marketparticipantsarebuyersandsellersintheprincipalmarketorthemostadvantageousmarketthatare: Independenti.e.notrelatedparties; Knowledgeablei.e.havingreasonableunderstandingabouttheasset/liabilityandthetransaction; Abletotransact; Willingtotransactintheassetorliability. Itisassumedthatthemarketparticipantsactintheirbesteconomicinteresti.e.marketparticipantsseektomaximisethefairvalueofanassetorminimisethefairvalueofaliability. 4.The(exit)price UnderIFRS13,fairvalueestimateisbasedonthe"exitprice"anddoesnotconsiderentrypriceorreplacementcostetc. IFRS13,prohibitstoadjusttransactioncostinthefairvalueestimateasitisspecifictotransaction. Transactioncostdonotinclude'transportcosts'.Locationisgenerallythecharacteristicoftheassetandthus,theexitpriceshallbeadjustedforthetransportcostthatwouldbeincurredtotransferassetfromcurrentlocationtoprincipalmarket. Example5 Anentitysellscertaincommoditywhichareavailableactivelyatlocation‘X’ andwhichisconsideredtobeitsprincipalmarket(beingsignificantvolumeoftransactionsandactivitiestakesplace).However,fairvalueofthecommodityisrequiredtobeassessedforlocation‘Y’ whichisfarfromlocation‘X’ andrequiresatransportcostofRs.100.Sincethetransportcostisnotatransactioncostanditisnotspecifictoanytransaction,butitisinherentcostwhichrequiredtobeincurredwhilebringingsuchcommodityfromlocationXtolocationY,itwillbeconsideredwhileevaluatingfairvaluefromtheprincipalmarket. Example6 XYZLimitedholdsanassetthatistradedinthreedifferentmarkets.XYZgenerallytradesinMarket3,however,thedetailsofothermarketsareasbelow:

  5. Calculatethefairvaluebasedoninformationprovided. • Assumethatprincipalmarketisnotdeterminableforabsenceoftotalvolumesineachmarketandcalculatefairvalue. • Solution • Fairvalueistheexitpriceoftheassetintheprincipalmarketorinabsenceofprincipalmarket,themostadvantageousmarket.Principalmarketisthemarketwithhighestvolume,whichisreadilydeterminable.Inaboveexample,Market1isthemarketwiththehighestvolumeamongstallthreemarketsandwillbeconsideredasprincipalmarket.Hence,exitpriceinMarket1willbeconsideredasfairvalue. • Exitpriceisthepricethatwouldbereceivedtosellanassetinquestion.Exitpricetobedeterminedafterconsideringthetransportcostsbutbeforethetransactioncosts.Transportcostisthecostassociatedwithphysicalcharacteristics(location)oftheassetandnotwiththesaletransactionofanasset.Transactionalcharacteristicscannotbeconsideredwhilearrivingattheexitprice.Itisthus,prohibitedtoadjusttransactioncostswhilearrivingattheexitprice.Thus,fairvalueoftheassetincase‘XYZ’ is57. b.Assuming,principalmarketisnotreadilydeterminable,evaluationofexitpricewillbebasedonthe‘mostadvantageousmarket’.Mostadvantageousmarketisevaluatedbasedonhighestcashrecoveryamongsttheavailablemarkets.CashrecoveryishighestinMarket3afterconsideringtheexpensetowardsthetransactioncosts.ThismakesMarket3asmostadvantageousmarket.TheexitpriceinMarket3willbeconsideredasfairvalueinsecondscenario.Exitpriceinmarket3is59beforeadjustingtransactioncostsandNOT 57.Itmeansthat,transactioncostsshallbedeductedonlytodeterminethehighestcashrecoveryandconsequentlythemostadvantageousmarket.Thus,fairvalueofassetinsecondscenariois59. Wehopethisbloghelpstounderstandthefairvaluedefinition,variousaspectsmanagementrequirestodetermineunderIFRS13,andotherfactorsneedtobeconsideredwhilemeasuringfairvalueofassetorliability,withthehelpofsuitableexamples&questionaswell.Inournextblogwe’lloutlinesomeotherconceptsoffairvaluemeasurementlike– considerationfornon-financialassets,valuationtechniquesandfairvaluehierarchy.

  6. Thankyouforreadingthisarticle.Staytunedformoresimplifiedinsightsonaccountingstandards!Thankyouforreadingthisarticle.Staytunedformoresimplifiedinsightsonaccountingstandards!

More Related