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Agenda 3

• Part I: context and scope

• Part II: measurement of fair value
• Part III: valuation approaches and techniques
• Part IV: disclosures
Part I
• Part V: effective date and transition
Context and scope

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Before IFRS 13–dispersed and

Part I: context and scope 5 conflicting guidance 6

• Why IFRS 13 is necessary

• Scope—when IFRS 13 applies IAS 36 IAS 39/IFRS 9 IAS 40 IAS 41 Etc.

• Scope—what IFRS 13 does not apply to Topic 820 in US GAAP (codified SFAS 157)

IFRS 13
• Single source of measurement guidance
• Clear measurement objective
• Consistent and transparent disclosures about fair
value
1

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 The previous definition of fair value 7 When does IFRS 13 apply? 8

Fair value definition Its weaknesses • When another IFRS requires or permits fair value
measurements or disclosures about fair value
It did not specify whether an entity
is buying or selling the asset measurements
The amount for which an
asset could be It was unclear about what ‘settling’ • IFRS 13 also applies to measurements, such as fair
meant because it did not refer to value less cost to sell, based on fair value or
exchanged the creditor
or a liability settled disclosures about those measurements
It was unclear about whether it was
between knowledgeable, market-based
willing parties in an arm’s It did not state explicitly when the
length transaction. ? exchange or settlement takes place

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When does IFRS 13 apply? 9 What does IFRS 13 not apply to? 10

For example, if you own a biological asset… Excluded from the • IFRS 2 and IAS 17
scope

IAS 41 Disclosures in IFRS 13 • Plan assets (IAS 19)

What not required for • Retirement benefit plan
A biological asset shall be
and investments (IAS 26)
measured on initial recognition and
at the end of each reporting period • Assets for which recoverable
when
at its fair value less cost to sell amount is fair value less cost
of disposal (IAS 36)

IFRS 13 How Not required for • IAS 2 (net realisable value)

measurement similar to • IAS 36 (value in use)
fair value
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Part II: measurement of fair value 12

• Definition of fair value and measurement principles

• Considerations specific to non-financial assets
• Considerations specific to liabilities

Part II
Measurement of fair value

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 IFRS 13’s ‘new’ definition of fair value 14

New fair value definition Comments

It specifies that the entity is selling
… the price that would be the asset
received to
Definition of fair value and sell an asset or paid to It refers to the transfer of a liability
measurement principles transfer a liability in an It is not a forced or distressed sale
orderly transaction It is clear it is market-based
between market
participants at the It states explicitly when the sale or
transfer takes place
measurement date.

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Fair value at initial recognition 15 A hypothetical transaction price 16

Principal market (or most

advantageous market)
• Transaction price (entry price) = Fair value
(exit price) unless:
–Transaction takes place in different Market Market
participant participant
markets buyer seller
–Transactions are for different units of
account an asset
at the
–Seller is distressed or forced Fair value measurement
of a liability date
–Transactions are between related parties
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Who would transact for the item? 17 What is being measured? 18

• Market participants are buyers and sellers in the • Unit of account

principal (or most advantageous) market who are: – IAS 41: A biological asset shall be measured …
at its fair value less costs to sell…
Independent Knowledgeable • Characteristics
– Which characteristics would a market participant
Able to enter into a Willing to enter into buyer take into account?
transaction a transaction – age and remaining economic life
• Market participants act in their economic best – condition
interest – location
– restrictions on use or sale 3
– Maximise the value of the asset
– Minimise the value of the liability – contractual terms
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 Where would the transaction take
place? 19 Transaction and transport costs 20

Fair value is the price in the … Description Included in fair value?

Or, if no principal market, the
Principal market Transaction The costs to sell the asset No (Although they are
most advantageous market or transfer the liability that considered in the
The market with the greatest The market that maximises the costs are directly attributable to assessment of which
volume and level of activity for amount that would be received to the disposal of the asset market is most
or the transfer of the advantageous)
the asset or liability sell the asset and minimises the
liability They are a characteristic of
amount that would be paid to
the transaction, not of the
transfer the liability asset or liability
• In most cases, these markets will be the same
Transport The costs that would be Yes Transport changes a
– arbitrage opportunities will be competed away incurred to transport an characteristic of the asset
costs asset from its current (its location)
• The entity must have access to the principal (or most
location to its exit market
advantageous) market
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© IFRS Foundation

How do we arrive at a market-based

measurement? 21

Is there a quoted price in an active market for an identical asset or liability?

Yes No
Replicate a market price through a
Use this quoted price to
valuation technique* (using observable+
measure fair value (Level 1) and unobservable inputs: Levels 2 and 3) Considerations specific to
non-financial assets
Must use without adjustment No significant Use of significant
unobservable unobservable
(Level 3) inputs‡ = (Level 3) inputs‡ =
* Valuation techniques include the
Level 2 measurement Level 3 measurement
market approach, income approach
and cost approach.
+ Maximise the use of relevant observable inputs and minimise the use of unobservable
inputs. Observable inputs include market data (prices and other information that is publicly
available).
‡ Unobservable inputs include the entity’s own data (budgets, forecasts), which must be
adjusted if market participants would use different assumptions. © IFRS Foundation
© IFRS Foundation

Highest and best use 23 Highest and best use continued 24

• Fair value assumes a non-financial asset is • Highest and best use is determined from the
used by market participants at its highest and perspective of market participants, even if the entity
best use intends a different use.
–the use of a non-financial asset by market • However, an entity’s current use of a non-financial
asset is presumed to be its highest and best use
participants that maximises the value of
unless market or other factors suggest that a
the asset different use by market participants would maximise
– physically possible the value of the asset.
– legally permissible
– financially feasible 4

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 Highest and best use continued 25 Valuation premise 26

• A non-financial asset either:

• Highest and best use is usually (but not always) the – provides maximum value through its use in combination
current use with other assets and liabilities as a group
– if for competitive reasons an entity does not – is its value influenced by it being ‘operated’ with other
intend to use the asset at its highest and best assets?
use, the fair value of the asset should still be – an example: equipment used in production facility
– market participants are assumed to hold
measured assuming its highest and best use by
complementary assets
market participants (defensive value) – provides maximum value through its use on a stand-alone
• Does not apply to financial instruments or liabilities basis
– is its value independent of its use with other assets?
– an example: a vehicle or an investment property

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• Does not apply to financial instruments or liabilities
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Transfer notion–liabilities and an

entity’s own equity instruments 28

• Fair value assumes a transfer to a market

participant who takes on the obligation. The transfer
assumes:

Considerations specific to liabilities Liability or equity remains outstanding

Restrictions on transfer are already reflected in

inputs; no additional adjustment required
Fair value of a liability reflects the effect of
non-performance risk

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Decision tree—liability measurement 29 No corresponding asset 30

Yes
Is there an No
observable market Two possible ways to approach it:
price to transfer the
instrument? Does somebody hold the
1. Use the future cash flows that a market participant
Fair value =
observable market corresponding asset? would expect to incur in fulfilling the obligation,
price of instrument including the compensation that a market
Yes No
participant would require for taking on the
Fair value = Fair value = fair value of Fair value = another
observable market
obligation. Such compensation includes:
the corresponding asset valuation
price of asset technique* – the cost to fulfil the obligation plus a return for
Yes Is there an observable * Using the undertaking the activity; and
No market price for the perspective of a
instrument traded as an market participant that – a risk premium to compensate for the risk that
Fair value = asset?
owes the liability or
actual cash flows might differ from expected
5
issued the claim on
another valuation equity
technique Level 2 or 3
cash flows.
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© IFRS Foundation
No corresponding asset continued 31

2. Use the amount that a market participant would

receive to enter into or issue an identical liability or
equity instrument.

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