Workbook on IFRS 13 Fair value measurement

Introduction

IFRS 13:

(i)     defines fair value;

(ii)     sets out in a single IFRS a framework for measuring fair value; and

(iii)    specifies disclosures about fair value measurements.

 

IFRS 13 applies to IFRSs that require or permit fair value measurements, or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in specified circumstances.

IFRS 13 explains how to measure fair value for financial reporting. 

It does not require fair value measurements in addition to those already required, or permitted, by other IFRSs.

Reasons for issuing IFRS 13

Some IFRSs require, or permit, undertakings to measure, or disclose, the fair value of assets, liabilities or their own equity instruments. 

Guidance was not always consistent across those IFRSs that refer to fair value. 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 of information reported in financial statements. 

IFRS 13 remedies that situation.

 Key Changes 

The definition of fair value has changed to:  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.  This is a minor change to the wording.

 

The Fair Value Hierarchy, first seen as an amendment to IFRS 7, is central to IFRS 13. Simplistically:

 

	Level 1	Level 2	Level 3
Inputs Observable/Unobservable	Observable	Observable	Unobservable
Comparables	Identical	Similar	Not similar
Examples	Foreign currency, Listed shares and bonds	Property	Unlisted shares

 

Fair value uses the highest level possible. Any combination of levels reduces the fair value to the lowest level of the combination.

Main features

IFRS 13 defines fair value 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 (an exit price). 

That definition of fair value emphasises that fair value is a market-based measurement, not an undertaking-specific measurement. When measuring fair value, an undertaking uses the assumptions that market participants would use when pricing the asset, or liability, under current market conditions, including assumptions about risk. 

 As a result, an undertaking's intention to hold an asset, or to settle or otherwise fulfil a liability, is not relevant when measuring fair value. 

IFRS 13 explains that a fair value measurement requires an undertaking to determine the following:

(i)     the particular asset, or liability, being measured;

(ii)     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;

(iii)     the market in which an orderly transaction would take place for the asset, or liability; and

(iv)     the appropriate valuation technique(s) to use when measuring fair value. The valuation technique(s) used should maximise the use of relevant observable inputs and minimise unobservable inputs. Those inputs should be consistent with the inputs a market participant would use when pricing the asset, or liability.

Objective

IFRS 13:

(i)     defines fair value;

(ii)     sets out in a single IFRS a framework for measuring fair value; and

(iii)     requires disclosures about fair value measurements.

 

Fair value is a market-based measurement, not an undertaking-specific measurement. For some assets and liabilities, observable market transactions, or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available.

However, the objective of a fair value measurement in both cases is the same - to estimate the price at which an orderly transaction to sell the asset, or to transfer the liability, would take place between market participants, at the measurement date, under current market conditions (an exit price at the measurement date from the perspective of a market participant that holds the asset, or owes the liability).

 

When a price for an identical asset, or liability, is not observable, an undertaking measures fair value using another valuation technique that maximises the use of relevant observable inputs, and minimises the use of unobservable inputs.

 

As fair value is a market-based measurement, it is measured using the assumptions that market participants would use when pricing the asset, or liability, including assumptions about risk. As a result, an undertaking's intention to hold an asset, or to settle or otherwise fulfil a liability, is not relevant when measuring fair value.

 

The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting measurement. In addition, IFRS 13 shall be applied to an undertaking's own equity instruments measured at fair value.

 

Scope

IFRS 13 applies when another IFRS requires, or permits, fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements).

The measurement and disclosure requirements of IFRS 13 do not apply to the following:

(i)     share-based payment transactions within the scope of IFRS 2 Share-based Payment;

(ii)     leasing transactions within the scope of IFRS 16 Leases; and

(iii)     measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.

 

The disclosures required by IFRS 13 are not required for the following:

(i)     plan assets measured at fair value in accordance with IAS 19 Employee Benefits;

(ii)     retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and Reporting by Retirement Benefit Plans; and

(iii)     assets for which recoverable amount is fair value less costs of disposal, in accordance with IAS 36.

 

Short-term receivables and payables may be presented at invoice amounts where the impact of not discounting is immaterial.

 

The fair value measurement framework described in IFRS 13 applies to both initial and subsequent measurement if fair value is required or permitted by other IFRSs.

  

Measurement

Definition of fair value

IFRS 13 defines fair value 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.

The asset, or liability

A fair value measurement is for a particular asset, or liability,. Therefore, when measuring fair value an undertaking shall take into account the characteristics of the asset, or liability, if market participants would take those characteristics into account when pricing the asset, or liability, at the measurement date. Such characteristics include, for example, the following:

(i)     the condition and location of the asset; and

(ii)     restrictions, if any, on the sale or use of the asset.

The effect on the measurement arising from a particular characteristic will differ depending on how that characteristic would be taken into account by market participants.

 

The asset, or liability, measured at fair value might be either of the following:

(i)     a stand-alone asset, or liability (such as a financial instrument or a non-financial asset); or

(ii)     a group of assets, a group of liabilities, or a group of assets and liabilities (such as a cash-generating unit, or a business).

 

Whether the asset, or liability, is a stand-alone asset, or liability, a group of assets, a group of liabilities or a group of assets and liabilities for recognition or disclosure purposes depends on its unit of account. The unit of account for the asset, or liability, shall be determined in accordance with IFRS 13 that requires, or permits, the fair value measurement, except as provided in IFRS 13.

 

The transaction

A fair value measurement assumes that the asset, or liability, is exchanged in an orderly transaction between market participants to sell the asset, or transfer the liability, at the measurement date under current market conditions.

 

A fair value measurement assumes that the transaction to sell the asset, or transfer the liability, takes place either:

(i)     in the principal market for the asset, or liability; or

(ii)     in the absence of a principal market, in the most advantageous market for the asset, or liability.

An undertaking need not undertake an exhaustive search of all possible markets to identify the principal market or, in the absence of a principal market, the most advantageous market, but it shall take into account all information that is reasonably available. In the absence of evidence to the contrary, the market in which the undertaking would normally enter into a transaction to sell the asset, or to transfer the liability, is presumed to be the principal market or, in the absence of a principal market, the most advantageous market.

If there is a principal market for the asset, or liability, the fair value measurement shall represent the price in that market (whether that price is directly observable or estimated using another valuation technique), even if the price in a different market is potentially more advantageous at the measurement date.

The undertaking must have access to the principal (or most advantageous) market at the measurement date. As different undertakings (and businesses within those undertakings) with different activities may have access to different markets, the principal (or most advantageous) market for the same asset, or liability, might be different for different undertakings (and businesses within those undertakings).  

Therefore, the principal (or most advantageous) market (and thus, market participants) shall be considered from the perspective of the undertaking, thereby allowing for differences between and among undertakings with different activities.

Although an undertaking must be able to access the market, the undertaking does not need to be able to sell the particular asset, or transfer the particular liability, on the measurement date to be able to measure fair value on the basis of the price in that market.

Even when there is no observable market to provide pricing information about the sale of an asset, or the transfer of a liability, at the measurement date, a fair value measurement shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset, or owes the liability. That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability.

Market participants

An undertaking shall measure the fair value of an asset, or a liability, using the assumptions that market participants would use when pricing the asset, or liability,, assuming that market participants act in their economic best interest.

In developing those assumptions, an undertaking need not identify specific market participants. Rather, the undertaking shall identify characteristics that distinguish market participants generally, considering factors specific to all the following:

(i)     the asset, or liability,;

(ii)     the principal (or most advantageous) market for the asset, or liability,; and

(iii)     market participants with whom the undertaking would enter into a transaction in that market.

The price

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (an exit price), regardless of whether that price is directly observable, or estimated using another valuation technique.

The price in the principal (or most advantageous) market used to measure the fair value of the asset, or liability, shall not be adjusted for transaction costs. Transaction costs shall be accounted for in accordance with other IFRSs. Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a transaction and will differ depending on how an undertaking enters into a transaction for the asset, or liability.

Transaction costs do not include transport costs. If location is a characteristic of the asset (as might be the case, for example, for a commodity), the price in the principal (or most advantageous) market shall be adjusted for the costs, if any, that would be incurred to transport the asset from its current location to that market.

Application to non-financial assets-Highest and best use for non-financial assets

 

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate benefits by using the asset in its highest and best use, or by selling it to another market participant that would use the asset in its highest and best use.

 The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows:

(i)     A use that is physically possible takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (such as the location, or size, of a property).

(ii)     A use that is legally permissible takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (such as the zoning regulations applicable to a property).

(iii)     A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income, or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset, put to that use.

 

Highest and best use is determined from the perspective of market participants, even if the undertaking intends a different use. However, an undertaking's current use of a non-financial asset is presumed to be its highest and best use, unless market or other factors suggest that a different use by market participants would maximise the value of the asset.

To protect its competitive position, or for other reasons, an undertaking may intend not to use an acquired non-financial asset actively, or it may intend not to use the asset according to its highest and best use. For example, that might be the case for an acquired intangible asset that the undertaking plans to use defensively by preventing others from using it. Nevertheless, the undertaking shall measure the fair value of a non-financial asset assuming its highest and best use by market participants.

 

Valuation premise for non-financial assets

The highest and best use of a non-financial asset establishes the valuation premise used to measure the fair value of the asset, as follows:

(1)     The highest and best use of a non-financial asset might provide maximum value to market participants through its use in combination with other assets as a group (as installed, or otherwise configured for use), or in combination with other assets and liabilities (such as a business). 

(i)     If the highest and best use of the asset is to use the asset in combination with other assets, or with other assets and liabilities, the fair value of the asset is the price that would be received in a current transaction to sell the asset, assuming that the asset would be used with other assets, or with other assets and liabilities, and that those assets and liabilities (its complementary assets and the associated liabilities) would be available to market participants.

(ii)     Liabilities associated with the asset and with the complementary assets include liabilities that fund working capital, but do not include liabilities used to fund assets other than those within the group of assets. 

(iii)     Assumptions about the highest and best use of a non-financial asset shall be consistent for all the assets (for which highest and best use is relevant) of the group of assets, or the group of assets and liabilities, within which the asset would be used.

(2)     The highest and best use of a non-financial asset might provide maximum value to market participants on a stand-alone basis. If the highest and best use of the asset is to use it on a stand-alone basis, the fair value of the asset is the price that would be received in a current transaction to sell the asset to market participants that would use the asset on a stand-alone basis.

  

The fair value measurement of a non-financial asset assumes that the asset is sold consistently with the unit of account specified in other IFRSs (which may be an individual asset). That is the case even when that fair value measurement assumes that the highest and best use of the asset is to use it in combination with other assets, or with other assets and liabilities because a fair value measurement assumes that the market participant already holds the complementary assets and the associated liabilities.

Application to liabilities and an undertaking's own equity instruments

General principles

A fair value measurement assumes that a financial or non-financial liability, or an undertaking's own equity instrument (such as equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer of a liability, or an undertaking's own equity instrument, assumes the following:

(i)     A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation. The liability would not be settled with the counterparty, or otherwise extinguished on the measurement date.

(ii)     An undertaking's own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled, nor otherwise extinguished on the measurement date.

Even when there is no observable market to provide pricing information about the transfer of a liability, or an undertaking's own equity instrument (as contractual, or other legal restrictions prevent the transfer of such items), there might be an observable market for such items, if they are held by other parties as assets (such as a corporate bond, or a call option, on an undertaking's shares).

 

In all cases, an undertaking shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs to meet the objective of a fair value measurement, which is to estimate the price at which an orderly transaction to transfer the liability, or equity instrument, would take place between market participants at the measurement date under current market conditions.

 

Liabilities and equity instruments held by other parties as assets

 When a quoted price for the transfer of an identical or a similar liability or undertaking's own equity instrument is not available and the identical item is held by another party as an asset, an undertaking shall mea sure the fair value of the liability, or equity instrument, from the perspective of a market participant that holds the identical item as an asset at the measurement date.

In such cases, an undertaking shall measure the fair value of the liability, or equity instrument, as follows:

(1)     using the quoted price in an active market for the identical item held by another party as an asset, if that price is available.

(2)     if that price is not available, using other observable inputs, such as the quoted price in a market that is not active for the identical item held by another party as an asset 

(3)     if the observable prices in (1) and (2) are not available, using another valuation technique, such as:

(i)     an income approach (such as a present value technique that takes into account the future cash flows that a market participant would expect to receive from holding the liability, or equity instrument as an asset).

(ii)     a market approach (such as using quoted prices for similar liabilities, or equity instruments, held by other parties as assets).

An undertaking shall adjust the quoted price of a liability, or an equity instrument, held by another party as an asset only if there are factors specific to the asset that are not applicable to the fair value measurement of the liability, or equity instrument. An undertaking shall ensure that the price of the asset does not reflect the effect of a restriction preventing the sale of that asset.

 

Some factors that may indicate that the quoted price of the asset should be adjusted include the following:

(i)     The quoted price for the asset relates to a similar (but not identical) liability, or equity instrument, held by another party as an asset. For example, the liability or equity instrument may have a particular characteristic (eg the credit quality of the issuer) that is different from that reflected in the fair value of the similar liability, or equity instrument, held as an asset.

(ii)     The unit of account for the asset is not the same as for the liability or equity instrument. For example, for liabilities, in some cases the price for an asset reflects a combined price for a package comprising both the amounts due from the issuer and a third-party credit enhancement.

If the unit of account for the liability is not for the combined package, the objective is to measure the fair value of the issuer's liability, not the fair value of the combined package. Thus, in such cases, the undertaking would adjust the observed price for the asset to exclude the effect of the third-party credit enhancement.

 

Liabilities and equity instruments not held by other parties as assets

 

When a quoted price for the transfer of an identical, or a similar liability, or undertaking's own equity instrument is not available and the identical item is not held by another party as an asset, an undertaking shall measure the fair value of the liability, or equity instrument using a valuation technique from the perspective of a market participant that owes the liability, or has issued the claim on equity.

For example, when applying a present value technique an undertaking might take into account either of the following 

(i)     the future cash outflows that a market participant would expect to incur in fulfilling the obligation, including the compensation that a market participant would require for taking on the obligation.

(ii)     the amount that a market participant would receive to enter into or issue an identical liability, or equity instrument, using the assumptions that market participants would use when pricing the identical item (having the same credit characteristics) in the principal (or most advantageous) market for issuing a liability, or an equity instrument, with the same contractual terms.

 

Non-performance risk

 The fair value of a liability reflects the effect of non-performance risk. Non-performance risk includes, but may not be limited to, an undertaking's own credit risk. Non-performance risk is assumed to be the same before and after the transfer of the liability.

When measuring the fair value of a liability, an undertaking shall take into account the effect of its credit risk (credit standing) and any other factors that might influence the likelihood that the obligation will, or will not, be fulfilled. That effect may differ depending on the liability, for example 

(i)     whether the liability is an obligation to deliver cash (a financial liability), or an obligation to deliver goods or services (a non-financial liability).

(ii)     the terms of credit enhancements related to the liability, if any.

The fair value of a liability reflects the effect of non-performance risk on the basis of its unit of account. 

 

The issuer of a liability issued with an inseparable third-party credit enhancement that is accounted for separately from the liability shall not include the effect of the credit enhancement (a third-party guarantee of debt) in the fair value measurement of the liability. If the credit enhancement is accounted for separately from the liability, the issuer would take into account its own credit standing and not that of the third party guarantor when measuring the fair value of the liability.

 

Restriction preventing the transfer of a liability, or an undertaking's own equity instrument

 

When measuring the fair value of a liability or an undertaking's own equity instrument, an undertaking shall not include a separate input, or an adjustment to other inputs, relating to the existence of a restriction that prevents the transfer of the item. 

 

The effect of a restriction that prevents the transfer of a liability, or an undertaking's own equity instrument, is either implicitly or explicitly included in the other inputs to the fair value measurement.

 

For example, at the transaction date, both the creditor and the obligor accepted the transaction price for the liability with full knowledge that the obligation includes a restriction that prevents its transfer. As a result of the restriction being included in the transaction price, a separate input, or an adjustment to an existing input, is not required at the transaction date to reflect the effect of the restriction on transfer. 

 

Similarly, a separate input, or an adjustment to an existing input, is not required at subsequent measurement dates to reflect the effect of the restriction on transfer.

 

Financial liability with a demand feature

 

The fair value of a financial liability with a demand feature (such as a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.

Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk

 

An undertaking that holds a group of financial assets and financial liabilities is exposed to market risks (as defined in IFRS 7) and to the credit risk (as defined in IFRS 7) of each of the counterparties. If the undertaking manages that group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, the undertaking is permitted to apply an exception to IFRS 13 for measuring fair value. 

 

That exception permits an undertaking to measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (an asset) for a particular risk exposure, or to transfer a net short position (a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. Accordingly, an undertaking shall measure the fair value of the group of financial assets and financial liabilities consistently with how market participants would price the net risk exposure at the measurement date.

 

An undertaking is permitted to use this exception only if the undertaking does all the following:

 

(i)     manages the group of financial assets and financial liabilities on the basis of the undertaking's net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty, in accordance with the undertaking's documented risk management, or investment strategy;

 (ii)     provides information on that basis about the group of financial assets and financial liabilities to the undertaking's key management; and

 (iii)     is required, or has elected, to measure those financial assets and financial liabilities at fair value in the statement of financial position at the end of each reporting period.

In some cases the basis for the presentation of financial instruments in the statement of financial position differs from the basis for the measurement of financial instruments, for example, if an IFRS does not require, or permit, financial instruments to be presented on a net basis. 

 

In such cases, an undertaking may need to allocate the portfolio-level adjustments to the individual assets, or liabilities, that make up the group of financial assets and financial liabilities managed on the basis of the undertaking's net risk exposure. An undertaking shall perform such allocations on a reasonable and consistent basis, using a methodology appropriate in the circumstances.

 

An undertaking shall make an accounting policy decision in accordance with IAS 8 to use the exception. An undertaking that uses the exception shall apply that accounting policy, including its policy for allocating bid-ask adjustments (see below) and credit adjustments (see below), if applicable, consistently from period to period for a particular portfolio.

 

The exception applies only to financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments. The references to financial assets and financial liabilities should

be read as applying to all contracts within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, regardless of whether they meet the definitions of financial assets or financial liabilities in IAS 32 Financial Instruments.

  

Exposure to market risks

 

When using the exception, the undertaking shall apply the price within the bid-ask spread that is most representative of fair value in the circumstances to the undertaking's net exposure to those market risks. An undertaking shall ensure that the market risk (or risks) to which the undertaking is exposed within that group of financial assets and financial liabilities is substantially the same. 

 

For example, an undertaking would not combine the interest rate risk associated with a financial asset with the commodity price risk associated with a financial liability because doing so would not mitigate the undertaking's exposure to interest rate risk or commodity price risk. 

 

Any basis risk resulting from the market risk parameters not being identical shall be taken into account in the fair value measurement of the financial assets and financial liabilities within the group.

 

Similarly, the duration of the undertaking's exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities shall be substantially the same. 

 

For example, an undertaking that uses a 12-month futures contract against the cash flows associated with 12 months' worth of interest rate risk exposure on a five-year financial instrument within a group made up of only those financial assets and financial liabilities measures the fair value of the exposure to 12-month interest rate risk on a net basis, and the remaining interest rate risk exposure (years 2 - 5) on a gross basis.

 

Exposure to the credit risk of a particular counterparty

 

When using the exception, the undertaking shall include the effect of the undertaking's net exposure to the credit risk of that counterparty, (or the counterparty's net exposure to the credit risk of the undertaking) in the fair value measurement when market participants would take into account any existing arrangements that mitigate credit risk exposure in the event of default (such as a master netting agreement with the counterparty, or an agreement that requires the exchange of collateral on the basis of each party's net exposure to the credit risk of the other party). 

 

The fair value measurement shall reflect market participants' expectations about the likelihood that such an arrangement would be legally enforceable in the event of default.

 

Fair value at initial recognition

 

When an asset is acquired, or a liability is assumed, in an exchange transaction for that asset, or liability, the transaction price is the price paid to acquire the asset, or received to assume the liability, (an entry price). 

 

In contrast, the fair value of the asset, or liability, is the price that would be received to sell the asset, or paid to transfer the liability, (an exit price). Undertakings do not necessarily sell assets at the prices paid to acquire them. Similarly, undertakings do not necessarily transfer liabilities at the prices received to assume them.

 

In many cases the transaction price will equal the fair value. This might be the case when on the transaction date the transaction to buy an asset takes place in the market in which the asset would be sold.

 

When determining whether fair value at initial recognition equals the transaction price, an undertaking shall take into account factors specific to the transaction and to the asset, or liability,. Related party transactions may be at different prices than fair value.

 

If another IFRS requires, or permits, an undertaking to measure an asset, or a liability, initially at fair value and the transaction price differs from fair value, the undertaking shall record the resulting gain, or loss, in profit or loss, unless that IFRS specifies otherwise.

 

Valuation techniques

 

An undertaking shall 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.

 

The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. 

 

Three widely used valuation techniques are the market approach, the cost approach and the income approach. (See Definitions)

 

An undertaking shall use valuation techniques consistent with one or more of those approaches to measure fair value.

 

In some cases a single valuation technique will be appropriate (such as when valuing an asset, or a liability, using quoted prices in an active market for identical assets, or liabilities,). 

 

In other cases, multiple valuation techniques will be appropriate (such as valuing a cash-generating unit). If multiple valuation techniques are used to measure fair value, the results (respective indications of fair value) shall be evaluated considering the reasonableness of the range of values indicated by those results. 

 

A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

 

If the transaction price is fair value at initial recognition, and a valuation technique that uses unobservable inputs will be used to measure fair value in subsequent periods, the valuation technique shall be calibrated so that at initial recognition the result of the valuation technique equals the transaction price. 

 

Calibration ensures that the valuation technique reflects current market conditions, and it helps an undertaking to determine whether an adjustment to the valuation technique is necessary (such as there might be a characteristic of the asset, or liability, that is not captured by the valuation technique). 

 

After initial recognition, when measuring fair value using a valuation technique that uses unobservable inputs, an undertaking shall ensure that those valuation techniques reflect observable market data (such as the price for a similar asset, or liability) at the measurement date.

 

Valuation techniques used to measure fair value shall be applied consistently. However, a change in a valuation technique, or its application (such as a change in its weighting when multiple valuation techniques are used, or a change in an adjustment applied to a valuation technique) is appropriate if the change results in a measurement that is equally, or more representative, of fair value in the circumstances. 

 

That might be the case if, for example, any of the following events take place:

(i)     new markets develop;

(ii)    new information becomes available;

(iii)   information previously used is no longer available;

(iv)   valuation techniques improve; or

(v)    market conditions change.

 

Revisions resulting from a change in the valuation technique, or its application, shall be accounted for as a change in accounting estimate in accordance with IAS 8. However, the disclosures in IAS 8 for a change in accounting estimate are not required for revisions resulting from a change in a valuation technique or its application.

 

Inputs to valuation techniques

 

General principles

Valuation techniques used to measure fair value shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs.

 

Examples of markets in which inputs might be observable for some assets and liabilities (such as financial instruments) include exchange markets, dealer markets, brokered markets and principal-to-principal markets.

 

An undertaking shall select inputs that are consistent with the characteristics of the asset, or liability, that market participants would take into account in a transaction for the asset, or liability,. In some cases, those characteristics result in the application of an adjustment, such as a premium, or discount (such as a control premium, or non-controlling interest discount). 

 

However, a fair value measurement shall not incorporate a premium, or discount,that is inconsistent with the unit of account in IFRS 13 that requires or permits the fair value measurement. 

 

Premiums, or discounts, that reflect size as a characteristic of the undertaking's holding (specifically, a blockage factor that adjusts the quoted price of an asset, or a liability, because the market's normal daily trading volume is not sufficient to absorb the quantity held by the undertaking) rather than as a characteristic of the asset, or liability, (such as a control premium when measuring the fair value of a controlling interest) are not permitted in a fair value measurement. 

 

In all cases, if there is a quoted price in an active market (a Level 1 input) for an asset or a liability, an undertaking shall use that price without adjustment when measuring fair value, except when the price does not equal fair value (see below).

Inputs based on bid and ask prices

 

If an asset, or a liability, measured at fair value has a bid price and an ask price (such as an input from a dealer market), the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value, regardless of where the input is categorised within the fair value hierarchy (Level 1, 2 or 3). The use of bid prices for asset positions and ask prices for liability positions is permitted, but is not required.

 

IFRS 13 does not preclude the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread.

 

Fair value hierarchy

 

IFRS 13 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets, or liabilities, (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

 

In some cases, the inputs used to measure the fair value of an asset, or a liability, might be categorised within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. 

 

Assessing the significance of a particular input to the entire measurement requires judgement, taking into account factors specific to the asset, or liability. Adjustments to arrive at measurements based on fair value (such as costs to sell when measuring fair value less costs to sell) shall not be taken into account when determining the level of the fair value hierarchy within which a fair value measurement is categorised.

 

The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation techniques. However, the fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value. 

 

For example, a fair value measurement developed using a present value technique might be categorised within Level 2 or Level 3, depending on the inputs that are significant to the entire measurement, and the level of the fair value hierarchy within which those inputs are categorised.

 

If an observable input requires an adjustment using an unobservable input and that adjustment results in a significantly higher or lower fair value measurement, the resulting measurement would be categorised within Level 3 of the fair value hierarchy. 

 

For example, if a market participant would take into account the effect of a restriction on the sale of an asset when estimating the price for the asset, an undertaking would adjust the quoted price to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an unobservable input that is significant to the entire measurement, the measurement would be categorised within Level 3 of the fair value hierarchy.

Level 1 inputs

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets, or liabilities, that the undertaking can access at the measurement date. A quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available, except as specified below.

 

A Level 1 input will be available for many financial assets and financial liabilities, some of which might be exchanged in multiple active markets (such as on different exchanges). Therefore, the emphasis within Level 1 is on determining both of the following:

 

i.the principal market for the asset, or liability or, in the absence of a principal market, the most advantageous market for the asset, or liability; and

(ii)     whether the undertaking can enter into a transaction for the asset, or liability, at the price in that market at the measurement date.

 

Adjustments to Level 1 Inputs

 

An undertaking shall not make an adjustment to a Level 1 input except in the following circumstances:

 

(i)     when an undertaking holds a large number of similar (but not identical) assets, or liabilities (such as debt securities) that are measured at fair value, and a quoted price in an active market is available, but not readily accessible for each of those assets, or liabilities, individually (given the large number of similar assets, or liabilities, held by the undertaking, it would be difficult to obtain pricing information for each individual asset, or liability, at the measurement date). 

 

In that case, as a practical expedient, an undertaking may measure fair value using an alternative pricing method that does not rely exclusively on quoted prices (eg matrix pricing). However, the use of an alternative pricing method results in a fair value measurement categorised within a lower level of the fair value hierarchy: Level 2 or 3.

 

(ii)     when a quoted price in an active market does not represent fair value at the measurement date. That might be the case if, for example, significant events (such as transactions in a principal-to-principal market, trades in a brokered market, or announcements) take place after the close of a market, but before the measurement date. An undertaking shall establish and consistently apply a policy for identifying those events that might affect fair value measurements. However, if the quoted price is adjusted for new information, the adjustment results in a fair value measurement categorised within a lower level of the fair value hierarchy: Level 2 or 3.

 

(iii)     when measuring the fair value of a liability, or an undertaking's own equity instrument, using the quoted price for the identical item traded as an asset in an active market and that price needs to be adjusted for factors specific to the item, or the asset. If no adjustment to the quoted price of the asset is required, the result is a fair value measurement categorised within Level 1 of the fair value hierarchy. 

 

However, any adjustment to the quoted price of the asset results in a fair value measurement categorised within a lower level of the fair value hierarchy: Level 2 or 3.

 

If an undertaking holds a position in a single asset, or liability (including a position comprising a large number of identical assets, or liabilities,, such as a holding of financial instruments) and the asset, or liability, is traded in an active market, the fair value of the asset, or liability, shall be measured within Level 1 as the product of the quoted price for the individual asset, or liability, and the quantity held by the undertaking. 

 

That is the case even if a market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price.

Level 2 inputs

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset, or liability,, either directly or indirectly.

 

If the asset, or liability, has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset, or liability,. Level 2 inputs include the following:

 

(1)     quoted prices for similar assets, or liabilities, in active markets.

 

(2)     quoted prices for identical or similar assets, or liabilities, in markets that are not active.

 

(3)     inputs other than quoted prices that are observable for the asset, or liability,, for example:

 

(i)     interest rates and yield curves, observable at commonly-quoted intervals;

 

(ii)     implied volatilities; and

 

(iii)     credit spreads.

 

(4)     market-corroborated inputs.

 

Adjustments to Level 2 inputs will vary depending on factors specific to the asset, or liability. Those factors include the following:

 

(i)     the condition or location of the asset;

 

(ii)     the extent to which inputs relate to items that are comparable to the asset, or liability,; and

 

(iii)     the volume or level of activity in the markets within which the inputs are observed.

 

An adjustment to a Level 2 input that is significant to the entire measurement might result in a fair value measurement categorised within Level 3 of the fair value hierarchy if the adjustment uses significant unobservable inputs.

Level 3 inputs

 

Level 3 inputs are unobservable inputs for the asset, or liability,.

 

Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset, or liability, at the measurement date. However, the fair value measurement objective remains the same: an exit price at the measurement date, from the perspective of a market participant that holds the asset,or owes the liability. 

 

Unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset, or liability, including assumptions about risk.

 

Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and the risk inherent in the inputs to the valuation technique. A measurement that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one when pricing the asset, or liability. 

 

For example, it might be necessary to include a risk adjustment when there is significant measurement uncertainty (such as when there has been a significant decrease in the volume, or level, of activity when compared with normal market activity for the asset, or liability, or similar assets, or liabilities, and the undertaking has determined that the transaction price, or quoted price, does not represent fair value).

 

An undertaking shall develop unobservable inputs using the best information available in the circumstances, which might include the undertaking's own data. In developing unobservable inputs, an undertaking may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the undertaking that is not available to other market participants (such as an undertaking-specific synergy). 

 

An undertaking need not undertake exhaustive efforts to obtain information about market participant assumptions. However, an undertaking shall take into account all information about market participant assumptions that is reasonably available. Unobservable inputs developed in the manner described above are considered market participant assumptions and meet the objective of a fair value measurement.

 

Disclosure

 

An undertaking shall disclose information that helps users of its financial statements assess both of the following:

 

(i)     for assets and liabilities that are measured at fair value on a recurring, or non-recurring basis, in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements.

(ii)     for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss, or other comprehensive income for the period.

 

To achieve this disclosure, an undertaking shall consider all the following:

 

(i)     the level of detail necessary to satisfy the disclosure requirements;

 

(ii)     how much emphasis to place on each of the various requirements;

 

(iii)     how much aggregation, or disaggregation, to undertake; and

 

(iv)     whether users of financial statements need additional information to evaluate the quantitative information disclosed.

 

An undertaking shall disclose, at a minimum, the following information for each class of assets and liabilities measured at fair value (including measurements based on fair value within the scope of IFRS 13) in the statement of financial position after initial recognition:

 

(1)     for recurring and non-recurring fair value measurements, the fair value measurement at the end of the reporting period, and for non-recurring fair value measurements, the reasons for the measurement. Recurring fair value measurements of assets, or liabilities, are those that IFRSs require, or permit, in the statement of financial position at the end of each reporting period. 

 

Non-recurring fair value measurements of assets, or liabilities, are those that IFRSs require, or permit, in the statement of financial position in particular circumstances (such as when an undertaking measures an asset held for sale at fair value less costs to sell, in accordance with IFRS 5 as the asset's fair value less costs to sell is lower than its carrying amount).

 

(2)     for recurring and non-recurring fair value measurements, the level of the fair value hierarchy within which the fair value measurements are categorised in their entirety (Level 1, 2 or 3).

 

(3)     for assets, and liabilities, held at the end of the reporting period that are measured at fair value on a recurring basis, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for those transfers and the undertaking's policy for determining when transfers between levels are deemed to have occurred. Transfers into each level shall be disclosed, and discussed separately from transfers out of each level.

 

(4)     for recurring, and non-recurring, fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement. If there has been a change in valuation technique (such as changing from a market approach to an income approach, or the use of an additional valuation technique), the undertaking shall disclose that change and the reason(s) for making it. 

 

For fair value measurements categorised within Level 3 of the fair value hierarchy, an undertaking shall provide quantitative information about the significant unobservable inputs used in the fair value measurement. An undertaking is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the undertaking when measuring fair value (such as when an undertaking uses prices from prior transactions, or third-party pricing information without adjustment). 

 

However, when providing this disclosure, an undertaking cannot ignore quantitative unobservable inputs that are significant to the fair value measurement and are reasonably available to the undertaking.

 

(5)     for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a reconciliation from the opening balances to the closing balances, disclosing separately changes during the period attributable to the following:

 

(i)     total gains, or losses, for the period recognised in profit or loss, and the line item(s) in profit or loss in which those gains or losses are recognised.

(ii)     total gains, or losses, for the period recognised in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognised.

 

(iii)     purchases, sales, issues and settlements (each of those types of changes disclosed separately).

 

(iv)     the amounts of any transfers into, or out, of Level 3 of the fair value hierarchy, the reasons for those transfers and the undertaking's policy for determining when transfers between levels are deemed to have occurred. Transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3.

 

(6)     for recurring fair value measurements categorised within Level 3, the amount of the total gains, or losses, for the period in (5)(i) included in profit or loss that is attributable to the change in unrealised gains or losses relating to those assets and liabilities held at the end of the reporting period, and the line item(s) in profit or loss in which those unrealised gains or losses are recognised.

 

(7)     for recurring and non-recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a description of the valuation processes used by the undertaking (including, for example, how an undertaking decides its valuation policies and procedures and analyses changes in fair value measurements from period to period).

 

(8)     for recurring fair value measurements categorised within Level 3 of the fair value hierarchy:

 

(i)     for all such measurements, a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs if a change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. 

         

         If there are interrelationships between those inputs and other unobservable inputs used in the fair value measurement, an undertaking shall also provide a description of those interrelationships and of how they might magnify, or mitigate, the effect of changes in the unobservable inputs on the fair value measurement. 

 

        To comply with that disclosure requirement, the narrative description of the sensitivity to changes in unobservable inputs shall include, at a minimum, the unobservable inputs disclosed when complying with (4).

 

(ii)     for financial assets and financial liabilities, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, an undertaking shall state that fact and disclose the effect of those changes. 

         The undertaking shall disclose how the effect of a change to reflect a reasonably possible alternative assumption was calculated. For that purpose, significance shall be judged with respect to profit or loss, and total assets or total liabilities, or, when changes in fair value are recognised in other comprehensive income, total equity.

 

(9)     for recurring and non-recurring fair value measurements, if the highest and best use of a non-financial asset differs from its current use, an undertaking shall disclose that fact and why the non-financial asset is being used in a manner that differs from its highest and best use.

 

 

An undertaking shall determine appropriate classes of assets and liabilities on the basis of the following:

 

(i)     the nature, characteristics and risks of the asset, or liability,; and

 

(ii)     the level of the fair value hierarchy within which the fair value measurement is categorised.

 

The number of classes may need to be greater for fair value measurements categorised within Level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and subjectivity. Determining appropriate classes of assets and liabilities, for which disclosures about fair value measurements should be provided, requires judgement. 

 

A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position. However, an undertaking shall provide information sufficient to permit reconciliation to the line items presented in the statement of financial position. 

 

If another IFRS specifies the class for an asset, or a liability, an undertaking may use that class in providing the disclosures required in IFRS 13, if that class meets the requirements.

 

An undertaking shall disclose and consistently follow its policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred. The policy about the timing of recording transfers shall be the same for transfers into the levels as for transfers out of the levels. 

 

Examples of policies for determining the timing of transfers include the following:

(i)     the date of the event or change in circumstances that caused the transfer.

(ii)     the beginning of the reporting period.

 (iii)     the end of the reporting period.

 

If an undertaking makes an accounting policy decision to use the exception above it shall disclose that fact.

 

For each class of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed, an undertaking shall disclose the information required by (2), (4) and (9). 

 

However, an undertaking is not required to provide the quantitative disclosures about significant unobservable inputs used in fair value measurements categorised within Level 3 of the fair value hierarchy (4). For such assets and liabilities, an undertaking does not need to provide the other disclosures required by IFRS 13.

 

For a liability measured at fair value, and issued with an inseparable third-party credit enhancement, an issuer shall disclose the existence of that credit enhancement, and whether it is reflected in the fair value measurement of the liability.

 

An undertaking shall present the quantitative disclosures required by IFRS 13 in a tabular format, unless another format is more appropriate.