14.1.2
Using multiple valuation techniques to measure fair value ....... 1033
14.1.3 Valuation
adjustments
........................................................................ 1036
14.1.3.A
Adjustments to valuation techniques that use
unobservable inputs ...................................................... 1037
14.1.4
Making changes to valuation techniques ....................................... 1037
14.2 Market approach ................................................................................................ 1038
14.3 Cost
approach
.....................................................................................................
1039
14.3.1
Use of depreciated replacement cost to measure fair value ...... 1039
14.4 Income approach ............................................................................................... 1040
15 INPUTS TO VALUATION TECHNIQUES ....................................................... 1040
15.1 General principles ............................................................................................. 1040
15.2 Premiums
and discounts ................................................................................... 1043
15.2.1
Blockage factors (or block discounts) ............................................ 1044
15.3 Pricing within the bid-ask spread ................................................................... 1046
15.3.1
Mid-market pricing ........................................................................... 1046
15.3.2
What does the bid-ask spread include? ........................................ 1046
15.4 Risk premiums ..................................................................................................... 1047
15.5 Broker quotes and pricing services ................................................................ 1048
15.5.1
How should values provided by central clearing
organisations for margin purposes be evaluated when
determining the fair value of centrally cleared derivatives
for financial reporting? ..................................................................... 1049
16 THE FAIR VALUE HIERARCHY .................................................................... 1049
16.1 The fair value hierarchy ................................................................................... 1050
16.2 Categorisation within the fair value hierarchy ............................................ 1050
16.2.1
Assessing the significance of inputs ................................................ 1052
16.2.2 Transfers between levels within the fair value hierarchy .......... 1053
16.2.3
Information provided by third-party pricing services or
brokers .................................................................................................. 1053
16.2.4 Categorisation of over-the-counter derivative instruments...... 1055
17 LEVEL 1 INPUTS .......................................................................................... 1056
936 Chapter
14
17.1 Use of Level 1 inputs .......................................................................................... 1057
17.1.1
Level 1 liabilities and instruments classified in an entity’s
own equity ........................................................................................... 1058
17.2 Alternative pricing methods ............................................................................. 1058
17.3 Quoted prices in active markets that are not representative of fair
value ...................................................................................................................... 1058
17.4 Unit of account .................................................................................................... 1059
18 LEVEL 2 INPUTS .......................................................................................... 1059
18.1 Level 2 inputs ...................................................................................................... 1059
18.2 Examples
of
Level 2 inputs .............................................................................. 1060
18.3 Market
corroborated inputs ............................................................................. 1061
18.4 Making adjustments to a Level 2 input.......................................................... 1062
18.5 Recently observed prices in an inactive market ......................................... 1062
19 LEVEL 3 INPUTS .......................................................................................... 1063
19.1 Use of Level 3 inputs .......................................................................................... 1063
19.2 Examples
of
Level 3 inputs .............................................................................. 1064
20 DISCLOSURES.............................................................................................. 1065
20.1 Disclosure objectives ......................................................................................... 1065
20.1.1
Format of disclosures ......................................................................... 1067
20.1.2 Level of disaggregation ...................................................................... 1067
20.1.2.A
Determining appropriate classes of assets and
liabilities for disclosure ................................................. 1067
20.1.3 Differentiating between ‘recurring’ and ‘non-recurring’ ........... 1068
20.2 Accounting policy disclosures ......................................................................... 1069
20.3 Disclosures for recognised fair value measurements .................................. 1071
20.3.1 Disclosures for recognised recurring fair value
measurements ..................................................................................... 1072
20.3.1.A
Recurring fair value measurements categorised
as Level 1 or Level 2 ...................................................... 1072
20.3.1.B
Recurring fair value measurements categorised
as Level 3 ......................................................................... 1073
20.3.2 Disclosures for recognised non-recurring fair value
measurements ..................................................................................... 1073
20.3.3 Fair value hierarchy categorisation ................................................ 1074
20.3.4 Transfers between hierarchy levels for recurring fair value
measurements ..................................................................................... 1077
20.3.5 Disclosure of valuation techniques and inputs ............................. 1079
20.3.5.A Significant unobservable inputs for Level 3 fair
value measurements ...................................................... 1079
20.3.6 Level 3 reconciliation ....................................................................... 1082
Fair value measurement 937
20.3.7 Disclosure of valuation processes for Level 3
measurements .................................................................................... 1084
20.3.8 Se
nsitivity of Level 3 measurements to changes in
significant unobservable inputs ....................................................... 1085
20.3.8.A Quantitative sensitivity of Level 3
measurements of financial instruments to
changes in significant unobservable inputs ............. 1086
20.3.9 Highest and best use ......................................................................... 1088
20.4 Disclosures for unrecognised fair value measurements ............................. 1088
20.5 Disclosures regarding liabilities issued with an inseparable third-
party credit enhancement ................................................................................ 1089
21 APPLICATION GUIDANCE – PRESENT VALUE TECHNIQUES ................... 1089
21.1 General principles for use of present value techniques ............................ 1089
21.2 The components of a present value measurement ...................................... 1091
21.2.1
Time value of money ........................................................................ 1092
21.2.2 Risk and uncertainty in a present value technique ..................... 1092
21.3 Discount rate adjustment technique ............................................................... 1093
21.3.1
Illustrative example of the discount rate adjustment
technique ............................................................................................. 1094
21.4 Expected present value technique .................................................................. 1095
21.4.1
Expected present value technique – method 1 and
method 2 ............................................................................................... 1097
22 EFFECTIVE DATE AND TRANSITION .......................................................... 1100
23 CONVERGENCE WITH US GAAP ............................................................... 1100
23.1 The development of IFRS 13 ............................................................................ 1100
23.2 US GAAP differences .......................................................................................... 1101
23.2.1
Practical expedient for alternative investments ............................ 1101
23.2.2 Fair value of liabilities with a demand feature ............................. 1102
23.2.3 Recognition
of
day-one gains and losses ....................................... 1102
23.2.4 Disclosures ........................................................................................... 1103
List of examples
Example 14.1:
Adjusting fair value for condition and location ............................. 962
Example 14.2:
Restrictions on assets .......................................................................... 962
Example 14.3:
Entity-specific restrictions on assets ............................................... 962
Example 14.4:
The effect of determining the principal market ............................ 964
Example 14.5:
Determining the principal market ..................................................... 967
Example 14.6:
Determining the principal market .................................................... 968
Example 14.7:
Determining the most advantageous market ................................. 968
938 Chapter
14
Example 14.8:
Asset group............................................................................................. 971
Example 14.9:
Estimating a market rate of return when there is a
significant decrease in volume or level of activity ......................... 981
Example 14.10:
Transportation costs ........................................................................... 986
Example 14.11:
Highest and best use versus current use ......................................... 990
Example 14.12:
Highest and best use versus intended use ....................................... 991
Example 14.13:
Consistent assumptions about highest and best use in an asset
group ....................................................................................................... 993
Example 14.14:
Debt obligation: quoted price .......................................................... 1001
Example 14.15:
Debt obligation: present value technique ..................................... 1002
Example 14.16:
Decommissioning liability ................................................................ 1004
Example 14.17:
Non-performance risk ....................................................................... 1007
Example 14.18:
Structured note .................................................................................. 1008
Example 14.19:
Applying the portfolio approach to a group of financial
assets and financial liabilities whose market risks are
substantially the same and whose fair value measurement
is categorised within Level 1 of the fair value hierarchy ............ 1025
Example 14.20:
Calculating net exposure .................................................................. 1026
Example 14.21:
Interest rate swap at initial recognition ........................................ 1030
Example 14.22:
Multiple valuation techniques – software asset ........................... 1034
Example 14.23:
Multiple valuation techniques – machine held and used .......... 1035
Example 14.24:
Blockage factors .................................................................................. 1045
Example 14.25:
Disclosure of assets measured at fair value and their
categorisation in the fair value hierarchy ...................................... 1075
Example 14.26:
Comparison of policies for recognising transfers ........................ 1078
Example 14.27:
Significant unobservable inputs (Level 3) ..................................... 1080
Example 14.28:
Reconciliation of fair value measurements categorised
within Level 3 of the fair value hierarchy ..................................... 1083
Example 14.29:
Gains and losses ................................................................................. 1084
Example 14.30:
Narrative description of sensitivity to significant
unobservable inputs .......................................................................... 1086
Example 14.31:
Discount rate adjustment technique ............................................... 1095
Example 14.32:
Expected present value techniques ............................................... 1098
Example 14.33:
Comparison of present value techniques ..................................... 1099
939
Chapter 14
Fair value measurement
1
INTRODUCTION AND BACKGROUND
1.1 Introduction
Many IFRSs permit or require entities to measure or disclose the fair value of assets,
liabilities or equity instruments. However, until 2011 there was limited guidance in IFRS
on how to measure fair value and
, in some cases, the guidance was conflicting. To
remedy this, the International Accounting Standards Board (IASB or the Board) issued
IFRS 13 – Fair Value Measurement – in May 2011. The standard was the result of a
convergence project between the IASB and the US Financial Accounting Standards
Board (FASB) (collectively, the Boards). The standard first applied to annual periods
beginning on or after 1 January 2013. [IFRS 13.C1].
IFRS 13 defines fair value, provides principles-based guidance on how to measure fair value
under IFRS and requires information about those fair value measurements to be disclosed.
[IFRS 13.1]. IFRS 13 does not attempt to remove the judgement that is involved in estimating
fair value, however, it provides a framework that is intended to reduce inconsistency and
increase comparability in the fair value measurements used in financial reporting.
IFRS 13 does not address which assets or liabilities to measure at fair value or when
those measurements must be performed. An entity must look to the other standards in
that regard. The standard applies to all fair value measurements, when fair value is
required or permitted by IFRS, with some limited exceptions, which are discussed later
in this chapter (see 2 below). The standard also applies to measurements, such as fair
value less costs to sell, that are based on fair value. However, it does not apply to similar
measurement bases, such as value in use. [IFRS 13.IN1, IN2].
At the time of writing, the IASB was concluding a Post-implementation Review (PIR) of
IFRS 13 to assess the effect of the standard on financial reporting. In particular, the
Board’s aim was to assess whether:1
• the information required by IFRS 13 is useful to users of financial statements;
• areas of IFRS 13 present implementation challenges and might result in
inconsistent application of the requirements; and
• unexpected costs have arisen when preparing, auditing or enforcing the
requirements of IFRS 13 or when obtaining the information that the Standard
requires entities to provide.
940 Chapter
14
Feedback from constituents on its May 2017 Request for Information (RFI) was
discussed at the IASB’s March 2018 meeting. In considering all of the feedback on the
RFI, the Board concluded that IFRS 13 is working as it intended. It also decided to:
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 184
