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asset entity for CU90, at acquisition, the entity would allocate the purchase price to the
property inside it. The property would, therefore, initially be recognised at CU90.
Assume that, at year-end, the fair value of the property is CU110 and that the entity
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measures the property at fair value in accordance with IAS 40. Assume that the fair
value of the shares in the single asset entity are CU99. IAS 40 requires that an entity
measure an investment property, not the shares of a single entity that owns it. As such,
the property would be measured at its fair value of CU110.4
5.1.1
Unit of account and P×Q
IFRS 13 does specify the unit of account to be used when measuring fair value in relation
to a reporting entity that holds a position in a single asset or liability that is traded in an
active market (including a position comprising a large number of identical assets or
liabilities, such as a holding of financial instruments). In this situation, IFRS 13 requires
an entity to measure the asset or liability based on the product of the quoted price for
the individual asset or liability and the quantity held (P×Q).
This requirement is generally accepted when the asset or liability being measured is a
financial instrument in the scope of IFRS 9. However, when an entity holds an
investment in a listed subsidiary, joint venture or associate, some believe the unit of
account is the entire holding and the fair value should include an adjustment (e.g. a
control premium) to reflect the value of the investor’s control, joint control or significant
influence over their investment as a whole.
Questions have also arisen on to how this requirement applies to cash-generating units
that are equivalent to listed investments. Some argue that, because IAS 36 requires certain
assets and liabilities to be excluded from a cash-generating unit (CGU), the unit of account
is not identical to a listed subsidiary, joint venture or associate and an entity can include
adjustments that are consistent with the CGU as a whole. Similarly, some argue that
approach is appropriate because in group financial statements an entity is accounting for
the assets and liabilities of consolidated entities, rather than the investment. However,
others argue that if the CGU is effectively the same as an entity’s investment in a listed
subsidiary, joint venture or associate, the requirement to use P×Q should apply.
IFRS 13 requires entities to select inputs that are consistent with the characteristics of the
asset or liability being measured and would be considered by market participants when
pricing the asset or liability (see 7.2 below). Apart from block discounts (which are specifically
prohibited), determining whether a premium or discount applies to a particular fair value
measurement requires judgement and depends on specific facts and circumstances.
As discussed at 15.2 below, the standard indicates that premiums or discounts should not
be incorporated into fair value measurements unless all of the following conditions are met:
• the application of the premium or discount reflects the characteristics of the asset
or liability being measured;
• market participants, acting in their economic best interest, would consider these
premiums or discounts when pricing the asset or liability; and
• the inclusion of the premium or discount is not inconsistent with the unit of
account in the IFRS that requires (or permits) the fair value measurement.
Therefore, when an entity holds an investment in a listed subsidiary, joint venture or
associate, if the unit of account is deemed to be the entire holding, it would be appropriate
to include, for example, a control premium when determining fair value, provided that
market participants would take this into consideration when pricing the asset. If, however,
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the unit of account is deemed to be the individual share of the listed subsidiary, joint
venture or associate, the requirement to use P×Q (without adjustment) to measure the fair
value would override the requirements in IFRS 13 that permit premiums or discounts to
be included in certain circumstances.
In September 2014, in response to these questions regarding the unit of account for an
investment in a listed subsidiary, joint venture or associate, the IASB proposed
amendments to clarify that:5
• The unit of account for investments in subsidiaries, joint ventures and associates
should be the investment as a whole and not the individual financial instruments
that constitute the investment.
• For investments that are comprised of financial instruments for which a quoted
price in an active market is available, the requirement to use P×Q would take
precedence, irrespective of the unit of account. Therefore, for all such
investments, the fair value measurement would be the product of P×Q, even when
the reporting entity has an interest that gives it control, joint control or significant
influence over the investee.
• When testing CGUs for impairment, if those CGUs correspond to an entity whose
financial instruments are quoted in an active market, the fair value measurement
would be the product of P×Q.
When testing for impairment in accordance with IAS 36, the recoverable amount
of a CGU is the higher of its value in use or fair value less costs of disposal. The fair
value component of fair value less costs of disposal is required to be measured in
accordance with IFRS 13.
When a CGU effectively corresponds to a listed entity, the same issue arises
regarding whether the requirement to use P×Q, without adjustment, to measure
fair value applies.
Consistent with its proposal in relation to listed investments in subsidiaries, joint
ventures and associates, the IASB proposed that, if the CGU corresponds to an
entity whose financial instruments are quoted in an active market, the requirement
to use P×Q would apply.
The exposure draft also included proposed clarifications for the portfolio exception,
discussed at 5.1.2 below.
The IASB proposed the following transition requirements:
• For quoted investments in subsidiaries, joint ventures and associates, an entity
would recognise a cumulative catch-up adjustment to opening retained earnings
for the period in which the proposed amendments are first applied. The entity
would then recognise the change in measurement of the quoted investments
during that period in profit or loss (i.e. retrospective application).
• For impairment testing in accordance with IAS 36, an entity would apply the
requirements on a prospective basis. If an entity incurs an impairment loss or
reversal during the period of initial application, it would provide quantitative
information about the likely effect on the impairment loss, or reversal amount, had
the amendments been applied in the immediately preceding period presented.
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The exposure draft did not include a proposed effective date. However, permitting
early adoption was proposed. Furthermore, the Board proposed that a first-time
adopter of IFRS be able to apply the amendments at the beginning of the earliest
period for which it presents full comparative information under IFRS in its first IFRS
financial statements (i.e. prospectively from the date of the first-time adopter’s
transition to IFRS). The comment period for this exposure draft ended on 16 January
2015 and the Board began redeliberations in March 2015. During redeliberations,
additional research was undertaken on fair value measurements of investments in
subsidiaries, associates and joint ventures that are quoted in an active market and
on the measurement of the recoverable amount of cash-generating units on the basis
of fair value less costs of disposal when the cash-generating unit is an entity that is
quoted in an active market.
Following the redeliberations, in its January 2016 meeting, the IASB concluded that the
research would be fed into the PIR of IFRS 13.6 As part of its PIR of IFRS 13, the IASB
issued a RFI and specifically asked about prioritising Level 1 inputs in relation to the
unit of account. The feedback was discussed at the IASB’s March 2018 meeting. In
respect of the valuation of quoted subsidiaries, associates and joint ventures, the PIR
found that there were continued differences in views between users and preparers over
whether to prioritise Level 1 inputs or the unit of account. The issue is not pervasive in
practice according to the PIR findings. However, respondents noted it can have a
material effect when it does occur. Some stakeholders said that there are material
differences between measuring an investment using the P×Q and a valuation using a
method such as discounted cash flows. Respondents indicated the reasons for such
differences include that share prices do not reflect market liquidity for the shares or that
they do not reflect the value of control and/or synergies. A few respondents also noted
that markets may lack depth and are, therefore, susceptible to speculative trading,
asymmetrical information and other factors.7
As noted at 1.1, the IASB has decided not to conduct any follow-up activities as a result
of findings from the PIR and stated, as an example, that it will not do any further work
on the issue of unit of account versus P×Q because the costs of such work would
outweigh the benefits.
The IASB is expected to release its Report and Feedback Statement on the PIR in the
last quarter of the 2018 calendar year-end.8
5.1.2
Unit of account and the portfolio exception
There is some debate about whether IFRS 13 prescribes the unit of account in relation
to the portfolio exception. Under IFRS 13, a reporting entity that manages a group of
financial assets and financial liabilities with offsetting risks on the basis of its net
exposure to market or credit risks is allowed to measure the group based on the price
that would be received to sell its net long position, or paid to transfer its net short
position, for a particular risk (if certain criteria are met).
Some believe the portfolio exception in IFRS 13 specifies the unit of measurement for any
financial instruments within the portfolio(s), i.e. that the net exposure of the identified
group to a particular risk, and not the individual instruments within the group, represents
the new unit of measurement. This may have a number of consequences. For example,
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the entity may be able to include premiums or discounts in the fair value measurement of
the portfolio that are consistent with that unit of account, but not the individual
instruments that make up the portfolio. In addition, because the net exposure for the
identified group may not be actively traded (even though some financial instruments
within the portfolio may be) P×Q may not be applied to the actively traded instruments
within the portfolio.
Others believe that the portfolio exception does not override the unit of account as
provided in IFRS 9. Therefore, any premiums or discounts that are inconsistent with
this unit of account, i.e. the individual financial instruments within the portfolio, would
be excluded from the fair value measurement under the portfolio exception, including
any premiums or discounts related to the size of the portfolio.
Regardless of which view is taken, it is clear in the standard that the portfolio exception
does not change the financial statement presentation requirements (see 12 below for
further discussion on the portfolio exception and 15 below for further discussion on
premiums and discounts).
In the US, ASC 820 has been interpreted by many as prescribing the unit of
measurement when the portfolio exception is used. That is, when the portfolio
approach is used to measure an entity’s net exposure to a particular market risk, the net
position becomes the unit of measurement. This view is consistent with how many US
financial institutions determined the fair value of their over-the-counter derivative
portfolios prior to the amendments to ASC 820 (ASU 2011-04)9 (see 23 below). We
understand that the IASB did not intend application of the portfolio exception to
override the requirements in IFRS 13 regarding the use of P×Q to measure instruments
traded in active markets and the prohibition on block discounts which raises questions
as to how the portfolio exception would be applied to Level 1 instruments.
In 2013, the IFRS Interpretations Committee referred a request to the Board on the
interaction between the use of Level 1 inputs and the portfolio exception. The IASB
noted that this issue had similarities with the issues of the interaction between the
use of Level 1 inputs and the unit of account that arises when measuring the fair
value of investments in listed subsidiaries, joint ventures and associates (see 5.1.1
above). The IASB discussed this issue in December 2013, but only in relation to
portfolios that comprise only Level 1 financial instruments whose market risks are
substantially the same. For that specific circumstance, the Board tentatively decided
that the measurement of such portfolios should be the one that results from
multiplying the net position by the Level 1 prices (e.g. multiplying the net long or
short position by the Level 1 price for either a gross long or short position). Given
this tentative decision, in September 2014 the IASB proposed adding a non-
authoritative example to illustrate the application of the portfolio exception in this
specific circumstance.10 However, after reviewing the comments received on the
proposal, the Board concluded that it was not necessary to add the proposed non-
authoritative illustrative example to IFRS 13 (see 12.2 below for further discussion)
because the example would have been non-authoritative and the comments
received did not reveal significant diversity in practice for the specific circumstance
of portfolios that comprise only Level 1 financial instruments whose market risks are
substantially the same.11
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5.1.3
Unit of account versus the valuation premise
In valuing non-financial assets, the concepts of ‘unit of account’ and ‘valuation premise’
are distinct, even though both concepts deal with determining the appropriate level of
aggregation (or disaggregation) for assets and liabilities. The unit of account identi
fies
what is being measured for financial reporting and drives the level of aggregation (or
disaggregation) for presentation and disclosure purposes (e.g. whether categorisation in
the fair value hierarchy is determined at the individual asset level or for a group of
assets). Valuation premise is a valuation concept that addresses how a non-financial
asset derives its maximum value to market participants, either on a stand-alone basis or
through its use in combination with other assets and liabilities.
Since financial instruments do not have alternative uses and their fair values
typically do not depend on their use within a group of other assets or liabilities, the
concepts of highest and best use and valuation premise are not relevant for financial
instruments. As a result, the fair value for financial instruments should be largely
based on the unit of account prescribed by the standard that requires (or permits)
the fair value measurement.
The distinction between these two concepts becomes clear when the unit of account of
a non-financial asset differs from its valuation premise. Consider an asset (e.g.
customised machinery) that was acquired other than by way of a business combination,
along with other assets as part of an operating line. Although the unit of account for the
customised machinery may be as a stand-alone asset (i.e. it is presented for financial
reporting purposes at the individual asset level in accordance with IAS 16 – Property,
Plant and Equipment), the determination of the fair value of the machinery may be
derived from its use with other assets in the operating line (see 10 below for additional
discussion on the concept of valuation premise).
5.1.4
Does IFRS 13 allow fair value to be measured by reference to an
asset’s (or liability’s) components?
IFRS 13 states that the objective of a fair value measurement is to determine the price that
would be received for an asset or paid to transfer a liability at the measurement date. That
is, a fair value measurement is to be determined for a particular asset or liability. The unit
of account determines what is being measured by reference to the level at which the asset
or liability is aggregated (or disaggregated) for accounting purposes.
Unless separation of an asset (or liability) into its component parts is required or allowed