a substitute (customised) machine of comparable utility. The estimate takes into account the
condition of the machine and the environment in which it operates, including physical wear and
tear (i.e. physical deterioration), improvements in technology (i.e. functional obsolescence),
conditions external to the condition of the machine such as a decline in the market demand for
similar machines (i.e. economic obsolescence) and installation costs. The fair value indicated by
that approach ranges from CU 40,000 to CU 52,000.
The entity determines that the higher end of the range indicated by the market approach is most representative
of fair value and, therefore, ascribes more weight to the results of the market approach. That determination is
made on the basis of the relative subjectivity of the inputs, taking into account the degree of comparability
between the machine and the similar machines. In particular:
(a) The inputs used in the market approach (quoted prices for similar machines) require fewer and less
subjective adjustments than the inputs used in the cost approach.
(b) The range indicated by the market approach overlaps with, but is narrower than, the range indicated by
the cost approach.
(c) There are no known unexplained differences (between the machine and the similar machines) within
that range.
Accordingly, the entity determines that the fair value of the machine is CU 48,000.
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If customisation of the machine was extensive or if there were not sufficient data available to apply the market
approach (e.g. because market data reflect transactions for machines used on a stand-alone basis, such as a
scrap value for specialised assets, rather than machines used in combination with other assets or with other
assets and liabilities), the entity would apply the cost approach. When an asset is used in combination with
other assets or with other assets and liabilities, the cost approach assumes the sale of the machine to a market
participant buyer with the complementary assets and the associated liabilities. The price received for the sale
of the machine (i.e. an exit price) would not be more than either of the following:
(a) the cost that a market participant buyer would incur to acquire or construct a substitute machine of
comparable utility; or
(b) the economic benefit that a market participant buyer would derive from the use of the machine.
Both Examples 14.22 and 14.23 highlight situations where it was appropriate to use more
than one valuation approach to estimate fair value. Although the indication of value
from the cost approach was ultimately not given much weight in either example,
performing this valuation technique was an important part of the estimation process.
Even when a particular valuation technique is given little weight, its application can
highlight specific characteristics of the item being measured and may help in assessing
the value indications from other techniques.
Determining the point in a range of values that is ‘most representative of fair value’ can
be subjective and requires the use of judgement by management. In addition, although
Example 14.23 refers to ‘weighting’ the results of the valuation techniques used, in our
view, this is not meant to imply that an entity must explicitly apply a percentage
weighting to the results of each technique to determine fair value. However, this may
be appropriate in certain circumstances.
The standard does not prescribe a specific weighting methodology (e.g. explicit
assignment of percentages versus qualitative assessment of value indications). As such,
evaluating the techniques applied in an analysis will require judgement based on the
merits of each methodology and their respective assumptions.
Identifying a single point within a range is not the same as finding the point within the
range that is most representative of fair value. As such, simply assigning arbitrary weights
to different indications of value is not appropriate. The weighting of multiple value
indications is a process that requires significant judgement and a working knowledge of
the different valuation techniques and inputs. Such knowledge is necessary to properly
assess the relevance of these methodologies and inputs to the asset or liability being
measured. For example, in certain instances it may be more appropriate to rely primarily
on the fair value indicated by the technique that maximises the use of observable inputs
and minimises the use of unobservable inputs. In all cases, entities should document how
they considered the various indications of value, including how they evaluated qualitative
and quantitative factors, in determining fair value.
14.1.3 Valuation
adjustments
In certain instances, adjustments to the output from a valuation technique may be
required to appropriately determine a fair value measurement in accordance with
IFRS 13. An entity makes valuation adjustments if market participants would make those
adjustments when pricing an asset or liability (under the market conditions at the
measurement date). This includes any adjustments for measurement uncertainty (e.g. a
risk premium).
Fair value measurement 1037
Valuation adjustments may include the following:
(a) an adjustment to a valuation technique to take into account a characteristic of an
asset or a liability that is not captured by the valuation technique (the need for such
an adjustment is typically identified during calibration of the value calculated using
the valuation technique with observable market information – see 14.1.3.A below);
(b) applying the point within the bid-ask spread that is most representative of fair
value in the circumstances (see 15.3 below);
(c) an adjustment to take into account credit risk (e.g. an entity’s non-performance risk
or the credit risk of the counterparty to a transaction); and
(d) an adjustment to take into account measurement uncertainty (e.g. 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 entity has determined that the transaction price or quoted price does not
represent fair value). [IFRS 13.BC145].
14.1.3.A
Adjustments to valuation techniques that use unobservable inputs
Regardless of the valuation technique(s) used, the objective of a fair value measurement
remains the same – i.e. an exit price under current market conditions from the
perspective of market participants. As such, if the transaction price is determined to
represent fair value at initial recognition (see 13 above) and a valuation technique that
uses unobservable inputs will be used to measure the fair value of an item in subsequent
periods, the valuation technique must be calibrated to ensure the valuation technique
reflects current market conditions. [IFRS 13.64].
Calibration ensures that a valuation technique incorporates current market conditions.
The calibration also helps an entity to determine whether an adjustment to the valuation
technique is necessary by identifying potential deficiencies in the valuation model. For
example, there might be a characteristic of the asset or liability that is not captured by
/> the valuation technique.
If an entity measures fair value after initial recognition using a valuation technique (or
techniques) that uses unobservable inputs, an entity must ensure the valuation
technique(s) reflect observable market data (e.g. the price for a similar asset or liability)
at the measurement date. [IFRS 13.64]. That is, it should be calibrated to observable market
data, when available.
14.1.4
Making changes to valuation techniques
The standard requires that valuation techniques used to measure fair value be applied
on a consistent basis among similar assets or liabilities and across reporting periods.
[IFRS 13.65]. This is not meant to preclude subsequent changes, such as a change in its
weighting when multiple valuation techniques are used or a change in an adjustment
applied to a valuation technique.
An entity can make a change to a valuation technique or its application (or a change in
the relative importance of one technique over another), provided that change results in
a measurement that is equally representative (or more representative) of fair value in
the circumstances.
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IFRS 13 provides the following examples of circumstances that may trigger a change in
valuation technique or relative weights assigned to valuation techniques:
(a) new
markets
develop;
(b) new information becomes available;
(c) information previously used is no longer available;
(d) valuation techniques improve; or
(e) market conditions change. [IFRS 13.65].
In addition, a change in the exit market, characteristics of market participants that
would transact for the asset or liability, or the highest and best use of an asset by market
participants could also warrant a change in valuation techniques in certain
circumstances.
Changes to fair value resulting from a change in the valuation technique or its
application are accounted for as a change in accounting estimate in accordance with
IAS 8. However, IFRS 13 states that the disclosures in IAS 8 for a change in accounting
estimate are not required for such changes. [IFRS 13.65, 66]. Instead, information would be
disclosed in accordance with IFRS 13 (see 20.3.5 below for further discussion). If a
valuation technique is applied in error, the correction of the technique would be
accounted as a correction of an error in accordance with IAS 8.
14.2 Market
approach
IFRS 13 describes the market approach as a widely used valuation technique. As defined
in the standard, the market approach ‘uses prices and other relevant information
generated by market transactions involving identical or comparable (i.e. similar) assets,
liabilities or a group of assets and liabilities, such as a business’. [IFRS 13.B5]. Hence, the
market approach uses prices that market participants would pay or receive for the
transaction, for example, a quoted market price. The market price may be adjusted to
reflect the characteristics of the item being measured, such as its current condition and
location, and could result in a range of possible fair values.
Valuation techniques consistent with the market approach use prices and other market
data derived from observed transactions for the same or similar assets, for example,
revenue, or EBITDA multiples. Multiples might be in ranges with a different multiple
for each comparable asset or liability. The selection of the appropriate multiple within
the range requires judgement, considering qualitative and quantitative factors specific
to the measurement. [IFRS 13.B6].
Another example of a market approach is matrix pricing. Matrix pricing is a
mathematical technique used principally to value certain types of financial instruments,
such as debt securities, where specific instruments (e.g. cusips) may not trade frequently.
The method derives an estimated price of an instrument using transaction prices and
other relevant market information for benchmark instruments with similar features (e.g.
coupon, maturity or credit rating). [IFRS 13.B7].
Fair value measurement 1039
14.3 Cost
approach
‘The cost approach reflects the amount that would be required currently to replace the
service capacity of an asset’. This approach is often referred to as current replacement
cost. [IFRS 13.B8]. The cost approach (or current replacement cost) is typically used to
measure the fair value of tangible assets, such as plant or equipment.
From the perspective of a market participant seller, the price that would be received for
the asset is based on the cost to a market participant buyer to acquire or construct a
substitute asset of comparable utility, adjusted for obsolescence.
Obsolescence is broader than depreciation, whether for financial reporting or tax
purposes. According to the standard, obsolescence encompasses:
• physical deterioration;
• functional (technological) obsolescence; and
• economic (external) obsolescence. [IFRS 13.B9].
Physical deterioration and functional obsolescence are factors specific to the asset.
Physical deterioration refers to wear, tear or abuse. For example, machines in a
factory might deteriorate physically due to high production volumes or a lack of
maintenance. Something is functionally obsolete when it does not function in the
manner originally intended (excluding any physical deterioration). For example,
layout of the machines in the factory may make their use, in combination, more
labour intensive, increasing the cost of those machines to the entity. Functional
obsolescence also includes the impact of technological change, for example, if
newer, more efficient and less labour-intensive models were available, demand for
the existing machines might decline, along with the price for the existing machines
in the market.
Economic obsolescence arises from factors external to the asset. An asset may be
less desirable or its economic life may reduce due to factors such as regulatory
changes or excess supply. Consider the machines in the factory; assume that, after
the entity had purchased its machines, the supplier had flooded the market with
identical machines. If demand was not as high as the supplier had anticipated, it
could result in an oversupply and the supplier would be likely to reduce the price in
order to clear the excess stock.
14.3.1
Use of depreciated replacement cost to measure fair value
As discussed at 14.3 above, IFRS 13 permits the use of a cost approach for measuring
fair value. However, care is needed in using depreciated replacement cost to ensure
the resulting measurement is consistent with the requirements of IFRS 13 for
measuring fair value.
Before using depreciated replacement cost as a method to measure fair value, an entity
should ensure that both:
• the highest and best use of the asset is its current use (see 10 above); and
• the exit market for the asset (i.e. the principal market or in its absence, the most
advantageous market, see 6 above) is the same as the entry market (i.e. the market
in which the asset was/will be purchased).
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In addition, an entity should ensure that both:
• the inputs used to determine replacement cost are consistent with what market
participant buyers would pay to acquire or construct a substitute asset of
comparable utility; and
• the replacement cost has been adjusted for obsolescence that market participant
buyers would consider – i.e. that the depreciation adjustment reflects all forms
of obsolescence (i.e. physical deterioration, technological (functional) and
economic obsolescence), which is broader than depreciation calculated in
accordance with IAS 16.
Even after considering these factors, the resulting depreciated replacement cost must
be assessed to ensure market participants would actually transact for the asset, in its
current condition and location, at this price. The Illustrative Examples to IFRS 13 reflect
this stating that ‘the price received for the sale of the machine (i.e. an exit price) would
not be more than either of the following:
(a) the cost that a market participant buyer would incur to acquire or construct a
substitute machine of comparable utility; or
(b) the economic benefit that a market participant buyer would derive from the use of
the machine.’ [IFRS 13.IE11-IE14].
14.4 Income
approach
The income approach converts future cash flows or income and expenses to a single
current (i.e. discounted) amount. A fair value measurement using the income approach
will reflect current market expectations about those future cash flows or income and
expenses. [IFRS 13.B10].
The income approach includes valuation techniques such as:
(a) present value techniques (see 21 below);
(b) option pricing models – examples include the Black-Scholes-Merton formula or a
binomial model (i.e. a lattice model) – that incorporate present value techniques
and reflect both the time value and the intrinsic value of an option; and
(c) the multi-period excess earnings method. This method is used to measure the fair
value of some intangible assets. [IFRS 13.B11].
The standard does not limit the valuation techniques that are consistent with the income
approach to these examples; an entity may consider other valuation techniques.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 205
