The standard provides some application guidance, but only in relation to present value
techniques (see 21 below for further discussion regarding this application guidance).
15
INPUTS TO VALUATION TECHNIQUES
15.1 General
principles
When selecting the inputs to use in a valuation technique, IFRS 13 requires that they:
• be consistent with the characteristics of the asset or liability that market
participants would take into account (see 5.2 above);
Fair value measurement 1041
• exclude premiums or discounts that reflect size as a characteristic of the entity’s
holding, rather than a characteristic of the item being measured (for example,
blockage factors); and
• exclude other premiums or discounts if they are inconsistent with the unit of
account (see 5.1 above for discussions regarding unit of account). [IFRS 13.69].
Premiums, discounts and blockage factors are discussed further at 15.2 below.
In all cases, if there is a quoted price in an active market (i.e. a Level 1 input) for the
identical asset or a liability, an entity shall use that price without adjustment when
measuring fair value. Adjustments to this price are only permitted in certain
circumstances, which are discussed at 17.1 below.
Regardless of the valuation techniques used to estimate fair value, IFRS 13 requires that
these techniques maximise the use of relevant observable inputs and minimise the use
of unobservable inputs. [IFRS 13.67]. This requirement is consistent with the idea that fair
value is a market-based measurement and, therefore, is determined using market-based
observable data, to the extent available and relevant.
The standard provides some examples of markets in which inputs might be observable.
(a) Exchange markets – where closing prices are both readily available and generally
representative of fair value, e.g. the Hong Kong Stock Exchange;
(b) Dealer markets – where dealers stand ready to trade for their own account.
Typically, in these markets, bid and ask prices (see 15.3 below) are more readily
available than closing prices. Dealer markets include over-the-counter markets,
for which prices are publicly reported;
(c) Brokered markets – where brokers attempt to match buyers with sellers but do
not stand ready to trade for their own account. The broker knows the prices bid
and asked by the respective parties, but each party is typically unaware of another
party’s price requirements. In such markets, prices for completed transactions may
be available. Examples of brokered markets include electronic communication
networks in which buy and sell orders are matched, and commercial and
residential real estate markets;
(d) Principal-to-principal markets – where transactions, both new and re-sales, are
negotiated independently with no intermediary. Little, if any, information about
these transactions in these markets may be publicly available. [IFRS 13.68, B34].
The standard clarifies that the relevance of market data must be considered when
assessing the priority of inputs in the fair value hierarchy. When evaluating the
relevance of market data, the number and range of data points should be considered, as
well as whether this data is directionally consistent with pricing trends and indications
from other more general market information.
Relevant market data reflects the assumptions that market participants would use in
pricing the asset or liability being measured. Recent transaction prices for the reference
asset or liability (or similar assets and liabilities) are typically considered to represent
relevant market data, unless the transaction is determined not to be orderly (see 8 above
for a discussion of factors to consider when determining if a transaction is orderly).
However, even in situations where a transaction is considered to be orderly, observable
1042 Chapter 14
transaction prices from inactive markets may require adjustment to address factors,
such as timing differences between the transaction date and the measurement date or
differences between the asset being measured and a similar asset that was the subject of
the transaction. In those instances where the adjustments to observable data are
significant and are determined using unobservable data, the resulting measurement
would be considered a Level 3 measurement.
Whether observable or unobservable, all inputs used in determining fair value should
be consistent with a market-based measurement. As such, the use of unobservable
inputs is not intended to allow for the inclusion of entity-specific assumptions in a fair
value measurement. While IFRS 13 acknowledges that unobservable inputs may
sometimes be developed using an entity’s own data, the guidance is clear that these
inputs should reflect market participant assumptions. When valuing an intangible asset
using unobservable inputs, for example, an entity should take into account the intended
use of the asset by market participants, even though this may differ from the entity’s
intended use. The entity may use its own data, without adjustment, if it determines that
market participant assumptions are consistent with its own assumptions (see 19.1 below
for additional discussion on how an entity’s own assumptions may be applied in a fair
value measurement).
The term ‘input’ is used in IFRS 13 to refer broadly to the assumptions that market
participants would use when pricing an asset or liability, rather than to the data entered
into a pricing model. This important distinction implies that an adjustment to a pricing
model’s value (e.g. an adjustment for the risk that a pricing model might not replicate a
market price due to the complexity of the instrument being measured) represents an
input, which should be evaluated when determining the measurement’s category in the
fair value hierarchy. For example, when measuring a financial instrument, an adjustment
for model risk would be considered an input (most likely a Level 3 input) that, if deemed
significant (see 16.2.1 below for further discussion on assessing the significance of inputs)
may render the entire fair value estimate a Level 3 measurement.
It is also important to note that an input is distinct from a characteristic. IFRS 13 requires
an entity to consider 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). [IFRS 13.11]. As discussed at
5.1 above, examples of such
characteristics could include:
• the condition and location of an asset; and
• restrictions, if any, on the sale or use of an asset or transfer of a liability.
To draw out the distinction between an input and a characteristic, consider the example
of a restricted security that has the following characteristics, which would be considered
by a market participant:
• the issuer is a listed entity; and
• the fact that the security is restricted.
An entity is required to select inputs in pricing the asset or liability that are consistent
with its characteristics. In some cases those characteristics result in the application of
an adjustmen
t, such as a premium or discount. In our example, the inputs could be:
Fair value measurement 1043
• a quoted price for an unrestricted security; and
• a discount adjustment (to reflect the restriction).
The quoted price for the unrestricted security may be an observable and a Level 1 input.
However, given the restriction and the standard’s requirement that inputs be consistent
with the characteristics of the asset or liability being measured, the second input in
measuring fair value is an adjustment to the quoted price to reflect the restriction. If this
input is unobservable, it would be a Level 3 input and, if it is considered to be significant
to the entire measurement, the fair value measurement of the asset would also be
categorised within Level 3 of the fair value hierarchy.
15.2 Premiums
and
discounts
IFRS 13 indicates that when measuring fair value, entities should select inputs that: (i)
are consistent with the characteristics of the asset or liability being measured; and (ii)
would be considered by market participants when pricing the asset or liability. In certain
instances, these characteristics could result in a premium or discount being
incorporated into the fair value measurement.
Determining whether a premium or discount applies to a particular fair value
measurement requires judgement and depends on specific facts and circumstances.
IFRS 13 distinguishes between premiums or discounts that reflect size as a characteristic
of the entity’s holding (specifically, a blockage factor) and control premiums, discounts
for non-controlling interests and discounts for lack of marketability that are related to
characteristics of the asset or liability being measured.
Control premiums, discounts for non-controlling interests and discounts for lack of
marketability reflect characteristics of the asset or liability being measured at fair value.
Provided these adjustments are consistent with the unit of account (see 5.1 above) of the
asset or liability being measured they can be taken into consideration when measuring
fair value. [IFRS 13.69].
Apart from block discounts (discussed at 15.2.1 below), IFRS 13 does not provide explicit
guidance on the types of premiums or discounts that may be considered, or when they
should be applied to a fair value measurement. Instead, the guidance indicates that
premiums and discounts (e.g. control premiums or discounts for lack of marketability)
should be incorporated into non-Level 1 fair value measurements if 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’ (see 7.2 above), 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
(see 5.1 above).
IFRS 13 emphasises that prices of instruments that trade in active markets (i.e. Level 1
measurements) should generally not be adjusted and should be measured based on the
quoted price of the individual instrument multiplied by the quantity held (P×Q).
1044 Chapter 14
Figure 14.7:
Differentiating between blockage factors and other premiums
and discounts
Examples of
Blockage factor
Discount for lack of
premiums and
Control premium
(or block discount)
marketability
discounts
Can fair value be
No
Yes, in certain
Yes, in certain
adjusted for the
circumstances.
circumstances.
premium or
discount?
In what situations
When an entity sells a
When an entity transacts
When an asset or
would these arise?
large holding of
for a controlling interest
liability is not readily
instruments such that the
in another entity (and the marketable, for example,
market’s normal daily
unit of account is
where there is no
trading volume is not
deemed to be the
established market of
sufficient to absorb the
controlling interest and
readily-available buyers
entire quantity
not the individual
and sellers or as a result
(i.e. flooding the market).
shares).
of restrictions.
IFRS 13 does not permit
an entity to take block
discounts into
consideration in the
measurement of fair value.
Example
An entity holds a 20%
An entity transacts for a
The shares of a private
investment in a listed
controlling interest in a
company for which no
company. The normal
private business and
liquid market exists.
daily trading for those
determines that the fair
shares on the exchange
value of the business is
is 1-2%. If the entity
greater than the
were to sell its entire
aggregate value of the
holding, the price per
individual shares due to
share would be expected
its ability to control the
to decrease by 30%.
acquired entity.
What does the
The difference between
The difference between
The difference between
premium or
the price to sell:
the price to sell:
the price to sell:
discount
• the individual asset
• the individual shares
• an asset or liability
represent?
or liability; and
in the controlled
does not trade in a
• an entity’s entire
entity; and
liquid market; and
holding.
• the entire controlling
• an identical asset or
IFRS 13 does not permit
interest.
liability for which a
an entity to include such a
liquid market exists.
difference in the
measurement of fair value.
15.2.1
Blockage factors (or block discounts)
IFRS 13 explicitly prohibits the consideration of blockage factors (or block discounts) in
a fair value measurement. [IFRS 13.69, 80]. While the term blockage factor may be subject
to different interpretations, during their deliberations the Boards indicated that they
view a blockage factor as an adjustment to the quoted price of an asset or liability
Fair value measurement 1045
because the market’s normal trading volume is not sufficient to absorb the quantity held
by a reporting entity.
Regardless of the hierarchy level in which a measuremen
t is categorised, blockage
factors are excluded from a fair value measurement because such an adjustment is
specific to the size of an entity’s holding and its decision to transact in a block. That is,
the Boards believe such an adjustment is entity-specific in nature. [IFRS 13.BC157].
However, the standard clarifies that there is a difference between size being a
characteristic of the asset or liability being measured (based on its unit of account) and
size being a characteristic of the reporting entity’s holding. While any adjustment for the
latter is not permitted, the former should be considered if it is consistent with how
market participants would price the asset or liability. [IFRS 13.69].
The following example illustrates how IFRS 13 distinguishes between size as a
characteristic of the item being measured and size as a characteristic of an entity’s holding.
Example 14.24: Blockage factors
Bank X has one outstanding OTC derivative contract with Dealer A.
The notional amount of this contract is CU 1 billion, which is significantly larger than the market norm for
these types of contracts.
Bank Y has 100 identical OTC derivative contracts outstanding with various dealers (whose risks are not
offsetting because all the contracts are assets and therefore are not measured using the measurement exception).
Each of the 100 contracts has a notional amount of CU 10 million, which is consistent with the market norm
for these types of contracts.
Although Bank X and Bank Y have virtually identical market exposures (ignoring credit risk for simplicity),
IFRS 13 would allow Bank X to consider a discount for lack of marketability but would preclude Bank Y
from applying a similar discount.
100 identical OTC
OTC derivative with a
contracts each with a
=
notional of CU 1 billion
/
CU10 million notional
For Bank X, the large notional amount (CU 1 billion) is a characteristic of the instrument being measured and
would likely be considered by market participants when transacting for the derivative based on its unit of
account (the derivative contract). As such, the fair value of the individual derivative should incorporate an
adjustment for size if market participants would consider one in pricing the instrument.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 206
