0.3%-2.0%
Investment properties:
Commercial
–
31 Discounted long-term net operating income
Asia
cash flow
margin
18%-32% (20%)
cap rate
0.08-0.12 (0.10)
Market
price per square metre (USD)
$3,000-$7,000
comparable
($4,500)
companies
Commercial
–
27 Discounted long-term net operating income
Europe
cash flow
margin
15%-25% (18%)
cap rate
0.06-0.10 (0.08)
Market
price per square metre (EUR)
€4,000-€12,000
comparable
(€8,500)
companies
(a)
Represents amounts used when the entity has determined that market participants would take into account these
premiums and discounts when pricing the investments.
(b)
Represents amounts used when the entity has determined that market participants would use such multiples when
pricing the investments.
(c)
The entity has determined that the reported net asset value represents fair value at the end of the reporting period.
(d)
Represents the range of volatility curves used in the valuation analysis that the entity has determined market
participants would use when pricing the contracts.
(e)
Represents the range of the credit default swap curves used in the valuation analysis that the entity has determined
market participants would use when pricing the contracts.
(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)
1082 Chapter 14
20.3.6
Level 3 reconciliation
IFRS 13 requires a reconciliation (also referred to as the Level 3 roll-forward) of the
beginning and ending balances for any recurring fair value measurements that utilise
significant unobservable inputs (i.e. Level 3 inputs). Therefore, any asset or liability
(measured at fair value on a recurring basis) that was determined to be a Level 3
measurement at either the beginning or the end of a reporting period would need to be
considered in the Level 3 reconciliation.
To reconcile Level 3 balances for the period presented, entities must present the
following information for each class of assets and liabilities:
• balance of Level 3 assets or liabilities (as at the beginning of the period);
• total gains or losses;
• purchases, sales, issues and settlements (presented separately);
• transfers in and/or out of Level 3 (presented separately); and
• balance of Level 3 assets or liabilities (as at the end of the period).
In addition, entities are required to separately present gains or losses included in
earnings from those gains or losses recognised in other comprehensive income, and to
describe in which line items these gains or losses are reported in profit or loss, or in
other comprehensive income. To enhance the ability of financial statement users to
assess an entity’s quality of earnings, IFRS 13 also requires entities to separately disclose
the amount of total gains and losses reported in profit or loss (for the period) that are
attributable to changes in unrealised gains and losses for assets and liabilities categorised
within Level 3 and are still held at the end of the reporting period. Effectively, this
requires an entity to distinguish its unrealised gains and losses from its realised gains and
losses for Level 3 measurements.
The following example from IFRS 13 illustrates how an entity could comply with the
Level 3 reconciliation requirements. [IFRS 13.IE61]. Extract 14.3 from BP p.l.c. and
Extract 14.4 from Rio Tinto plc at 20.3.8.A below also illustrates these disclosure
requirements in relation to derivatives categorised within Level 3.
Fair value measurement 1083
Example 14.28: Reconciliation of fair value measurements categorised within
Level 3 of the fair value hierarchy
Fair value measurements using significant unobservable inputs (Level 3)
(CU in millions)
Hedge
fund
Other equity
invest-
Deriv-
Investment
securities Debt
securities
ments
atives
properties
bt
stry
s
s
sed ons
s
racts
du
stry
ntial
fund
Asia
Total
indu
-yield de
Europe
Healthcare
rivate equity
Reside
securitie
securitie
securitie
Commercial
Energy in
P
Collaterali debt obligati
High
Credit cont
mortgage-backed
mortgage-backed
Opening balance
49 28 20 105
39 25
145
30 28 26
495
Transfers into
Level 3
(a)(b)60
60
Transfers out of
Level 3
(b)(c)(5)
(5)
Total gains or losses
for the period
Included in profit
or loss
5
(23)
(5)
(7) 7 5
3
1
(14)
Included in other
comprehensive
income 3
1
4
Purchases, issues,
sales and settlements
Purchases
1 3
16 17
18
55
Issues
Sales
(12)
(62)
(74)
Settlements
(15)
(15)
Closing balance
53 32 25 125 50 35
90
38 31 27 506
Change in unrealised
gains or losses for the
period included in
profit or loss for
assets held at the end
of the reporting period
5
(3)
(5)
(7)
(5)
2
3
1
(9)
(a)
Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from a decrease in
market activity for the securities.
(b)
The entity’s policy is to recognise transfers into and transfers out of Level 3 as at the date of the event or
change in circumstances that caused the transfer.
(c)
Transferred from Level 3 to Level 2 because observable market data became available for the securities.
(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)
1084 Chapter 14
IFRS 13 also provides the following example to ill
ustrate how an entity could comply
with the requirements to separately disclose the amount of total gains and losses
reported in profit or loss that are attributable to changes in unrealised gains and losses
for assets and liabilities categorised within Level 3 and are still held at the end of the
reporting period. [IFRS 13.IE62].
Example 14.29: Gains and losses
(CU in millions)
Non-financial
Financial income
income
Total gains or losses for the period included in profit or loss
(18) 4
Change in unrealised gains or losses for the period included in
profit or loss for assets held at the end of the reporting period
(13) 4
(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the
entity.)
20.3.7
Disclosure of valuation processes for Level 3 measurements
Entities are required to describe the valuation processes used for fair value measurements
categorised within Level 3 of the fair value hierarchy, whether on a recurring or non-
recurring basis. This is illustrated in the extract below from the financial statements of UBS
Group AG. The Boards decided to require these disclosures for Level 3 measurements
because they believe this information, in conjunction with the other Level 3 disclosures,
will help users assess the relative subjectivity of these measurements.
Extract 14.2: UBS Group AG (2017)
Notes to the UBS Group AG consolidated financial statements [Extract]
Note 22 Fair value measurement (continued) [Extract]
b) Valuation governance [Extract]
UBS’s fair value measurement and model governance framework includes numerous controls and other procedural
safeguards that are intended to maximize the quality of fair value measurements reported in the financial statements.
New products and valuation techniques must be reviewed and approved by key stakeholders from risk and finance control
functions. Responsibility for the ongoing measurement of financial and non-financial instruments at fair value resides
with the business divisions. In carrying out their valuation responsibilities, the businesses are required to consider the availability and quality of external market data and to provide justification and rationale for their fair value estimates.
Fair value estimates are validated by risk and finance control functions, which are independent of the business divisions.
Independent price verification is performed by Finance through benchmarking the business divisions’ fair value estimates
with observable market prices and other independent sources. Controls and a governance framework are in place and are
intended to ensure the quality of third-party pricing sources where used. For instruments where valuation modes are used to determine fair value, independent valuation and model control groups within Finance and Risk Control evaluate UBS’s
models on a regular basis, including valuation and model input parameters as well as pricing. As a result of the valuation controls employed, valuation adjustments may be made to the business divisions’ estimates of fair value to align with
independent market data and the relevant accounting standard.
Fair value measurement 1085
IFRS 13 provides an example of how an entity could comply with the requirements to
disclose the valuation processes for its Level 3 fair value measurements, suggesting this
disclosure might include the following:
(i) for the group within the entity that decides the entity’s valuation policies and
procedures:
• its description;
• to whom that group reports; and
• the internal reporting procedures in place (e.g. whether and, if so, how
pricing, risk management or audit committees discuss and assess the fair
value measurements);
(ii) the frequency and methods for calibration, back testing and other testing
procedures of pricing models;
(iii) the process for analysing changes in fair value measurements from period to period;
(iv) how the entity determined that third-party information, such as broker quotes or
pricing services, used in the fair value measurement was developed in accordance
with the IFRS; and
(v) the methods used to develop and substantiate the unobservable inputs used in a
fair value measurement. [IFRS 13.IE65].
20.3.8
Sensitivity of Level 3 measurements to changes in significant
unobservable inputs
IFRS 13 requires entities to provide a narrative description of the sensitivity of recurring
Level 3 fair value measurements to changes in the unobservable inputs used, if changing
those inputs would significantly affect the fair value measurement. However, except in
relation to financial instruments (see 20.3.8.A below) there is no requirement to quantify
the extent of the change to the unobservable input, or the quantitative effect of this
change on the measurement (i.e. only discuss directional change).
At a minimum, the unobservable inputs quantitatively disclosed based on the
requirements described at 20.3.5 above must be addressed in the narrative description.
In addition, entities are required to describe any interrelationships between the
unobservable inputs and discuss how they might magnify or mitigate the effect of
changes on the fair value measurement.
This disclosure, combined with the quantitative disclosure of significant unobservable
inputs, is designed to enable financial statement users to understand the directional
effect of certain inputs on an item’s fair value and to evaluate whether the entity’s views
about individual unobservable inputs differ from their own. The Boards believe these
disclosures can provide meaningful information to users who are not familiar with the
pricing models and valuation techniques used to measure a particular class of assets or
liabilities (e.g. complex structured instruments).
1086 Chapter 14
The following example from IFRS 13 illustrates how an entity could comply with the
disclosure requirements related to the sensitivity of Level 3 measurements to changes
in significant unobservable inputs. [IFRS 13.IE66].
Example 14.30: Narrative description of sensitivity to significant unobservable
inputs
The significant unobservable inputs used in the fair value measurement of the entity’s residential mortgage-
backed securities are prepayment rates, probability of default and loss severity in the event of default.
Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower
(higher) fair value measurement. Generally, a change in the assumption used for the probability of default is
accompanied by a directionally similar change in the assumption used for the loss severity and a directionally
opposite change in the assumption used for prepayment rates.
We note that the above example is fairly general in nature, because no numbers relating
to how the unobservable inputs might be changed, or how such a change would affect
fair value, are required to be disclosed. However, in making this disclosure we would
encourage entities to avoid over-generalisations that may not hold true in all cases.
20.3.8.A
Quantitative sensitivity of Level 3 measurements of financial instruments
to changes
in significant unobservable inputs
In addition to the qualitative sensitivity analysis, IFRS 13 requires quantitative sensitivity
analysis for Level 3 fair value measurements of financial assets and financial liabilities
(as noted at 20.3.1.B above, this is only for recurring fair value measurements), which is
generally consistent with the existing disclosure requirement in IFRS 7 (see Chapter 50).
If changing one or more of the unobservable inputs to reflect reasonably possible
alternative assumptions would change fair value significantly, an entity must disclose
the fact and the effect of those changes.
The entity must also disclose how the effect of a change to reflect a reasonably
possible alternative assumption was calculated. For the purpose of this disclosure
requirement, significance is 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 and total equity.
Fair value measurement 1087
The following extracts from BP p.l.c. and Rio Tinto plc illustrates the disclosures
required for Level 3 measurements.
Extract 14.3: BP p.l.c. (2014)
28. Derivative financial instruments [Extract]
Level 3 derivatives
The following table shows the changes during the year in the net fair value of derivatives held for trading purposes
within level 3 of the fair value hierarchy.
$
million
Oil
Natural gas
Power
price
price
price Other Total
Net fair value of contracts at 1 January 2014
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 214
