IFRS 13: FAIR VALUE MEASUREMENT
Many
standards require you to measure fair value of some items. Examples of such
standards include
·
Financial Instruments
·
Biological assets
·
Assets held for Sale and many others
OBJECTIVES
The
objectives of IFRS 13 are:
·
to define fair value
·
to set out in a single IFRS a framework
for measuring fair value and
·
to require disclosures about fair value
measurements
What
is Fair Value?
Fair
value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.
The
price that would be received to sell an asset or paid to transfer a liability
is known as Exit price.
Principal/
Most advantageous market
An entity must first consider the principal market
before considering most advantageous market.
Principal
market is the market with the
greatest volume or activity level.
When there is no principal market, entity must
consider most advantageous market.
Most
advantageous market is the market
that would maximize the amount to sell asset or minimize the amount to transfer
liability after considering transaction and transport cost.
Note:
1. To determine fair value, transaction cost is not
accounted for by IFRS 13.
2. To determine fair value, transport cost is
adjusted only if location is a characteristic.
IFRS 13 states that in order to determine fair value
the entity should use assumptions that market participants use when pricing the
asset or liability.
This is because market participants must act in
their economic best interest.
Market
participants
They
are buyers and sellers in the principal or the most advantageous market for the
asset or liability, with the following characteristics
·
Independent
·
Knowledgeable
·
Able to enter into transaction
·
Willing to enter into transaction
When an entity performs the fair value measurement,
it must determine all of the following:
1. The particular asset or liability that is the
subject of the measurement
2. For a non-financial asset, the valuation premise
that is appropriate for the measurement
3. The principal (or most advantageous) market for
the asset or liability
4. The valuation techniques appropriate for the
measurement
• The availability of data with which to develop
inputs
• The level of the fair value hierarchy
APPLICATION
TO NON-FINANCIAL ASSETS
Fair
value of a non-financial asset shall be measured based on its highest and
best use from a market participant’s perspective.
The
highest and best use takes into account the use of the asset that is:
1.
Physically possible
2.
Legally permissible
3.
Financial feasible
The
asset or liability measured at fair value might be either:
1.
A stand-alone asset or liability
2.
A group of assets, a group of liabilities, or a group of assets and liabilities
NOTE:
Whether
asset or liability is stand-alone or a group depends on its unit of account.
FAIR
VALUE HIERARCHY
Inputs
to valuation techniques are categorized as follows:
1.
Level 1 inputs
They
are quoted prices in active markets for identical assets or liabilities that
the entity can assess at the measurement date. An example of Level 1 inputs is
quoted prices on shares traded on stock exchange.
2.
Level 2 inputs
They
are inputs other than quoted market prices included with Level 1 that
are observable for the asset or liability, either directly or indirectly.
Level
2 inputs include:
•
Quoted prices for similar assets or
liabilities in active markets
•
Quoted prices for identical or similar
assets or liabilities in markets that are not active
•
Inputs other than quoted prices that are
observable for the asset or liability.
3.
Level 3 inputs
They
are unobservable inputs for the asset or liability.
Eg:
financial forecasts, historical volatility, etc.
An
entity develops unobservable inputs using the best information available in the
circumstances, which might include the entity’s own data, taking into account
all information about market participant assumptions that is reasonably
available.
An
entity shall use valuation techniques that are appropriate in the circumstances
and for which
1.
sufficient data are available to measure fair value
2.
maximising the use of relevant observable inputs and
3.
minimising the use of unobservable inputs.
VALUATION
APPROACH
Valuation
approaches used to measure fair value fall under three (3) categories:
1.
Market Approach
It
uses prices and other relevant information by market transactions. E.g: matrix
pricing, market multiplies, etc.
2.
Income Approach
It
converts future amounts to a single current amount. E.g: present value, lattice
model, relief-from-royalty, etc.
3.
Cost Approach
It
reflects the amount that would be required currently to replace the service
capacity of an asset. Depreciated replacement cost method is an valuation
technique under the Cost Approach.
IFRS 13 - FAIR VALUE MEASUREMENT