FAR Fair Value Measurement
The objectives of IFRS 13 are (3) ...
1. to define fair value
2. to set out a framework for measuring value
3. to require disclosures about fair value measurement
1. Fair value is defined as ...
1.1 The price that would be received
1.2 to sell an asset or pay to transfer a liability
1.3 in an orderly transaction
1.4 between market participants
1.5 at the measurement date
1.1 (exit) price definition
the price that is received to sell an asset or paid to transfer a liability
1.1 An exit price is based on ...
expectations about the future cash flows
1.3 An orderly transaction means that ...
there is sufficient time and exposure to a market to allow the usual marketing activities
Both ... and ... affect the determination of the fair value of an asset or liability
transaction and transport costs
Transaction costs are the ... , that are essential to the transaction
incremental direct costs
Transaction costs are defined as ... and are ... to the sale or transfer
the costs that would be incurred in the principal, directly attributable
incremental costs are costs that
would not otherwise have been incurred if the entity did not enter into that transaction
Transportation costs are those that are paid
to move the asset to the principal
The reason for not adjusting the fair value for transaction costs is that ... while transportation costs ...
transaction costs are not considered to be a characteristic of the asset or liability, are applied to fair value becaue of being characteristic
2. When measuring fair value, IFRS 13 requires an entity to determine the following (4)
2.1 The particular asset or liability
2.2 For a non-financial asset, the valuation grounds
2.3 The principal market for the asset
2.4 The valuation techniques
2.1 Determining the particular asset or liability (4)
2.1.1 What is the unit of account (stand alone price)
2.1.2 Any restrictions on sale / transfer of asset / liability
2.1.3 Condition of the asset
2.1.4 Location of the asset
Block discount definition
The price per unit would be expected to fall if a large volume of units were being sold as a package
When measuring fair value, an entity is required to assume that the hypothetical transaction to sell the asset or transfer the liability takes place either (2)
1. in the principal market, or when no principle market is present
2. most advantageous market
2.3 Principal market definition
The market with the greatest volume and level of activity for the asset or liability
When determing the most advantageous market you look at the ...
net amount
The principal (or most advantageous) market is considered from the perspective of the ... , which means that ...
reporting entity, it could be different for different companies
The principal (or most advantageous) market must be one that the entity ...
can access at the measurement date
1.4 Market participants are (3) ...
1. Independent and not related of each other
2. Knowledgeable with reasonable understanding
3. Able and willing to enter into a transaction for the asset or liability
2.4 Three valuation techniques apply
2.4.1 The market approach (market transactions / characteristics)
2.4.2 The income approach (future cashflow)
2.4.3 The cost approach (consideration to be paid)
Significant judgement is required in selecting the appropriate valuation technique for the situation (4)
1. The technique must be appropriate
2. Sufficient data needs to be available
3. Maximize observable inputs and minimise the use of unobservable inputs
4. Applied consistently
Inputs are the assumptions that ...
the market participants would use when pricing the assets or liability
Observable inputs definition
Inputs that are developed using open market data
Unobservable inputs definition
Inputs for which market data are not available and that are developed using the best information available
Regardless of the selected valuation technique, the inputs an entity uses must be ... and should ...
consistent with the characteristics of the asset or liability, exclude premiums or discounts
the price within a bid–ask spread that is most representative of fair value should be ... and is done by ...
used to measure fair value, mid-market pricing
To achieve consistency and comparability in the measurement of fair values, IFRS 13 provides a hierarchy of inputs (3)
1. Quoted market prizes
2. Observable inputs
3. Unobservable inputs
Level 1 inputs are defined as
1. Quoted prices (unadjusted)
2. in active markets
3. for identical assets or liabilities
4. that the entity can access at the measurement date
An active market definition (3)
1. A market in which transactions take place with sufficient frequency and volume
2. to provide pricing information
3. on an ongoing basis
The pricing of assets in an active market needs to be for ... and not mainly for ...
identical items, similar items
Level 2 inputs are any inputs, other than ... , that are ...
level 1 inputs, directly or indirectly observable
Examples of level 2 inputs (3)
1. Finished goods inventory at a retail outlet
2. Building held and used
3. Cash generating unit
Level 3 inputs are ...
unobservable
Examples of level 3 inputs are (3)
1. CGU
2. Trademark
3. Accounts receivable
The fair value of a non-financial asset must take into consideration the ... from a market participant perspective.
highest and best use of the asset
According to IAS 13, the highest and best use must be:
1. Physically possible
2. Legally possible
3. Financially feasible
The highest and best use is determined from ...
a market participant perspective
The fair value of the non-financial asset will either be measured assuming market participations would purchase the asset to benefit from the use or sale of the asset ...
on a stand alone basis or in combination with other assets
... measures the expected cash flows an ... expects to receive from using those assets
value in use, entity
Fair value measured measured under the ... is based on the cash flows that ... would expect to receive from the asset
in-use premise, market participants
The objective of a fair value measurement of a liability is to estimate the price that would be paid to ... the liability between market participants at the ... under current ...
transfer, measurement date, market conditions
A transfer of a liability assumes:
A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation
When an entity measures the fair value of a liability it also considers the effect of ... which is ...
non-performance risk, the risk that an entity will not fullfill an obligation
If the identical item is held by another party as an asset:
measure fair value from the perspective of a market participant that holds the asset
If the identical item is not held by another party as an asset:
measure the fair value using a valuation technique from the perspective of a market participant that owes the liability
If there is an asset available, IFRS 13 states that measurement of the corresponding asset should be in the following order of preference:
1. The quoted price of the asset in an active market
2. The quoted price for the asset in a market that is not active
3. A valuation under a technique such as an income approach or a market approach
If there is no asset available, the entity measuring the fair value of the liability must use ... In such cases, a ... could be applied.
a valuation technique from the perspective of a market participant that owes the same liability, present value technique
A fair value measurement assumes that ...
an entity's own equity instruments are transferred to a market participant at the measurement date
An entity's own equity instrument would ... and the market participant transferee would ... associated with the instrument
remain outstanding, take on the rights and responsibilities
If an entity holds financial instruments, it is exposed to ... and ...
market risk, credit risk
The disclosures are designed to provide users of financial statements with additional transparency regarding (3)
1. The extent to which fair value is used to measure assets and liabilities
2. The valuation techniques
3. The effect of level 3 fair value measurements
Recurring fair value measurements are those that other IFRSs require or permit in ... Non-recurring fair value measurements are those that other IFRSs require or permit in
the statement of financial position at the end of the period, particular circumstances
IFRS 13 requires the disclosure of information that assists users in understanding (5)
1. Policies and processes
2. Specific assets and liabilities
3. How fair value is measured
4. The likelihood that fair value could change
5. The reasons for changesin fair value between periods