today’s agenda - nelson cpa · 2011-10-13 · financial reporting 13 october 2011 ......

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© 2008-11 Nelson Consulting Limited 1

Fair Value Accounting in Financial Reporting 13 October 2011

Lam Chi Yuen, Nelson 林智遠MBA MSc BBA ACA ACS CFA CPA(Aust) CPA(US) CTA FCCA FCPA FHKIoD FTIHK MHKSI MSCA


Requirements of Fair Value under HKFRS and IFRS

Latest requirement under HKFRS and IFRS 13

Global Trend in Financial Reporting

Today’s Agenda

Fair Value Debate

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China

India (2011)

Hong Kong

Russia

U.S.Korea (2011)

Japan (2016?)

Canada (2011)

2015?

Europe

Blue areas indicate countries that require or permit IFRSs. Grey areas are countries seeking convergence with the IASB or pursuing adoption of IFRSs.



• Over 100 countries or places currently require or permit the use of, or have a policy of convergence with, IFRSs – 2005 is a critical year as Europe began to adopt IFRS

for its listed companies– China is one of the places regarded as having a set of

“substantially the same” accounting standards (since 2007)

– Hong Kong is one of the places fully converged to IFRS (since 2005)

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• Before (or even after) US and other countries have finally adopted IFRS, are there any potential issues? ‒ US GAAP is converging to IFRS or IFRS

converging to US GAAP‒ Pressure or impact from different countries,

stakeholders, non-accounting issues …..‒ Impact of financial tsunami‒ Fair value accounting


Requirements of Fair Value under HKFRS and IFRS

Today’s Agenda

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Introduction of HKFRS and IFRS

Asset

Liability

Equity

Income

Expense

Financial Position (in balance sheet)

Financial Performance (in income statement)

• a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise

• a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits

• the residual interest in the assets of the enterprise after deducting all its liabilities

• increases in economic benefits during a period in the form of– inflows or enhancements of assets or– decreases of liabilities that result in increases in equity– other than those relating to contributions from equity participants

• decreases in economic benefits during a period in the form of– outflows or depletions of assets or– incurrences of liabilities that result in decreases in equity,– other than those relating to distributions to equity participants

Balance Sheet Approach Financial Position Approach


Introduction of HKFRS and IFRS

Definition

Recognition

Measurement

Disclosure

What is it?

When is it recognised?

How much is it recognised and carried?

How is it showed in the financial statements?

Financial Position Approach

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Introduction: Financial Assets

• Financial instruments, including financial assets, financial liabilities and derivatives, are clearly defined and all such items shall be accounted for by using IAS 39

• Financial asset is recognised if it meets the recognition criteria: the entity becomes a party to the contractual provisions

of the instrument (“probable” flow-in is not required)

• Initially measured at fair value (plus transaction cost in most cases) while subsequently measured at either Fair value or Amortised cost (if conditions can be met)

• Certain information is required to be disclosed in the financial statements‒ IAS 32 and IFRS 7 provides more requirements on

presentation and disclosure of financial instruments

ExampleIAS 39 Financial Instruments: Recognition and Measurement

Definition

Recognition

Measurement

Disclosure


Introduction: Property, Plant and E.

• Property, plant and equipment (PPE) is clearly defined and properties not within the definition are not accounted for by using IAS 16

e.g. property held to earn rental is not covered by IAS 16• PPE is recognised if it meets the recognition criteria:

a) it is probable that future economic benefits associated with the item will flow to the entity; and

b) the cost of the item can be measured reliably.

• Initially measured at cost while subsequently measured by using either Cost model or Revaluation model

• Certain information is required to be disclosed in the financial statements

ExampleIAS 16 Property, plant and equipment

Definition

Recognition

Measurement

Disclosure

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Introduction: Investment Property

• Property held for rental and/or capital appreciation and meets other conditions is investment property (IP) that is accounted for by using IAS 40

• IP is recognised if it meets the recognition criteria:a) it is probable that future economic benefits associated

with the item will flow to the entity; andb) the cost of the item can be measured reliably.

• Initially measured at cost while subsequently measured by using either Cost model or Fair value model

• Certain information is required to be disclosed in the financial statements

ExampleIAS 40 Investment property

Definition

Recognition

Measurement

Disclosure

Any difference between revaluation model and fair value model?


Fair Value: What is it?

• Fair value is used or mentioned in most IFRSs• Fair value is defined as:

– the amount for which an asset could be exchanged,or a liability settled, between knowledgeable, willingparties in an arm’s length transaction

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• The same definition is used in different IFRSs,– The application to different assets and liabilities may not

be the same, for example:• IAS 16 Property, plant and equipment• IAS 36 Impairment of assets• IAS 38 Intangible assets• IAS 39 Financial instruments: recognition & measurement• IAS 40 Investment property• IFRS 2 Share-based payment• IFRS 3 Business combinations• IFRS 7 Financial instruments: Disclosure



• Fair value can be applied to– initial measurement,– subsequent measurement, or – both

Applied to initial measurement but not subsequent measurement:• Held-to-maturity (IAS 39)• Loans and receivables (IAS 39)• Business combination (IFRS 3)

Not applied to initial measurement but applied to subsequent measurement (incl. selective):• Property, plant and equipment

(IAS 16)• Intangible assets (IAS 38)• Investment property (IAS 40)

Example

Applied to both initial and subsequent measurement:• Inventories (IAS 2)• Financial assets and liabilities at

fair value through P/L (IAS 39)• Available for sale financial

assets (IAS 39)• Agriculture (IAS 41)

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Fair value model (e.g. IAS 40)

• Refers to fair value • Refers to fair value

Revaluation model (e.g. IAS 16)

• Changes in fair value recognised in profit or loss

• Changes in fair value recognised in equity (or other comprehensive income)

• No depreciation or amortisation is required

• Depreciation or amortisation is required

• Revalued at each reporting date • Not clearly defined, only require sufficient regular that no material different from fair value

• N/A • Deficit about fair value below depreciated cost is recognised in profit or loss

Example


Fair Value: What is it?How is fair value determined?

Active Market

Less Active Market

No Market but with reliable

measure

No Reliable Measure

1. The best evidence for fair value is the current bid price in an active market

2. If no such price in an active market, the information from a variety of sources can be considered, e.g.:a) Recent transaction priceb) Current prices in a less active marketc) Value derived from valuation techniques, including

– using recent arm’s length market transactions between knowledgeable, willing parties

– discounted cash flow analysis– option pricing models– other valuation techniques commonly used in

the market3. If some conditions are met and there is no other

reliable measure, the item is stated at cost

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IAS 16 Property, Plant and Equipment


PPE – Overview

Definition

Recognition

Measurement

Presentation and Disclosure

Measurement at RecognitionMeasurement after Recognition

• Property, plant and equipment (PPE) are tangible items that:a) are held for use

– in the production or supply of goods or services,

– for rental to others, or – for administrative purposes; and

b) are expected to be used during more than one period.

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PPE – Measurement at Recognition

• An item of PPE that qualifies for recognition as an asset shall be measured at its cost.

Cost • the amount of cash or cash equivalents paid or • the fair value of other consideration given to acquire an

asset at the time of its acquisition or construction, or

• where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSse.g. IAS 39, IFRS 2


PPE – Measurement after Recognition

• An entity shall choose either:

Cost Model

Revaluation Model

• as its accounting policy and• the entity shall apply that policy to

an entire class of PPE.

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Cost Model

Revaluation Model

After recognition as an asset, an item of PPE shall be carried at– Its cost– less

• any accumulated depreciation and • any accumulated impairment losses

After recognition as an asset, an item of PPE shall be carried at– a revalued amount, being its fair value at

the date of the revaluation, – Less

• any subsequent accumulated depreciation and

• subsequent accumulated impairment losses.


All IFRS/IAS have same definition on fair value now.


Revaluation Model

• Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

• The fair value of– land and buildings is usually determined from market-based

evidence by appraisal that is normally undertaken by professionally qualified valuers.

– items of PPE is usually their market value determined byappraisal.

• If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold, an entity may need to estimate fair value using

• an income or• a depreciated replacement cost approach.

What is fair value?

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Revaluation Model

• The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalued.a) When the fair value of a revalued asset differs materially from its

carrying amount, a further revaluation is required.b) Some items of PPE experience significant and volatile changes in

fair value, thus necessitating annual revaluation.c) Such frequent revaluations are unnecessary for items of PPE with

only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every 3 or 5 years.

Revaluations shall be made with sufficient regularity– to ensure that the carrying amount does not

differ materially from the fair value at the balance sheet date.



Revaluation Model

• If an item of property, plant and equipment is revalued,– the entire class of PPE to which that asset belongs shall

be revalued• If an asset’s carrying amount is increased as a result of

a revaluation, the increase shall be credited directly to equity under the heading of revaluation surplus.– However, the increase shall be recognised in profit or

loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.

• If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.– However, the decrease shall be debited directly to equity

under the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.

ClassEntire class

To Equity directly

Negative to P/L

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• Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

• Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

• Useful life is:a) the period over which an asset is expected to be available for use by an entity; orb) the number of production or similar units expected to be obtained from the asset by

an entity.• The residual value of an asset is the estimated amount that an entity would

currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

DepreciationCost Model

Revaluation Model



• To determine whether an item of PPE is impaired, an entity applies IAS 36

• Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable

Depreciation

Depreciable amount

Depreciation method

Impairment

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IAS 40 Investment Property


• Investment property is property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciationor both, rather than for:a) use in the production or supply of goods or

services or for administrative purposes; orb) sale in the ordinary course of business

• An investment property shall be measured initially at its cost.‒ Transaction costs shall be included in the initial measurement.

IP – Measurement at Recognition

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IP – Measurement after Recognition

• However, even Cost Model is adopted, IAS 40 still requires all entities to determine the fair value of investment property ……• For disclosure purpose, the fair value of the investment property

has to be disclosed in notes to the financial statement!• In determining the fair value of investment property for both cost

model and fair value model an entity is only encouraged, but not required, to rely on a

professional valuer’s valuation

Cost Model

Fair Value ModelAllow Cost Model and choose either

and



Fair Value Model• After initial recognition, an entity that chooses • shall measure all of its investment property at fair value, except in

the cases that1. the fair value cannot be determined reliably, or2. the cost model is chosen for the investment property backing liabilities that pay a

return linked directly to the fair value of, or returns from specific assets including that investment property

• When a property interest held by a lessee under an operating lease is classified as an investment property the fair value model must be applied for all investment

properties• A gain or loss arising from a change in the fair value of

investment property shall be recognised in profit or loss for the period in which it arises

Depreciation?

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IAS 40• Uses fair value

– IAS 40 only encourages, but not requires, a profession valuation on a fair value


Fair Value Model

• Fair value is defined as the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction– Same definition used in other IFRSs and IASs– But IAS 40 provides more explanations unique for a fair value of a property

• The fair value of investment property shall reflectmarket conditions at the balance sheet date

Depreciation?

No depreciation required in IAS 40



Fair Value Model• There is a rebuttable presumption that an entity can reliably determine the fair value of an investment property on a continuing basis.

• However, in exceptional cases and in initial recognition of investment property, there is clear evidence that the fair value of the investment property is not reliably determinable on a continuing basis.– This arises when, and only when,

• comparable market transactions are infrequent and• alternative reliable estimates of fair value (for example, based on

discounted cash flow projections) are not available.• In such cases, an entity shall measure that investment property (alone)

using the cost model in IAS 16– residual value shall be assumed to be zero– apply IAS 16 until disposal of the investment property– shall continue to account for other investment properties using the

fair value model

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IFRS 3 Business Combinations


蘋果日報 (2011.5.28)

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IFRS 3 – Key Changes

• Extended the scope, i.e. less exemption • Acquisition-date fair value extensively applied,

including:– Non-controlling interests (or minority interests) can be

measured at “full” fair value approach– Goodwill can incorporate the goodwill of non-

controlling interests– Intangible asset identified in the business

combination shall be measured at fair value– Contingent consideration shall be measured at fair

value• Step acquisition shall be measured by a different

approach• All transactions costs to be expensed

Application of the method

Method of accounting

Scope












ScopeUBS Securities Asia Ltd. states that• The accounting rule states all

payments to purchase a businessare to be recorded at fair value

at the acquisition date, with contingent payments classified as debt (under balance of purchase consideration payable), subsequently remeasured through the consolidated profit and loss account. (25.5.2011)

Li & Fung issued a clarification announcement on 27.5.2011 and stated:• It is stated on page 11 of the Report that …… “L&F has recently adopted a new

accounting rule, HKFRS 3 (revised). This potentially allows companies to convert earn-out payments to earnings”.

• These statements are misleading …… It is not optional ……

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Scope

Li & Fung clarified on 27.5.2011 that:• It is also stated on page 23 of the Report that “goodwill is not tested annually for

impairment or when there are indications of impairment”. • These statements are all fundamentally incorrect.

HKFRS 3 (revised 2007) states:• The acquirer measures goodwill at the amount recognised at the acquisition date

less any accumulated impairment losses. • HKAS 36 Impairment of Assets prescribes the accounting for impairment losses.

(HKFRS 3.63a)

UBS Securities Asia Ltd. states:• Under the new accounting rule,

goodwill associated with the acquired operation will not be impaired …... (See the appendix section for more detail)

• …… goodwill is not tested annually for impairment or when there are indications of impairment. (25.5.2011)


The Acquisition Method

• An operating lease in which the acquiree is the lessee is normally not recognised as assets or liabilities except for:

– if the terms of an operating lease are favourable relative to market terms the acquirer shall recognise an intangible asset

– if the terms are unfavourable relative to market terms the acquirer shall recognise a liability (IFRS 3.B29)

• If the terms of an operating lease in which the acquiree is the lessor are either favourable or unfavourable when compared with market terms

– The acquirer does not recognise a separate asset or liability(IFRS 3.B42)

• Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree

Example

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Financial Instruments(IFRS 9)

Chapters1 Objective2 Scope3 Recognition and Derecognition4 Classification5 Measurement6 Hedge Accounting (not used yet)7 Disclosures (not used yet)8 Effective Date and Transition7


Background

• In response to the input received on its work responding to the financial crisis, and following the conclusions of the G20 leaders and the recommendations of international bodies, – the IASB announced an accelerated timetable for

replacing IAS 39 in April 2009, and– finally, IFRS 9 Financial Instruments in Nov. 2009

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Chapter 3 Recognition & Derecognition

• An entity shall recognise a financial asset or a financial liability in its statement of financial position when, and only when, – the entity becomes party to the contractual provisions of

the instrument. • When an entity first recognises a financial asset, it shall

– classify it in accordance with paragraphs 4.1.1-4.1.5 and

– measure it in accordance with paragraph 5.1.1 and5.1.2.

• When an entity first recognises a financial liability, it shall – classify it in accordance with paragraphs 4.2.1 and

4.2.2 and – measure it in accordance with paragraph 5.1.1.

(para. 3.1.1)

Same as before

Amended(Ch. 4 of IFRS 9)

Amended(Ch. 5 of IFRS 9)

Similar toIAS 39

Same para. as financial assets


Chapter 4.1 Classification of FA

• Unless para. 4.1.5 of IFRS 9 (so-called “fair value option”) applies, an entity shall classify financial assets as subsequently measured at either – amortised cost or– fair value

on the basis of both:a) the entity’s business model for managing the financial assets; andb) the contractual cash flow characteristics of the financial asset.

(para. 4.1.1)

Amortised cost Fair value

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Chapter 4.1 Classification of FA

Fair value through other comprehensive income

Meet the contractual cash flow characteristics?

Amortised cost

Determine the category of a financial asset for subsequent measurement

No

Fair value

Choose fair value option?

No

Yes

Yes

Fair value throughprofit or loss

Meet the business model for managing the financial asset?

Yes

No

Sourced: Intermediate Financial Reporting, 2nd (forthcoming) by Nelson Lam & Peter Lau


For those classified as measured at fair value

Chapter 5.7 Gains and Losses

Fair value option?Yes

Equity instrument?

Elected to present gains and losses in other comprehensive income?

No

Held for trading?

Yes



No

Yes

Yes

No

No

Part of hedging relationshipYes

No

Hedge accounting(IAS 39.89 to 102)


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Equity instrument?



• Under IFRS 9, amount presented in other comprehensive income shall not be subsequently transferred to profit or loss– Implies that

• no recycling of any fair value change on those financial assets measured at fair value through other comprehensive income to profit or loss (or income statement)

• no gain or loss will be recognised in profit or loss (or income statement) on derecognition of such investments in equity instruments




• A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss unlessa. It is part of a hedging relationshipb. the financial asset is an

investment in an equity instrumentand the entity has elected to present gains and losses on that investment in other comprehensive income ……

yFinancial liability

• If it is financial liability,– a financial liability designated as at fair value through profit or loss

and the entity is required to present the effects of changes in the liability’s credit risk in other comprehensive income in accordance with para. 5.7.7. (para. 5.7.1)

Presentedin OCI

Credit risk

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Chapter 7 Effective Date & Transition

Effective date• An entity shall apply IFRS 9 for annual periods

beginning on or after 1 January 2013. • Earlier application is permitted. • However, if an entity elects to apply IFRS 9 early

and has not already applied IFRS 9 issued in 2009, it must apply all of the requirements in IFRS 9 at the same time (but see also para. 7.3.2).

• If an entity applies IFRS 9 in its financial statements for a period beginning before 1 January 2013, – it shall disclose that fact and at the same time apply

the amendments in Appendix C (i.e. Amendments to other IFRSs). (para. 7.1.1)


Chapter 7 Effective Date & Transition

Transition• An entity shall apply IFRS 9 retrospectively, in

accordance with IAS 8, except as specified in paragraphs 7.2.4–7.2.15.

• IFRS 9 shall not be applied to items that have already been derecognised at the date of initial application. (para. 7.2.1)

The IASB published on 4 Aug. 2011 for public comment an exposure draft of

proposals to adjust the mandatory effective date of IFRS 9 to

1 January 2015

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Today’s Agenda

Fair Value Debate


Fair Value Debate

Housing price declines

Value of MBS (mortgage back securities) declines

Mark-to-market losses recognised

To raise capital (say by selling MBS)

Credit ratings downgraded Eventually, entity collapse …..

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Fair Value Debate

• William Isaac, Past Chairman of the US Federal Insurance Deposit Corp. complained that fair value accounting or mark-to-market rule is the chief culprit in the global financial crisis and “should be withdrawn immediately”, noting “hundreds of billions of dollars have been lost because of these rules.” (A Plus Dec. 2008)

• FASB Chairman Bob Herz said: “The concept of fair value, which was intended to help bring transparency, was scorned by some as a villain, exacerbating the (economic) turmoil, and heralded by others as a savior in revealing the problems on a timely basis”

(Journal of Accountancy Dec. 2008)


Fair Value Debate

• France supported by some countries within European Commission was lobbying very hard for changes in IFRS, in particular IAS 39, i.e. including fair value accounting rule.

(A Plus Dec. 2008)

• Sir David Tweedie even nearly quit from the Chairman of the International Accounting Standard Board due to political pressure from the European Commission that forced to changes in fair value accounting rules

(Financial Times Nov. 2008)

• The American Bankers Association is currently the leading critic, saying that fair value has exaggerated losses at financial institutions.

(Financial Week Oct. 2008)

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• US SEC Chairman, Christopher Cox, said “the current concept of mark-to-market accounting increases the transparency of financial information.” (InvestorNews Dec. 2008)

• “However, those criticising fair value accounting do not seem to provide any credible alternatives.”

• “Do we go back to historical cost accounting, wherein the financial assets are stated at outdated values and hence are not relevant or reliable?” (The Economic Times, 21 Nov. 08)

Fair Value Debate: Defend

• “Admittedly, fair value measurement is not a perfect system ….. But calls to scrap or suspend the implementation of fair value rules are unwarranted.” (CFA Magazine, Jul-Aug 2008)


Fair Value Debate: Steps Taken

• On 2 April 2009, after the continuous pressure from US Congress and the banks …….“The US standard-setter has relaxed fair value accounting rules for bank assets in a move that allows them to ignore market prices where the market for those assets is judged to be illiquid or distressed.”

“In a bid to reduce pressure on banks carrying toxic assets on their balance sheets, the Financial Accounting Standards Board also voted to allow banks to book smaller losses on impaired assets that are listed for sale.”

“US markets reacted strongly, welcoming FASB's decision. • “The Dow Jones Index topped 8,000 for the first time since 9

February.”• “The cheer spread to the UK, where the FTSE 100 rose 4.3

per cent to 4,125 in the first time it has closed above 4,000 for more than a month.”

(Accountancy Age, 3 April 2009)

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(Apple Daily, 3 April 2009)

Fair Value Debate: Steps Taken


Latest requirement under HKFRS and IFRS 13

Today’s Agenda

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Introduction

• IFRS 13 is a single standard to address the measurement fair value used in many other IFRSs:a. defines fair value;b. sets out in a single IFRS a framework for

measuring fair value; andc. requires disclosures about fair value

measurements. (IFRS 13.1)

Definition of Fair Value

Single Framework for Single Framework for FV Measurement

Disclosure


Agenda for IFRS 13

1. Applicable Standard and Scope2. Definition of Fair Value3. Fair Value Measurement4. Application to Specific Situations5. Fair Value at Initial Recognition6. Valuation Techniques7. Fair Value Hierarchy

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1. Applicable Standard and Scope

• With effective from annual periods beginning on or after 1 January 2013, except in specified circumstances as set out below, an entity is required to apply IFRS 13, when another IFRS requires or permits1. Fair value measurements, or disclosures about

fair value measurements; and2. Measurements, such as fair value less costs to

sell, based on fair value, or disclosure about those measurements. (IFRS 13.5)


2. Definition of Fair Value

• Fair value is defined as – 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. (IFRS 13.9)

– i.e. an exit price• It is a market-based measurement, not an

entity-specific measurement• Historically, fair value is normally defined as:

– The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.


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2. Definition of Fair Value

• Fair value is defined as – 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. (IFRS 13.9)

– i.e. an exit price• It is a market-based measurement, not an

entity-specific measurement• Historically, fair value is normally defined as:

– The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.


The IASB considered the previous definition of fair value:a. did not specify whether an entity is buying or selling the asset;b. was unclear about what is meant by settling a liability because it did

not refer to the creditor, but to knowledgeable, willing parties; andc. did not state explicitly whether the exchange or settlement takes

place at the measurement date or at some other date (IFRS 13.BC30)


3. Fair Value Measurement

• IFRS 13 explains that a fair value measurement requires an entity to determine the following:a. the particular asset or liability being measured;b. for a non-financial asset, the highest and best use

of the asset and whether the asset is used • in combination with other assets or • on a stand-alone basis;

c. the market in which an orderly transaction would take place for the asset or liability; and

d. the appropriate valuation technique(s) to use when measuring fair value.

• The valuation technique(s) used should maximise the use of relevant observable inputs and minimise unobservable inputs.

• Those inputs should be consistent with the inputs a market participant would use when pricing the asset or liability. (IFRS 13.IN10)

Single Framework for Single Framework for FV Measurement

Fair Value Hierarchy (3 levels)

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Measurement Date

For Particular Asset or Liability

Orderly Transaction

Market Participants

ExitPrice

Principal Market

Most Advantageous

Market

Fair value




• IFRS 13 also assumes that the orderly transaction to sell the asset or transfer the liability can take place either:1. In the principal market for the asset or liability; or2. In the absence of a principal market, in the most advantageous

market for the asset or liability (IFRS 13.16)

Orderly Transaction

Principal Market

Most Advantageous

Market

• Principal market is defined as – the market with the greatest volume and

level of activity for the asset or liability.• Most advantageous market is defined as

– the market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs.


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4. Application to Specific Situations

• In applying the fair value measurement, IFRS 3 introduces the concepts of highest and best use and valuation premise for non-financial assets, but it also explains that they would not apply to financial assets or to liabilities.

• Together with the application to non-financial assets, IFRS 3 addresses application to at least three groups of items:1. Application to non-financial assets;2. Application to liabilities and an entity’s own equity instruments; and3. Application to financial instruments within a portfolio, i.e. the financial

assets and financial liabilities with offsetting positions in market risks or counterparty credit risk.


5. Fair Value at Initial Recognition

• IFRS 13 specifies the consideration when fair value is required or permitted to use in initial recognition of an asset or a liability.– IFRS 13 has not specified whether fair value should be used for initial

recognition of an asset or a liability– An asset or a liability is initially recognised at a basis in accordance with the

corresponding IFRS and. • Historically, IFRS commonly addresses that the fair value on initial

recognition is normally the transaction price. • However, IFRS 13 uses the phrase “in many cases” to substitute the

word “normally” in describing the relationship between the fair value and transaction price. – The change represents that a fair value is defined as

a current exit price in IFRS 13 – but a transaction price is considered as an entry price.

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6. Valuation Techniques

• In selecting and using valuation techniques in fair value measurement, an entity is required to use– Valuation techniques that are appropriate in the

circumstances and for which sufficient data are available to measure fair value.

– The techniques maximising the use of relevant observable inputs and minimising the use of unobservable inputs. (IFRS 13.61)

• IFRS 13 – sets out three valuation approaches to guide the

selection and use of valuation techniques; – imposes requirements on the inputs to be used in each

technique and then it in turn also affects the selection and use of valuation techniques.



• IFRS 13 sets out the following three valuation approaches to guide the selection and usage of valuation techniques and 1. Market approach,2. Cost Approach, and3. Income Approach.

• An entity is required to use valuation techniques consistent with one or more of the valuation approaches to measure fair value.

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• In fair value measurement, – an entity is not only required to use the valuation

techniques consistent with one or more of the three valuation approaches, but also required to use the techniques,1. Maximising the use of relevant observable

inputs and2. Minimising the use of unobservable inputs

(IFRS 13.67)



• Present value techniques are the valuation techniques consistent with income approach to measure fair value and are specified in the application guidance of IFRS 13.

• The application guidance of IFRS 13 sets out – the general principles in using present value

techniques and– the consideration of risk and uncertainty.

• IFRS 13 also specifies the following two present value techniques:1. Discount rate adjustment technique; and2. Expected present value technique.

In order to understand them, IFRS 13 also explains the portfolio theory, unsystematic (diversifiable) risk, systematic (non-diversifiable) risk ……

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7. Fair Value Hierarchy

• To increase consistency and comparability in fair value measurements and related disclosures, IFRS 13 establishes a fair value hierarchy that categorises the inputs to valuation techniques used to measure fair value into the following three levels:– Level 1 inputs– Level 2 inputs– Level 3 inputs


7. Fair Value Hierarchy

No

Yes

Quoted price in active market? Level 1 Inputs

Significant unobservable

inputs?Level 2 Inputs

Level 3 Inputs

Adjusted?Yes

Yes

No

NoObservable inputs?

No

Yes


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IFRS 13: Effective Date

• An entity shall apply IFRS 13 for annual periods beginning on or after 1 January 2013.

• Earlier application is permitted. • IFRS 13 shall be applied prospectively as of the beginning of

the annual period in which it is initially applied.• The disclosure requirements of IFRS 13 need not be applied in

comparative information provided for periods before initial application of IFRS 13. (IFRS 13.C1)



Lam Chi Yuen, Nelson 林智遠[email protected]/NelsonCPA

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Q&A SessionQ&A Session


Lam Chi Yuen, Nelson 林智遠[email protected]/NelsonCPA

today’s agenda - nelson cpa · 2011-10-13 · financial reporting 13 october 2011 ......

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