A86045 Accoun,ng and Financial Repor,ng (2016/2017) Session 12 bis Fair Value Measurement Paul G. Smith B.A., F.C.A.
Objec,ves of Session 12 bis Fair Value At the end of this session session students will understand the defini,on of fair value; how to apply the fair value measurement framework; and the required disclosures about fair value measurements. A 86045 Accoun,ng and Financial 2 Repor,ng
Overview of Session 12 bis – Fair Value • Objec,ve of IFRS 13 • IASs and IFRSs impacted • Defini,on of Fair Value • Fair Value Framework • Valua,on techniques - Fair Value hierarchy • Disclosures A 86045 Accoun,ng and Financial 3 Repor,ng
OBJECTIVE OF IFRS 13 A 86045 Accoun,ng and Financial 4 Repor,ng
Objec,ve of IFRS 13 IFRS 13 defines fair value, provides principles-based guidance on how to measure fair value and requires informa,on about those fair values to be disclosed. IFRS 13 does not address which assets and liabili,es to measure at fair value or when those measurements must be performed. An en,ty must look to other standards in that regard. See a1ached file SM1 A 86045 Accoun,ng and Financial 5 Repor,ng
IASS AND IFRSS IMPACTED BY IFRS 13 A 86045 Accoun,ng and Financial 6 Repor,ng
IASs and IFRSs Impacted by IFRS 13 SM 1 IFRS Standards and Fair Value Implica,ons Worksheet A 86045 Accoun,ng and Financial 7 Repor,ng
Exercise DEFINITION OF FAIR VALUE A 86045 Accoun,ng and Financial 8 Repor,ng
Defini,on of Fair Value Fair value is the price that would be received to sell and asset or paid to transfer a liability in an orderly transac;on between market par;cipants at the measurement date. A 86045 Accoun,ng and Financial 9 Repor,ng
FAIR VALUE FRAMEWORK A 86045 Accoun,ng and Financial 10 Repor,ng
Fair Value measurement Framework - 1 The asset or liability Principal or most Highest & best use advantageous market and Valua,on premise (Non-financial assets Market par,cipant only) characteris,cs Maximise Level 1 inputs and Inputs Valua,on techniques Minimize level 3 inputs Fair value (The price in an orderly If needed, allocate to transac,on between unit of account market par,cipants) Disclosures including fair value hierarchy categoriza,on (based on the lowest level input that is significant to fair value A 86045 Accoun,ng and Financial 11 Repor,ng
Fair Value measurement Framework - 2 The asset or The asset or liability liability Principal or most A fair value measurement is for Highest & best use advantageous market a par,cular asset or liability. and Valua,on Therefore, when measuring fair premise value an en,ty shall take into (Non-financial assets Market par,cipant only) characteris,cs account the characteris,cs of the asset or liability if market par,cipants would take those Maximise Level 1 inputs characteris,cs into account and Inputs Valua,on techniques Minimize level 3 inputs when pricing the asset or liability at the measurement date. Such characteris,cs include, for example, the Fair value (The price in an orderly If needed, allocate to following: transac,on between unit of account a) The condi,on and loca,on market par,cipants) of the asset; and b) Restric,ons, if any, on the sale or use of the asset Disclosures including fair value Could be a stand-alone or group hierarchy categoriza,on (based on the lowest level of assets or liabili,es or both. input that is significant to fair value A 86045 Accoun,ng and Financial 12 Repor,ng
Fair Value measurement Framework - 3 The asset or The TransacIon liability Principal or most A fair value measurement Highest & best use advantageous market assumes that the asset or and Valua,on liability is exchanged in an premise orderly transac,on between (Non-financial assets Market par,cipant only) characteris,cs market par,cipants to sell the asset or transfer the liability at the measurement date under Maximise Level 1 inputs current market condi,ons. and Inputs Valua,on techniques Minimize level 3 inputs A fair value measurement assumes that the transac,on to sell the asset or transfer the Fair value (The price in an orderly If needed, allocate to liability takes place either: transac,on between unit of account a) In the principal market for market par,cipants) the asset or liability; or b) In the absence of a principal market, in the most Disclosures advantageous market for including fair value the asset or liability. hierarchy categoriza,on (based on the lowest level input that is significant to fair value A 86045 Accoun,ng and Financial 13 Repor,ng
Fair Value measurement Framework – 4 The asset or Market ParIcipants liability Principal or most An en,ty shall measure the fair Highest & best use advantageous market value of an asset or a liability and Valua,on using the assump,ons that premise market par,cipants would use (Non-financial assets Market par,cipant only) characteris,cs when pricing the asset or liability, assuming that market par,cipants act in their Maximise Level 1 inputs economic best interest. and Inputs Valua,on techniques Minimize level 3 inputs Fair value (The price in an orderly If needed, allocate to transac,on between unit of account market par,cipants) Disclosures including fair value hierarchy categoriza,on (based on the lowest level input that is significant to fair value A 86045 Accoun,ng and Financial 14 Repor,ng
Fair Value measurement Framework - 5 The asset or The Price liability Principal or most Fair value is the price that Highest & best use advantageous market would be received to sell an and Valua,on asset or paid to transfer a premise liability in an orderly (Non-financial assets Market par,cipant only) characteris,cs transac,on in the principal (or most advantageous) market at the measurement date under Maximise Level 1 inputs current market condi,ons (i,.e. and Inputs Valua,on techniques Minimize level 3 inputs an exit price) regardless of whether that price is directly observable or es,mated using another valua,on technique. Fair value (The price in an orderly If needed, allocate to transac,on between unit of account market par,cipants) Disclosures including fair value hierarchy categoriza,on (based on the lowest level input that is significant to fair value A 86045 Accoun,ng and Financial 15 Repor,ng
Fair Value measurement Framework - 6 The asset or ApplicaIon to Non- liability financial assets Principal or most Highest & best use advantageous market Highest and best use and Valua,on premise (Non-financial assets Market par,cipant A fair value measurement of a only) characteris,cs non-financial asset takes into account a market par,cipant’s ability to generate economic Maximise Level 1 inputs and benefits by using the asset in its Inputs Valua,on techniques Minimize level 3 inputs highest and best use or by selling it to another market par,cipant that would use the Fair value asset in its highest and best use. (The price in an orderly If needed, allocate to Current use may not be the transac,on between unit of account highest and best use of a non- market par,cipants) financial asset. For example, market par,cipants may maximize the use of land, Disclosures currently used as a site for a including fair value hierarchy categoriza,on manufacturing facility, for (based on the lowest level residen,al housing instead. input that is significant to . fair value A 86045 Accoun,ng and Financial 16 Repor,ng
VALUATION TECHNIQUES A 86045 Accoun,ng and Financial 17 Repor,ng
Valua,on techniques Market approach Based on market transac,ons involving iden,cal or similar assets or liabili,es Income approach Based on future amounts (e.g. cash flows or income and expenses) that are converted (discounted) to a single present amount Cost approach Based on the amount required to replace the service capacity of an asset (frequently referred to as current replacement cost) A 86045 Accoun,ng and Financial 18 Repor,ng
FAIR VALUE HIERARCHY A 86045 Accoun,ng and Financial 19 Repor,ng
Fair value hierarchy Level 1 Level 2 Level 3 Defini,on (IFRS 13 Quoted prices Inputs other than quoted Unobservable inputs for Appendix A) (unadjusted) in an ac,ve prices included within the asset or liability. market for iden,cal level 1 that are assets or liabili,es that observable for the asset the en,ty can access at or liability, either directly the measurement date. or indirectly. Example The price for a financial Interest rate and yield Projected cash flows used asset or financial liability curves observable at in a discounted cash flow for the iden,cal asset is commonly quoted calcula,on. traded on an ac,ve intervals, implied market (e.g. London vola,li,es, and credit Stock Exchange) spreads. Price per square meter Cash genera,ng unit for a building derived financial forecast from observed market developed using the data (comparable en,,es own data. transac,ons) A 86045 Accoun,ng and Financial 20 Repor,ng
DISCLOSURES A 86045 Accoun,ng and Financial 21 Repor,ng
Disclosures SM 2 Source: Tesco plc Annual Report 2003 A 86045 Accoun,ng and Financial 22 Repor,ng
SUMMARY AND VALIDATION A 86045 Accoun,ng and Financial 23 Repor,ng
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