Applying IFRS: Fair Value Measurement - EY

1 fair Value MeasurementNovember 2012 Applying IFRSIFRS 13 fair Value Measurement1 November 2012 fair Value Measurement Introduction Many ifrs permit or require entities to measure or disclose the fair Value of assets, liabilities, or equity instruments. However, until recently there was limited guidance in ifrs on how to measure fair Value and, in some cases, the guidance was conflicting. To remedy this, the International Accounting Standards Board (IASB) issued ifrs 13 fair Value Measurement (the standard) in May 2011.

2 The standard was the result of a convergence project between the IASB and the US Financial Accounting Standards Board (FASB) (collectively, the Boards). ifrs 13 defines fair Value , provides principles-based guidance on how to measure fair Value under ifrs and requires information about those fair Value measurements to be disclosed. ifrs 13 does not attempt to remove the judgement that is involved in estimating fair Value , rather, it provides a framework that is intended to reduce inconsistency and increase comparability in the fair Value measurements used in financial reporting.

3 ifrs 13 does not address which assets or liabilities to measure at fair Value or when those measurements must be performed. An entity must look to other standards in that regard. The standard applies to all fair Value measurements, when fair Value is required or permitted by ifrs , with some limited exceptions. The standard also applies to measurements, such as fair Value less costs to sell, that are based on fair Value . However, it does not apply to similar Measurement bases, such as Value in use. The standard is effective for annual periods beginning on or after 1 January 2013, with early adoption permitted, and will apply prospectively.

4 In the interim, unless adopted early, existing fair Value Measurement requirements in other standards will continue to be applicable. On adoption, fair Value measurements recognised in the financial statements may change. The extent of this change will differ depending on the type of asset or liability being measured and the previous fair Value Measurement requirements to which they were subject. Similarly, the effect of ifrs 13 may differ by industry. At a minimum, the adoption of ifrs 13 will require entities to reconsider their processes and procedures for measuring fair Value and providing the required disclosures.

5 This publication outlines the requirements of ifrs 13, its definitions, Measurement framework and disclosure requirements. It addresses some of the key questions that are being asked about how to apply ifrs 13, recognising that some aspects of the standard are still unclear and different views may exist. Further issues and questions are likely to be raised in the future as entities adopt the new standard. We encourage readers to closely monitor developments with respect to fair Value measurements. November 2012 fair Value Measurement 2 Contents 1 Overview and objectives of ifrs 13.

6 6 Overview .. 6 Objective of ifrs 13 .. 8 2 Scope .. 10 Items in the scope of ifrs 13 .. 10 Scope exclusions .. 12 Present Value techniques .. 13 fair Value Measurement exceptions and practical expedients in other standards .. 13 Measurement exceptions and practical expedients within ifrs 13 .. 14 3 The fair Value framework .. 15 Definition of fair Value .. 15 The fair Value Measurement framework .. 16 4 The asset or liability .. 19 The asset or liability .. 19 The unit of account.

7 19 Characteristics of the asset or liability .. 22 5 The principal (or most advantageous) market .. 26 The principal market .. 27 The most advantageous market .. 31 6 Market participants .. 33 Characteristics of market participants .. 33 Market participant assumptions .. 34 7 The transaction .. 38 Evaluating whether there has been a significant decrease in the volume or level of activity for an asset or liability .. 40 Identifying transactions that are not orderly .. 43 Estimating fair Value when there has been a significant decrease in the volume or level of activity.

8 46 8 Price .. 52 Transaction costs .. 52 Transportation costs .. 54 9 Application to non-financial assets .. 55 Highest and best use .. 56 Valuation premise for non-financial 62 3 November 2012 fair Value Measurement 10 Application to liabilities and an entity s own equity .. 68 General Principles .. 69 Measuring the fair Value of a liability or an entity s own equity when quoted prices for the liability or equity instruments are not available .. 71 Non-performance risk .. 82 Restrictions preventing the transfer of a liability or an entity s own equity89 Financial liability with a demand feature.

9 91 11 Financial Assets and Liabilities with offsetting positions .. 92 Criteria for using the portfolio approach for offsetting positions .. 93 Measuring fair Value for offsetting positions .. 96 12 fair Value at initial recognition .. 101 Exit price vs entry price .. 102 Day one gains and losses .. 103 Related party transactions .. 105 13 Valuation techniques .. 106 Selecting appropriate valuation techniques .. 107 Market Approach .. 115 Cost Approach .. 115 Income Approach .. 116 14 Inputs to Valuation Techniques.

10 118 General principles .. 119 Premiums and discounts .. 120 Pricing within the bid-ask spread .. 124 Risk premiums .. 125 Broker quotes and pricing services .. 127 15 The fair Value hierarchy .. 129 The fair Value hierarchy .. 130 Categorisation within the fair Value hierarchy .. 131 16 Level 1 inputs .. 136 Use of Level 1 inputs .. 137 Alternative pricing methods .. 138 Quoted prices in active markets that are not representative of fair value138 Unit of account .. 138 17 Level 2 inputs.