IFRS 13 Fair Value Measurement

Question 1

Definition of fair value measurement

Answer 1

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

=> Exit Price

Marke based value

Question 2

Steps in fair value measurement process

Answer 2

1 - identify asset/liability consistent with unit of account per IFRS

Characteristics :

a) condition + location : age/wear&tear/transport cost
b) restrictions to sell/transfer

2 - determine best + highest use of asset physically + legally possible, economically viable (non financial asset/liability)

3 - identify accessible principle market or

if no principle market most accessible favorable market

(include transaction + transport cost for comparision

include only transport cost in FV)

4 - determine appropriate valuation technique maximising observable items - minimising unobservable items

assumptions market participants would use

Question 3

What is “orderly transaction”

Answer 3

1) asset traded frequently
- sufficient market exposure to obtain knowledge + awareness
2) motivated not forced or urged
3) weighted based on volume and date when it was measured

Question 4

What are the characteristics of “market participants”

Answer 4

1) act in their economic best interestindependant +
2) not related partyable +
3) knowledgeable
4) able to enter into transaction (access to market)
5) willing to enter into transaction, not forced/compelled

Question 5

What are indicators that transaction is NOT “orderly”

Answer 5

1) sold to single market participant
2) market participant near bankrupty

Question 6

How is the most favorable market determined ?

Answer 6

For determination : take into account transport + transaction cost

For fair value : exclude transaction cost

Question 7

What valuation techniques are described ?

Answer 7

1-Market approach (market multiples EBITA, matrix pricing)

2-Input approach -> present value techniques/multiperiod excess earnings

3-Cost approach -> cost or rebuilding item taking into account obsolescence

Apply valuation techniques consistently - change = IAS 8 change in estimates

Question 8

What are the levels and how are they distinguished ?

Answer 8

Level 1-3

Level 1 : Unadjusted quoted price of an identical item on an accessible active market

Level 2 : based on observable inputs with no significant unobservable inputs.

Eg market comparable approach, identical items on inactive market,

level 1 with adj for controlling interests

Level 3 : contains significant unobservable inputs.

Eg Input or cost approach techniques, option price models, multi-period excess earnings

Question 9

What are the present value techniques in IFRS

Answer 9

1 Discount rate technique :
cashflows : most likely cashflow
discount rate : market rate observed or estimated
Observed :
credit,
duration,
collateral,
liquidity,
restrictive covenants
respond similarly to changes in econ conds
Estimated :
risk free (govt bond w/same period)
+ uncertainty premium
+ asset specific risk
2 Expected value techniques :
a) Method 1 :
cashflows : probability weighted cashflows
uncertainty premium
asset specific risk adjustment
discount rate : risk free
b) Method 2 :
cashflows : probability weighted cashflows
asset specific risk adjustment
discount rate : risk free
+ uncertainty premium

Question 10

Fair value process for liabilities + own equity ?

Answer 10

1-consider transfer, not liquidation

2-quoted price of an identical instrument - if not

3-valuation of equivalent asset

a) if exists :
- adjustment for factors not applicable to liabs
b) if not :
- input/cost approach techniques

4- demand feature : to earliest date settlement demand could be exercised

• credit risk : considered to remain the same
• transfer restrictions : ignored

Question 11

Disclosures objective of IFRS 13

Answer 11

helps users of its financial statements assess both of the following:

1- recurring or non-recurring assets/liabs:

the valuation techniques and inputs used to develop those measurements.

2- recurring assets/liabs:

significant unobservable inputs the effect of the measurements on PL/OCI for the period

Question 12

Conditions to measure FV on a net position ?

Answer 12

1) it is an option
2) risk managed by key mgmt on net exposure
3) documented strategy
4) measured at FV

Question 13

How to determine a discount rate ?

Answer 13

1) risk free rate (govt bonds with same period)
2) systematic/market risk NOT specific to particular asset/liab

willingness of particip to accept risk - may be applied to cf

3) unsystematic/risk to specific asset/liab or probability weighting of cf
4) Consistency in determening rate & avoid double counting

Question 14

Disclosures requirements

Answer 14

1) ? FV measurement at the end of reporting period
2) ? Categorization within fair value hierarchy
3) ? If level 2 / level 3 category => valuation technique + inputs + change
4) ? Quantitative information about unobservable inputs
5) ? Reasons for measurement

Recurring FV measurements :

a) ? Reconciliation b/f to c/f
b) ? Quantitative information about inputs
c) ? Valuation process
d) ? Sensitivity to changes

Question 15

What are the components of present value measurements ?

Answer 15

a) estimate of future cash flows
b) Unertainty (possible variations in amount + timing) of cf
c) time value of money (risk free rate)
d) price (risk premium) for bearing uncertainty in cf
e) other factor market participant would take into account
f) liability : own credit/non performance risk

Question 16

What are indicators that the entry price is not equal the exit price and how is that difference treated ?

Answer 16

Indicators :
1 -transaction not occuring on principle or most advantegous market
2 -counterparty is not independant
3 -countreparty is forced/compelled to sell
4 -unit of account represented by trans price is different from that measured at FV

Treatement :
if measured at FV -> difference (day 1 diff) to PL