Lec 3 Flashcards
(17 cards)
Historical cost based accounting
Does not contain relevant info for the users of financial statements
Hides info about the nature, uncertainty, timing and amount of future cash flows
Fair value IFRS13
Value of company’s assets, liabilities and equity from a perspective of a free and knowledgeable market participant
Fair value definition
Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
E.g. 2 bids one is 30 and one is 29. Acquisition cost is 30m (entry price)
The fv = 29m (exit Price obtained from selling it into the market
Performing FV measurements requires company to determine
- Unit of account (what A/L is being valued)
- Market
- Market participant assumptions
- Valuation techniques (3 levels of fv hierarchy)
- Application to non financial assets & E/L instruments
- Unit of account
Level at which A/L are aggregated or disaggregated:
Usually determined in each standard
Maybe a single or grouped A/L
- Principal or most advantageous markets
FV measure assumes A/L is exchanged in an orderly transaction between market participants that take place in either
Principal market (one with greatest volume or activity)
Or in absence market (sim market)
Most advantageous market is one that
Maximise price received to sell an asset
Minimise is price paid to transfer a liability
FV EQN
FV= price - transportation costs
not transaction costs
Example
One market sells at 300 but has transaction costs of 50 and transportation of 10
Therefore it’s overall is 240 (market)
Other market sells at 250 but has transaction costs of 8 and transportation costs of 10
Therefore it’s overall market is 232
So market b has better advantageous market
It’s fv then is 250 -10 = 240
3: Market participation’s assumptions
Fv measurement requires entities to consider assumptions that market participants acting in their economics interest would use to price the A/L
Condition and location of asset
Restrictions on the sale or use of asset
Market participants 3 characteristics:
Act independently
Knowledgeable and use all available info
Able and willing to enter into a transaction
- Valuation techniques
IFRS 13 establishes that an entity should use valuation techniques that maximise observable inputs and minimises unobserved inputs
3 techniques
Market approach
Cost approach
Income approach
Fv hierarchy for valuation techniques
Level 1: quoted prices or market multiples in active markets
level 2: direct or indirect observation inputs (sim assets, markets data)
Level 3: unobservable inputs for assets and liabilities (company’s assumptions and data)
Disclosure objective
To provide users of general purpose financial statements with at least info regarding
1) extent to which fair value is used in measuring A/L
2) valuation techniques, inputs and assumptions used
3) the effect of level 3 fair value on PL
Disclosure 3 points
Enables users to understand effects
Reference FV hierarchy levels
For level 3 company also disclose the sensitivity analysis of the assumptions and input used
Pro of FV
Transparency in firms economics
Provides info to users - prompt actions
No evenidence that markets are calmer under historical cost accounting
Neg of FV
More obscure since it can use assumptions and unobservable inputs
Can prompt undesirable actions
Is pro cyclical (lots of swings in market)
When valuation a non financial asset
Take into account highest and best use policy
Valuation premise 3 tests:
Use physically possible
Legally permissible
Financially feasible
Company applies the highest and best use approach regardless its intentions to use the asset or its current use of the asset
FV of a L/E
Price of transferring the L/E in the principal market on the measurement date. Entity sets FV of a L/E instrument to: quoted market prices
Other valuation
