Ifrs 13 d Ppt 12 2013 1y6w1d

IFRS 13 Fair Value Measurement

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Disclaimer and allowed use

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This Microsoft PowerPoint® presentation was prepared by IASB Education Initiative staff as a convenience for others. It has not been approved by the IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training, provided that copies of this presentation (or any part of it) whether hard copy, electronic or otherwise are provided free of charge. If you require any other use please us. Any changes to this presentation must be clearly identifiable as not part of the presentation prepared by the Education Initiative staff and the copyright notice must be removed from every amended page. Disclaimer: The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this presentation, whether such loss is caused by negligence or otherwise. This presentation is intended as guidance only and does not constitute any type of advice. This presentation may be modified from time to time. To the latest version and to learn more about the IASB Education Initiative, visit: http://www.ifrs.org/Use-around-the-world/Education/Pages/Education.aspx © IFRS Foundation

Agenda • • • • •

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Part I: context and scope Part II: measurement of fair value Part III: valuation approaches and techniques Part IV: disclosures Part V: effective date and transition

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Part I Context and scope

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Part I: context and scope • Why IFRS 13 is necessary • Scope—when IFRS 13 applies • Scope—what IFRS 13 does not apply to

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Before IFRS 13–dispersed and conflicting guidance IAS 36

IAS 39/IFRS 9

IAS 40

IAS 41

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Etc.

Topic 820 in US GAAP (codified SFAS 157) IFRS 13 • Single source of measurement guidance • Clear measurement objective • Consistent and transparent disclosures about fair value

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The previous definition of fair value Fair value definition

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Its weaknesses

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

It did not specify whether an entity is buying or selling the asset It was unclear about what ‘settling’ meant because it did not refer to the creditor It was unclear about whether it was market-based It did not state explicitly when the exchange or settlement takes place

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When does IFRS 13 apply?

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• When another IFRS requires or permits fair value measurements or disclosures about fair value measurements • IFRS 13 also applies to measurements, such as fair value less cost to sell, based on fair value or disclosures about those measurements

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When does IFRS 13 apply?

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For example, if you own a biological asset… IAS 41 A biological asset shall be measured on initial recognition and at the end of each reporting period at its fair value less cost to sell

IFRS 13

What and when

How © IFRS Foundation

What does IFRS 13 not apply to? Excluded from the scope

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• IFRS 2 and IAS 17

Disclosures in IFRS 13 • Plan assets (IAS 19) not required for • Retirement benefit plan investments (IAS 26) • Assets for which recoverable amount is fair value less cost of disposal (IAS 36) Not required for • IAS 2 (net realisable value) measurement similar to • IAS 36 (value in use) fair value © IFRS Foundation

Part II Measurement of fair value

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Part II: measurement of fair value • Definition of fair value and measurement principles • Considerations specific to non-financial assets • Considerations specific to liabilities

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Definition of fair value and measurement principles

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IFRS 13’s ‘new’ definition of fair value

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New fair value definition

Comments

… the price that would be received to sell an asset or paid to transfer a liability in an

It specifies that the entity is selling the asset

orderly transaction between market participants at the measurement date.

It refers to the transfer of a liability It is not a forced or distressed sale It is clear it is market-based It states explicitly when the sale or transfer takes place

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Fair value at initial recognition

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• Transaction price (entry price) = Fair value (exit price) unless: – Transaction takes place in different markets – Transactions are for different units of – Seller is distressed or forced – Transactions are between related parties

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A hypothetical transaction price

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Principal market (or most advantageous market)

Market participant buyer

Market participant seller an asset

Fair value of

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a liability

at the measurement date

Who would transact for the item?

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• Market participants are buyers and sellers in the principal (or most advantageous) market who are: Independent

Knowledgeable

Able to enter into a Willing to enter into transaction a transaction • Market participants act in their economic best interest – Maximise the value of the asset – Minimise the value of the liability © IFRS Foundation

What is being measured?

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• Unit of – IAS 41: A biological asset shall be measured … at its fair value less costs to sell… • Characteristics – Which characteristics would a market participant buyer take into ? – – – – –

age and remaining economic life condition location restrictions on use or sale contractual © IFRS Foundation

Where would the transaction take place?

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Fair value is the price in the … Principal market The market with the greatest volume and level of activity for the asset or liability

Or, if no principal market, the most advantageous market The market that maximises the amount that would be received to sell the asset and minimises the amount that would be paid to transfer the liability

• In most cases, these markets will be the same – arbitrage opportunities will be competed away

• The entity must have access to the principal (or most advantageous) market © IFRS Foundation

Transaction and transport costs Description

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Included in fair value?

Transaction costs

The costs to sell the asset No or transfer the liability that are directly attributable to the disposal of the asset or the transfer of the liability

Transport costs

The costs that would be incurred to transport an asset from its current location to its exit market

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(Although they are considered in the assessment of which market is most advantageous) They are a characteristic of the transaction, not of the asset or liability

Yes Transport changes a characteristic of the asset (its location)

How do we arrive at a market-based measurement?

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Is there a quoted price in an active market for an identical asset or liability? Yes

Use this quoted price to measure fair value (Level 1)

Must use without adjustment

No Replicate a market price through a valuation technique* (using observable+ and unobservable inputs: Levels 2 and 3)

No significant unobservable (Level 3) inputs‡ =

Use of significant unobservable (Level 3) inputs‡ =

* Valuation techniques include the Level 2 measurement Level 3 measurement market approach, income approach and cost approach. + Maximise the use of relevant observable inputs and minimise the use of unobservable inputs. Observable inputs include market data (prices and other information that is publicly available). ‡ Unobservable inputs include the entity’s own data (budgets, forecasts), which must be adjusted if market participants would use different assumptions. © IFRS Foundation

Considerations specific to non-financial assets

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Highest and best use

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• Fair value assumes a non-financial asset is used by market participants at its highest and best use – the use of a non-financial asset by market participants that maximises the value of the asset – physically possible – legally permissible – financially feasible © IFRS Foundation

Highest and best use continued

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• Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. • However, an entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset.

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Highest and best use continued

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• Highest and best use is usually (but not always) the current use – if for competitive reasons an entity does not intend to use the asset at its highest and best use, the fair value of the asset should still be measured assuming its highest and best use by market participants (defensive value) • Does not apply to financial instruments or liabilities

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Valuation premise

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• A non-financial asset either: – provides maximum value through its use in combination with other assets and liabilities as a group – is its value influenced by it being ‘operated’ with other assets? – an example: equipment used in production facility – market participants are assumed to hold complementary assets – provides maximum value through its use on a stand-alone basis – is its value independent of its use with other assets? – an example: a vehicle or an investment property

• Does not apply to financial instruments or liabilities © IFRS Foundation

Considerations specific to liabilities

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Transfer notion–liabilities and an entity’s own equity instruments

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• Fair value assumes a transfer to a market participant who takes on the obligation. The transfer assumes: Liability or equity remains outstanding Restrictions on transfer are already reflected in inputs; no additional adjustment required Fair value of a liability reflects the effect of non-performance risk © IFRS Foundation

Decision tree—liability measurement Yes

Fair value = observable market price of instrument

Is there an observable market price to transfer the instrument?

No

Does somebody hold the corresponding asset?

Yes

Fair value = observable market price of asset Yes No

Fair value = another valuation technique

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No

Fair value = fair value of the corresponding asset

Fair value = another valuation technique*

Is there an observable market price for the instrument traded as an asset?

* Using the perspective of a market participant that owes the liability or issued the claim on equity

Level 2 or 3 © IFRS Foundation

No corresponding asset

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Two possible ways to approach it: 1. Use the future cash flows that a market participant would expect to incur in fulfilling the obligation, including the compensation that a market participant would require for taking on the obligation. Such compensation includes: – the cost to fulfil the obligation plus a return for undertaking the activity; and – a risk to compensate for the risk that actual cash flows might differ from expected cash flows. © IFRS Foundation

No corresponding asset continued

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2. Use the amount that a market participant would receive to enter into or issue an identical liability or equity instrument.

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Part III Valuation approaches and techniques

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Part III: valuation techniques • Valuation approaches • Valuation techniques—illustration for unquoted equity instruments • Bid and ask spread, s and discounts • Measuring the fair value of portfolios

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Valuation approaches

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Valuation approaches

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Measure fair value using valuation techniques that are appropriate in the circumstances and for which sufficient data are available. • Market approach – prices from market transactions for identical or similar assets or liabilities, for example: – using market multiples (eg of earnings or cash flows) from a set of comparable companies and applying those multiples to the earnings or cash flows of the company being valued © IFRS Foundation

Valuation approaches continued

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• Cost approach – the cost to acquire or reconstruct a substitute asset of comparable utility, adjusted for physical, functional and economic obsolescence – often used for PP&E and some intangibles • Income approach – converts future amounts (eg cash flows) to a single current discounted amount, for example: – present values – option pricing models – multi-period excess earnings method © IFRS Foundation

Selecting a valuation approach

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Market price is available

(eg discounted cash flow)

(eg replacement cost)

Level 1

Cost approach

• Price for identical item • Must be used without adjustment

Level 2

Income approach

• Price needs adjustment • Observable inputs

• Observable inputs • Rare

• Observable inputs • Rare

Level 3

Market approach

• Price needs adjustment • Unobservable inputs

• Unobservable inputs

• Unobservable inputs

• Directly identifiable cash flows

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• Not directly income-producing • No identical market price • Price needs adjustment

Valuation techniques—illustration for unquoted equity instruments

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Measuring the fair value of unquoted equity instruments • Scope of this particular illustration: – Unquoted equity instruments  not quoted in an active market – Non-controlling interest within the scope of IFRS 9 • A range of valuation techniques can be used. • Judgement is involved – in the selection of a valuation technique (given specific facts and circumstances, some techniques might be more appropriate than others) – when applying the valuation technique © IFRS Foundation

Valuation approaches and techniques Valuation approaches Market approach

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Valuation techniques Transaction price paid for an identical or a similar instrument of an investee Comparable company valuation multiples

Income approach

Discounted cash flow (DCF) method Dividend discount model (DDM) Constant-growth DDM Capitalisation model © IFRS Foundation

Market approach

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• Uses prices and other relevant information that have been generated by market transactions that involve identical or comparable assets. • Techniques that are most commonly referred to for valuing unquoted equity instruments are related to the data sources that they use: – transaction price paid for an identical or a similar instrument of an investee – comparable company valuation multiples derived from quoted prices (ie trading multiples) or from prices paid in transactions such as mergers and acquisitions (ie transaction multiples) © IFRS Foundation

Valuation multiples

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• Valuation basis:

– Equity value – Enterprise value (EV) • Multiple • Performance measures: – EBITDA, EBIT, EBITA – Earnings, ie net income (E) – Book value, ie value of an entity’s shareholders equity (B) – Revenue © IFRS Foundation

Fair value measurement using valuation multiples–four steps

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• Identify comparable company peers. • Select the performance measure that is most relevant to assessing the value for the investee. • Apply the appropriate valuation multiple to the relevant performance measure of the investee to obtain an indicated fair value of the investee’s equity value or the investee’s enterprise value. • Make appropriate adjustments to ensure comparability (eg non-controlling interest discount).

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Commonly used valuation multiples

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• Earnings multiples commonly used when valuing:

established business with an identifiable stream of continuing and stable earnings: –, – (where P is entity’s market capitalisation) • Book value multiples: where entities use their equity capital bases to generate earnings (eg businesses that have not yet generated positive earnings) • Revenue multiples:

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Example–applying comparable company peers’ multiples

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• Investor has 5% non-controlling interest in Entity J (private company) and measures it at fair value. • Financial information about Entity J – Normalised EBITDA = CU*100 million – Debt at FV = CU350 million • Six comparable public company peers (same business and geographical region) • EV/EBITDA multiple was chosen because there are differences in capital structure and depreciation policies between J and peers. • No relevant non-operating items. * CU = currency units

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Example–applying comparable company peers’ multiples continued

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Step 1  Identify comparable peers • The investor has selected six comparable public company peers that operate in the same business and geographical region as Entity J. Step 2  Select the performance measure that is most relevant to assessing the value for the investee. • The investor has chosen the EV/EBITDA multiple to value Entity J because there are differences in the capital structure and depreciation policies between Entity J’s comparable company peers and Entity J. © IFRS Foundation

Example–applying comparable company peers’ multiples continued

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Step 3  Apply valuation multiple to obtain fair value • Trading multiples of the comparable public company peers are:

Upon further analysis, these entities are considered comparable (ie similar risk, growth and cash flow-generating profiles

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Example–applying comparable company peers’ multiples continued • Step 3 continued • Investor selected average multiple (ie 8.5x) because it appropriately reflects Entity J’s characteristics relative to its peers.

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Example–applying comparable company peers’ multiples continued

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Step 4  Make appropriate adjustments to ensure comparability • No non-controlling interest discount is required because the valuation multiples used to measure the fair value of Entity J were derived from the trading prices of the comparable public company peers and are consistent with holding a five per cent non-controlling equity interest in Entity J.

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Example–applying comparable company peers’ multiples continued •Step 4

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continued

• Discount for the lack of liquidity  assessed to be 30% on the basis of relevant studies applicable in the region and industry as well as on the specific facts and circumstances. • Therefore • And the fair value of 5% non-controlling interest is CU17.5m (ie CU350m×0.05) © IFRS Foundation

Income approach

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• Income approach converts future amounts (eg cash flows) to a single current (ie discounted) amount. – Discounted Cash Flow method (DCF) – Dividend Discount Model (DDM) – Constant growth DDM – Capitalisation model

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Enterprise value

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• Enterprise value = discounted FCFF @ WACC – FCFF (Free Cash Flow to Firm): a common definition among others  cash flow from assets before any debt payments but after making reinvestments that are needed for future growth or the cash flows available to all capital providers (debt/equity) – WACC: discount rate that reflects the cost of raising both debt and equity financing, in proportion to their use (ie the Weighted Average Cost of Capital) – – – –

D&A = Depreciation and amortisation RR = Reinvestment requirements NWC = Net working capital t = income tax rate © IFRS Foundation

WACC: cost of debt capital component and computation

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•

• Computing WACC requires cost of equity capital and cost of debt capital (, respectively) and market participants’ expectations of the investee’s longterm optimal capital structure • There are a number of approaches for estimating – Based on recent borrowings – By reference to an actual or synthetic credit rating and default spread

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WACC: cost of equity capital component • Cost of equity capital () is often estimated using

CAPM: where: is the expected rate of return on a risk-free asset is the required market rate of return on a fully diversified portfolio is the measure of the systematic risk for the individual shares © IFRS Foundation

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Example–DCF method using enterprise value

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• An investor has 5% non-controlling interest in Entity R. • FCFF of Y1 to Y5 of CU100m and terminal value from Y5 onwards is CU1,121.8m (assumption: inflation is offset by market shrinkange, no growth in nominal ) • WACC  8.9% • Fair value of debt = CU240m • Non-controlling interest discount  CU8m • Discount for the lack of liquidity  CU4.09m © IFRS Foundation

Example–DCF method using enterprise value continued

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Example–DCF method using enterprise value continued

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A combination of approaches– adjusted net asset method

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• Involves deriving the fair value of an investee’s equity instruments by reference to the fair value of its assets and liabilities (recognised and unrecognised). • Appropriate for an investee whose value is mainly derived from the holding of assets (rather than from deploying those assets as part of a broader business). • Requires measurement of the fair value of the individual assets and liabilities. • Non-controlling interest and liquidity discounts may be applicable. © IFRS Foundation

Bid and ask spread, s and discounts

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Pricing within a bid-ask spread

Bid price

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The price at which the dealer will…

For an asset, the non-dealer entity’s…

For a liability, the non-dealer entity’s…

buy

exit price

entry price

entry price

exit price

Ask (offer) price sell

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Pricing within a bid-ask spread

continued

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• If an asset or a liability measured at fair value has a bid and an ask price, use the price within the bidask spread that is most representative of fair value • Mid-market pricing or other pricing conventions can be used as a practical expedient for fair value measurements within a bid-ask spread if these conventions do not contravene the principle

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s and discounts

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• Any or discount applied must be consistent with: – characteristics of asset or liability – the unit of in the IFRS requiring fair value • No block discounts – an adjustment to a quoted price for reduction that would occur if a market participant were to sell a large holding of assets or liabilities in one or a few transactions © IFRS Foundation

Measuring the fair value of portfolios

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Portfolios of financial instruments

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• IFRS 13 permits an entity to measure a group of financial assets and financial liabilities on the basis of the net risk exposure to either market risks or credit risks. • This practice was already allowed in IAS 39/IFRS 9 • The “exception” was permitted because: – derivatives often cannot be sold, but management can mitigate risk exposure by entering into an offsetting position – portfolio composition is entity-specific (depends on entity’s risk preferences) © IFRS Foundation

Portfolios of financial instruments continued

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• Conditions that need to be met: – Entity must have documented risk management strategy – The entity provides information on the basis of the net risk exposure to key management personnel – Only for portfolios of instruments measured at FV • ing policy decision • Does not affect presentation in IAS 32. – Allocations shall be performed on a reasonable and consistent basis. • Portfolio-level adjustments may need to be allocated to the unit of for presentation purposes.

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Portfolios of financial instruments continued

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• If there are offsetting market risks: – can apply bid-ask spread to net open risk position – offsetting risks must be “substantially the same” – duration of instruments leading to exposure to market risk must be “substantially the same” Market risk: the risk that the price will fluctuate because of changes in market prices (currency risk, interest rate risk and other price risk). © IFRS Foundation

Portfolios of financial instruments continued

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• If the entity is exposed to the credit risk of a particular counterparty, an entity shall include the effect of: – its net exposure to the credit risk of the counterparty. – the counterparty’s net exposure to its credit risk. – any existing arrangements that mitigate credit risk exposure if market participants expect that such arrangements would be legally enforceable in the event of default.

Credit risk: the risk the entity or the counterparty will not pay or otherwise perform as agreed. © IFRS Foundation

Part IV: Disclosures

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General • • • • •

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Fair value at end of reporting period Level in hierarchy Transfers between levels Valuation techniques and inputs used If highest and best use is different from current use

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General continued

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• Disclosures also required for unrecognised amounts (ie that are only disclosed) or amounts recognised using a different measure (eg amortised cost) – eg financial asset at amortised cost, but IFRS 7 requires disclosure of asset’s fair value • Quantitative disclosures in a table unless another format is better © IFRS Foundation

General continued

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Illustrative Example 15 - Fair values at the end of the reporting period and level of the fair value hierarchy for recurring fair value measurements…

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General continued

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Illustrative Example 15 - Fair values at the end of the reporting period and level of the fair value hierarchy for non-recurring fair value measurements…

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More information about Level 3

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• Quantitative disclosure of unobservable inputs and assumptions used • Reconciliation of opening to closing balances • Description of valuation process in place

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More information about Level 3

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• Sensitivity analysis: – narrative discussion about sensitivity to changes in unobservable inputs, including interrelationships between inputs that magnify or mitigate the effect on the measurement – quantitative sensitivity analysis for financial instruments • More detail in determining classes

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More information about Level 3

continued

Illustrative Example 17 – Quantitative information about significant unobservable inputs used

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More information about Level 3

continued

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Illustrative Example 18 – Valuation processes: An entity might disclose the following: (a) For the group within the entity that decides the entity’s valuation policies and procedures: – its description; – to whom that group reports; and – the internal reporting procedures in place (eg whether and, if so, how pricing, risk management or audit committees discuss and assess the fair value measurements); (b) the frequency and methods for calibration, back testing and other testing procedures of pricing models; (c) the process for analysing changes in fair value measurements from period to period; (d) how the entity determined that third-party information, such as broker quotes or pricing services, used in the fair value measurement was developed in accordance with the IFRS; and (e) the methods used to develop and substantiate the unobservable inputs used in a fair value measurement. © IFRS Foundation

More information about Level 3

continued

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Illustrative Example 19 – Narrative discussion about sensitivity to changes in unobservable inputs: The significant unobservable inputs used in the fair value measurement of the entity’s residential mortgage-backed securities are prepayment rates, probability of default and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. © IFRS Foundation

Part V: Effective date and transition

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Effective date and transition • Effective 1 January 2013 • Earlier application permitted • Prospective application, no comparatives

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