ifrs 13 fair value measurement - world banksiteresources.worldbank.org/.../mi_ifrs13_eng.pdf ·...

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.

© IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IFRS 13 Fair Value Measurement

Mariela Isern, IASB Senior Technical Manager

6 December 2012

Agenda

• Fair value measurement principles

• Answering what, where, who and how

• Measuring the fair value of non-financial assets

• Measuring the fair value of financial and non-financial liabilities

• Valuation techniques

• Disclosures

• Effective date

• The work continues: educational material

2



not necessarily those of the IASB or IFRS Foundation

Fair value measurement principles

The previous definition of fair value 4

Fair value definition Its weaknesses

The amount for which an

asset could be exchanged

or a liability settled

between knowledgeable,

willing parties in an arms

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.

IFRS 13’s ‘new’ definition of fair value 5

New fair value definition Its improvements

… 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.

It specifies that the entity is selling

the asset.

It refers to the transfer of a liability.

It is clear it is market-based.

It states explicitly when the sale or

transfer takes place.

It is not a forced or distressed sale.




Answering what, where,

who and how

A hypothetical transaction price 7

Market

participant

buyer

Market

participant seller

Fair value of

Principal market (or most

advantageous market)

an asset

a liability

at the

measurement

date

What is being measured?

• Unit of account

– 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 account?

– age and remaining economic life?

– condition

– location

– restrictions on use or sale

– contractual terms

8

Where would the transaction take place?

• 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

9

Fair value is the price in the …

Principal market Or, if no principal market, the

most advantageous market

The market with the greatest

volume and level of activity for the

asset or liability

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

Who would transact for the item?

• Market participants are buyers and sellers in the

principal (or most advantageous) market who are:

• Market participants act in their economic best interest

– Maximise the value of the asset

– Minimise the value of the liability

10

Independent Knowledgeable

Able to enter into

a transaction

Willing to enter

into a transaction

How do we arrive to a market-based measurement? 11

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

Use this quoted price to measure fair

value (Level 1)

Replicate a market price through a valuation

technique* (using observable+ and

unobservable inputs: Levels 2 and 3)

No use of significant

unobservable

(Level 3) inputs‡ =

Level 2 measurement

Use of significant

unobservable

(Level 3) inputs‡ =

Level 3 measurement

Must use without adjustment

Yes No

* Valuation techniques include the 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.




Measuring the fair value of non-financial assets

Highest and best use

• 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

13

Highest and best use continued

• 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 still reflects its highest and best use by market

participants (defensive value)

• Does not apply to financial instruments or liabilities

14

Valuation premise

• 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

15




Measuring the fair value of financial and non-financial liabilities

Transfer notion

• Fair value assumes a transfer to a market participant

who takes on the obligation. The transfer assumes:

17

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

Is there a corresponding asset? 18

Is there an observable market

price to transfer the

instrument?

Does somebody hold the

corresponding asset?

Fair value = observable

market price of

instrument

Fair value = fair value of the

corresponding asset

Is there an observable

market price for the

instrument traded as an

asset?

Fair value = another

valuation technique*

No Yes

Yes No

Yes

Fair value = observable

market price of asset

No

Fair value = another

valuation technique

* Using the perspective of a

market participant that owes

the liability or issued the claim

on equity




Valuation techniques

Valuation techniques and fair value hierarchy 20 Level 2

Level 1

Level 3

Market approach • Market price is available

• Price needs adjustment

• Observable inputs

• Price is for an identical

asset or liability and must

be used

• No adjustment is necessary

or allowed

Cost approach (current replacement cost)

• Not directly income producing

• No identical market price


Income approach (eg discounted cash flow)

• Directly identifiable cash flows


• Rarely seen in practice


• Rarely seen in practice


• Unobservable inputs • Unobservable inputs • Unobservable inputs

Measure fair value using valuation techniques that

are appropriate in the circumstances and for which

sufficient data are available.




Disclosures

General

• 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

22

General continued 23

31/12/X9

Quoted prices in

active markets

for identical

assets

(Level 1)

Significant other

observable

inputs

(Level 2)

Significant

unobservable

inputs

(Level 3)

Total gains

(losses)

Recurring fair value measurements

Trading equity securities(a):

Real estate industry 93 70 23

Oil and gas industry 45 45

Other 15 15

Total trading equity securities 153 130 23

Other equity securities(a):

Financial services industry 150 150

Healthcare industry 163 110 53

Energy industry 32 32

Private equity fund investments (b) 25 25

Other 15 15

Total other equity securities 385 275 110

Debt securities:

Residential mortgage-backed securities 149 24 125

Commercial mortgage-backed securities 50 50

Collateralised debt obligations 35 35

Risk-free government securities 85 85

Corporate bonds 93 9 84

Total debt securities 412 94 108 210

Hedge fund investments:

Equity long/short 55 55

Global opportunities 35 35

High-yield debt securities 90 90

Total hedge fund investments 180 90 90

Derivatives:

Interest rate contracts 57 57

Foreign exchange contracts 43 43

Credit contracts 38 38

Commodity futures contracts 78 78

Commodity forward contracts 20 20

Total derivatives 236 78 120 38

Investment properties:

Commercial—Asia 31 31

Commercial—Europe 27 27

Total investment properties 58 58

Total recurring fair value measurements 1,424 577 341 506

Non-recurring fair value measurements

Assets held for sale(c) 26 26 (15)

Total non-recurring fair value measurements 26 26 (15)

(CU in millions)

Fair value measurements at the end of the

reporting period using

Description

(a) On the basis of its analysis of the nature, characteristics and risks of the securities, the entity has determined that presenting them by

industry is appropriate.(b) On the basis of its analysis of the nature, characteristics and risks of the investments, the entity has determined that presenting them

as a single class is appropriate.(c) In accordance with IFRS 5, assets held for sale with a carrying amount of CU35 million were written down to their fair value of CU26

million, less costs to sell of CU6 million (or CU20 million), resulting in a loss of CU15 million, which was included in profit or loss for the

period.

(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)

Illustrative Example 15 - Fair values at the end of the reporting period and

level of the fair value hierarchy for recurring fair value measurements…

General continued 24

31/12/X9

Quoted prices in

active markets

for identical

assets

(Level 1)

Significant other

observable

inputs

(Level 2)

Significant

unobservable

inputs

(Level 3)

Total gains

(losses)

Recurring fair value measurements

Trading equity securities(a):

Real estate industry 93 70 23

Oil and gas industry 45 45

Other 15 15

Total trading equity securities 153 130 23

Other equity securities(a):

Financial services industry 150 150

Healthcare industry 163 110 53

Energy industry 32 32

Private equity fund investments (b) 25 25

Other 15 15

Total other equity securities 385 275 110

Debt securities:

Residential mortgage-backed securities 149 24 125

Commercial mortgage-backed securities 50 50

Collateralised debt obligations 35 35

Risk-free government securities 85 85

Corporate bonds 93 9 84

Total debt securities 412 94 108 210


Equity long/short 55 55

Global opportunities 35 35

High-yield debt securities 90 90

Total hedge fund investments 180 90 90

Derivatives:

Interest rate contracts 57 57

Foreign exchange contracts 43 43

Credit contracts 38 38

Commodity futures contracts 78 78

Commodity forward contracts 20 20

Total derivatives 236 78 120 38


Commercial—Asia 31 31

Commercial—Europe 27 27

Total investment properties 58 58

Total recurring fair value measurements 1,424 577 341 506

Non-recurring fair value measurements

Assets held for sale(c) 26 26 (15)

Total non-recurring fair value measurements 26 26 (15)

(CU in millions)

Fair value measurements at the end of the

reporting period using

Description

(a) On the basis of its analysis of the nature, characteristics and risks of the securities, the entity has determined that presenting them by

industry is appropriate.(b) On the basis of its analysis of the nature, characteristics and risks of the investments, the entity has determined that presenting them

as a single class is appropriate.(c) In accordance with IFRS 5, assets held for sale with a carrying amount of CU35 million were written down to their fair value of CU26

million, less costs to sell of CU6 million (or CU20 million), resulting in a loss of CU15 million, which was included in profit or loss for the

period.


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…

More information about Level 3

• Quantitative disclosure of unobservable inputs and

assumptions used

• Description of valuation process in place

• Sensitivity analysis:

– narrative discussion about sensitivity to changes in

unobservable inputs, including inter-relationships

between inputs that magnify or mitigate the effect on the

measurement

– quantitative sensitivity analysis for financial instruments

25

More information about Level 3 continued 26

Illustrative Example 17 – Quantitative information about significant unobservable

inputs used

Quantitative information about fair value measurements using significant unobservable inputs (Level 3)

(CU in millions)

Description

Fair value at

31/12/X9 Valuation technique(s) Unobservable input Range (weighted average)

Other equity securities:

Healthcare industry 53 Discounted cash f low w eighted average cost of capital 7% - 16% (12.1%)

long-term revenue grow th rate 2% - 5% (4.2%)

long-term pre-tax operating margin 3% - 20% (10.3%)

discount for lack of marketability (a) 5% - 20% (17%)

control premium(a) 10% - 30% (20%)

Market comparable companies EBITDA multiple(b) 10 - 13 (11.3)

revenue multiple(b) 1.5 - 2.0 (1.7)



Energy industry 32 Discounted cash f low w eighted average cost of capital 8% - 12% (11.1%)

long-term revenue grow th rate 3% - 5.5% (4.2%)

long-term pre-tax operating margin 7.5% - 13% (9.2%)



Market comparable companies EBITDA multiple(b) 6.5 - 12 (9.5)

revenue multiple(b) 1.0 - 3.0 (2.0)



Private equity fund investments 25 Net asset value(c) n/a n/a

Debt securities:

Residential mortgage-backed securities 125 Discounted cash f low constant prepayment rate 3.5% - 5.5% (4.5%)

probability of default 5% - 50% (10%)

loss severity 40% - 100% (60%)

Commercial mortgage-backed securities 50 Discounted cash f low constant prepayment rate 3% - 5% (4.1%)

probability of default 2% - 25% (5%)

loss severity 10% - 50% (20%)

Collateralised debt obligations 35 Consensus pricing offered quotes 20 - 45

comparability adjustments (%) -10% - +15% (+5%)


High-yield debt securities 90 Net asset value(c) n/a n/a

Derivatives:

Credit contracts 38 Option model annualised volatility of credit(d) 10% - 20%

counterparty credit risk(e) 0.5% - 3.5%

ow n credit risk(e) 0.3% - 2.0%


Commercial—Asia 31 Discounted cash f low long-term net operating income margin 18% - 32% (20%)

cap rate 0.08 - 0.12 (0.10)

Market comparable approach price per square metre (USD) $3,000 - $7,000 ($4,500)

Commercial—Europe 27 Discounted cash f low long-term net operating income margin 15% - 25% (18%)

cap rate 0.06 - 0.10 (0.80)

Market comparable approach price per square metre (EUR) €4,000 - €12,000 (€8,500)

(a) Represents amounts used w hen the entity has determined that market participants w ould take into account these premiums and discounts w hen pricing the investments.

(b) Represents amounts used w hen the entity has determined that market participants w ould use such multiples w hen pricing the investments.

(c) The entity has determined that the reported net asset value represents fair value at the end of the reporting period.

(d) Represents the range of the volatility curves used in the valuation analysis that the entity has determined market participants w ould use w hen pricing the contracts.

(e) Represents the range of the credit default sw ap spread curves used in the valuation analysis that the entity has determined market participants w ould use w hen pricing the contracts.


More information about Level 3 continued

An entity might disclose the following:

– 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);

– the frequency and methods for calibration, back testing and other testing procedures of pricing models;

– the process for analysing changes in fair value measurements from period to period;

– 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

– the methods used to develop and substantiate the unobservable inputs used in a fair value

measurement.

27

Illustrative Example 18 – Valuation processes

More information about Level 3 continued 28

Illustrative Example 19 – Narrative discussion about sensitivity to changes in

unobservable inputs

An entity might disclose the following about its residential mortgage-backed securities to

comply with this disclosure requirement:

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.




Effective date

Effective date

• Effective 1 January 2013

• Earlier application permitted

• Prospective application, no comparatives

30




The work continues: educational material

Educational material

The IASB is aware of concerns about applying FVM principles. Those concerns

were reiterated at the Emerging Economies Group (EEG) meeting in Beijing in

July 2011.

IFRS Foundation Education Initiative is developing educational material with

assistance from a valuation expert group. Will cover a number of topics in

chapters.

A staff draft of the first chapter covering measurement of unquoted equity

instruments at fair value was published in October 2012. Final publication

expected December 2012.

The chapter will be published by the IFRS Foundation. Its content will be

non-authoritative.

32

http://eifrs.ifrs.org/eifrs/stdcontent/2009_Bound_Volume/IAS32c_2005-08-18_en-3.html

Questions or comments?

Expressions of individual views by members

of the IASB and its staff are encouraged.

The views expressed in this presentation are

those of the presenter. Official positions of the

IASB on accounting matters are determined

only after extensive due process

and deliberation.

33

Thank you

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