Hilary Eastman, IASB Staff

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International Financial Reporting Standards

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

not necessarily those of the IASB or IFRS Foundation

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

November 2010

Mensurao de Valor

Justo

Hilary Eastman, IASB Staff


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2Agenda

Fair value in IFRSs Why an exit price?

What will change?

What will stay the same? IFRS Foundation educational material

Next steps


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Fair value in IFRSs


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4Fair value measurements today

Requirements

IFRSInitial

recognition

Subsequent

measurement

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 5 Non-current Assets Held for Sale and Discontinued

Operations

IFRS 7 Financial Instruments: Disclosures

IFRS 9 Financial Instruments (for some)


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5Fair value measurements today continued

Requirements

IFRSInitial

recognition

Subsequent

measurement

IAS 17 Leases

IAS 19 Employee Benefits (plan assets)

IAS 20 Government Grants

IAS 26Accounting and Reporting by Retirement Benefit Plans (plan

investments)

IAS 28 Investments in Associates (investments held by venture capital

firms)


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Requirements

IFRSInitial

recognition

Subsequent

measurement

IAS 36 Impairment of Assets (recoverable

amount)

IAS 39 Financial Instruments: Recognition and Measurement (for some)

IAS 41 Biological Assets

IFRIC 12 Service Concession Arrangements (construction

or upgrade

services)

(financial

asset)

IFRIC 13 Customer Loyalty Programmes


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Options

IFRSInitial

recognition

Subsequent

measurement

IFRS 1 First Time Adoption of IFRSs (deemed

cost)

IAS 16 Property, Plant and Equipment (cost)

IAS 27 Consolidated and Separate Financial Statements

IAS 38 Intangible Assets (cost)

IAS 40 Investment Property (cost)


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8The fair value measurement project

was initiated in 2005 to clarify the measurement objective

create a single source of guidance

improve and harmonise disclosures

will not

introduce new fair values

change the measurement objective in another IFRS


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Why an exit price?


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10Clarify the measurement objective

Current definition of fair value lacks clarity

Is it the price to buy or to sell an asset?

What is meant by settling a liability?

When does the exchange (or settlement) take place?

Who are the knowledgeable, willing parties?

The amount for which an asset could be exchanged or a

liability settled between knowledgeable, willing parties in

an arms length transaction


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11Clarify the measurement objective continued

Proposed definition of fair value

Exit price notion

A current price

Market-based view

Not a liquidation price or a forced sale

The price that would be received to sellan asset or paid to

transfera liability in an orderly transaction between

market participants at the measurement date


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12Clarify the measurement objective continued

An exit price reflects expectations about future cash inflowsand outflows

Exit price does not mean a liquidation value, but the price

that would be paid by a market participant who will also use

the asset or fulfil the obligation objective is to replicate a market-clearing price

objective is the same in Level 3

What an entity intends to do with the asset or liability is not

relevant in a fair value measurement


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What will change?


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14

Differences between current guidance andnew standard

Consistent exit market Explicit reference to highest and best use of an asset

Explicit three-level fair value hierarchy

Change in bid-ask spread guidance Explicit guidance for measuring fair value in inactive

markets

Additional guidance for measuring liabilities

Some new disclosures about fair value measurements


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15The exit transaction

IFRSs are inconsistent about the market in whichmarket participants would transact

Exit transaction takes place in the principal market

the market with the greatest volume and level of activity

for the asset or liability (most liquid)

Or (if no principal market) in the most advantageous

market

maximises the amount that would be received to sell the

asset and minimises the amount that would be paid to

transfer the liability


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16Highest and best use

Concept is implicit in IFRSs, new standard will make itexplicit

Highest and best use is the use of an asset by market

participants that would maximise the value of the asset

physically possible legally permissible

financially feasible

Highest and best use is usually (but not always) the

current use

Does not apply to financial instruments or liabilities

F i l hi h


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17

Fair value hierarchy:Levels 1, 2 and 3

Is there a quoted price for an

identical asset or liability?(Level 1 input)

Are there any observable

inputs other than quoted

prices for an identical asset

or liability?

Use the Level 1 input =

Level 1 measurement

Significant use of Level 2

inputs (observable inputs

that are not Level 1) =Level 2 measurement

Significant use of

unobservable inputs =

Level 3 measurement

NoYes

Yes No

Must use withoutadjustment

Fair value when markets become


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Fair value when markets becomeinactive

IFRSs are not explicit about how to measure fair valuewhen markets become inactive, new standard will have

explicit guidance

Modeled after October 2008 Expert Advisory Panel

report

Will include:

indications that market activity has declined

factors for determining transactions that are not orderly


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19Disclosures

Fair value hierarchy Disclosure by class (aggregate/disaggregate to provide

meaningful information)

Policy for transfers between levels (and Level 3

reconciliation)

Measurement uncertainty or sensitivity analysis

Level of hierarchy for items disclosed but not

recognised at fair value

Difference between highest and best use and current

use


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What will stay the same?

What is being carried over to the new


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21

What is being carried over to the newstandard?

Fair value reflects characteristics of asset or liability

Market participants vs knowledgeable, willing parties

Determination of an active market

Effect of an entitys own credit risk

Valuation techniques (market, income, cost)

Financial instrumentsoffsetting of market risks

Treatment of transaction costs

Some existing disclosures are likely to remain (egagriculture, asset impairments)


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IFRS Foundation

educational material


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23What do we mean by how to?

Knowledge about valuation

Measuring fair value

for financial reporting

Principal market

Market participants

Highest and best use

Valuation techniques

Market participant assumptions


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24How do you measure fair value?The asset or liability

(unit of account)

Indicated value forunit of valuation

Market participant

assumptions

Fair valuemeasurement

Presentation and

disclosure

Selection of and inputs to

valuation techniquesAttribute value to asset or

liability at unit of account level

Highest and

best use

Exit transaction

Valuation

premise

Example:


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25

Level2

Level1

Level3

Market approach

Market price is available

Example:Selecting a valuation technique

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

(eg replacement cost)

Not income producing

No identical market price


Income approach

(eg discounted cash flow)

Directly identifiable cash flows

Observable inputs

Rarely seen in practice

Observable inputs

Rarely seen in practice


Unobservable inputs Unobservable inputs Unobservable inputs


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Next steps


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2727What will happen next?

2011

Q1 2011

Final IFRS on fair

value measurement

Q2 2011

IFRS Foundation

educational material

2010

Oct 2010 Jan 2011

Joint redeliberations

Measurement uncertainty Portfolios of financial

instruments

Premiums and discounts

Third party guarantees

Scope of disclosures

Effective date and

transition


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28Questions or comments?

Expressions of individual views

by members of the IASB andits staff are encouraged.

The views expressed in this

presentation are those of the

presenter. Official positions of

the IASB on accounting mattersare determined only after

extensive due process

and deliberation.

Hilary Eastman, IASB Staff

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