IFRS 13 Fair Value Measurement - World...

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

not necessarily those of the IASB or IFRS Foundation.

International Financial Reporting Standards

4 June 2013

Executive IFRS Workshop for

Regulators – Vienna

IFRS 13 Fair Value Measurement

Mariela Isern Senior Technical Manager, IASB

Agenda

• Why IFRS 13 was necessary

• Fair value measurement principles

• Answering what, where, who and how

• Bid and ask spread, premiums and discounts, credit risk, own

credit risk, portfolios

• Fair value when the volume or level of activity has significantly

decreased

• Effective date

2

© 2013 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org



not necessarily those of the IASB or IFRS Foundation

Why IFRS 13 was necessary

Dispersed and conflicting guidance 4

IAS 40 IAS 39/IFRS 9 IAS 41 IAS 36 Etc.

IFRS 13

• Single source of measurement guidance

• Clear measurement objective

• Consistent and transparent disclosures about

fair value

Topic 820 in US GAAP (codified SFAS 157)





Fair value measurement principles

When does IFRS 13 apply? 6

If you own a financial asset

IFRS 9

After initial recognition, an entity

shall measure a financial asset […]

at fair value or amortised cost […]

IFRS 13

What

and

when

How


What does IFRS 13 not apply to? 7

Excluded from the scope • IFRS 2 and IAS 17

Disclosures in IFRS 13

not required for

• Plan assets (IAS 19)

• Retirement benefit plan investments

(IAS 26)

• Assets for which recoverable amount

is fair value less cost of disposal

(IAS 36)

Not required for

measurement similar to

fair value

• IAS 2 (net realisable value)

• IAS 36 (value in use)


The previous definition of fair value 8

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 9

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.


Fair value at initial recognition

Transaction price (entry price) = Fair value (exit price) unless:

– Transaction takes place in different markets

– Transactions are for different units of account

– Seller is distressed or forced

– Transactions are between related parties

10





Answering what, where,

who and how

A hypothetical transaction price 12

Market

participant

buyer

Market

participant

seller

Fair value

of

Principal market (or most advantageous market)

an asset

a liability

at the

measure-

ment date


What is being measured?

• Unit of account – IFRS 9: After initial recognition, an entity shall measure

a financial asset … at fair value or amortised cost…

• Characteristics – Which characteristics would a market participant buyer

take into account?

– contractual terms

– restrictions on sale

– quoted, unquoted

13


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.

14

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


Transaction and transportation costs 15

Description Included in fair value?

Transaction

costs

The costs to sell the asset

or transfer the liability that

are directly attributable to

the disposal of the asset or

the transfer of the liability

No (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

Transport

costs

The costs that would be

incurred to transport an

asset from its current

location to its exit market

Yes Transportation changes a

characteristic of the asset (its location)


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

16

Independent Knowledgeable

Able to enter into

a transaction

Willing to enter

into a transaction


How do we arrive to a market-based measurement? 17

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.





Bid and ask spread, premiums and discounts,

credit risk and portfolios

Pricing within a bid-ask spread 19

The price at

which the dealer

will…

For an asset, the

non-dealer

entity’s…

For a liability, the

non-dealer

entity’s…

Bid price buy exit price entry price

Ask (offer) price sell entry price exit price


Pricing within a bid-ask spread continued

• If an asset or a liability measured at fair value has a bid and

an ask price, use the price within the bid-ask 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.

20


Premiums and discounts

• Any premium or discount applied must be consistent with:

– characteristics of asset or liability

– the unit of account 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

21


Premiums and discounts continued 22

Is a level 1 input

available?

Would market participants

incorporate premium or

discount in transaction?

Does fair value include

premium or discount

Yes n/a FV = Level 1 price x quantity

held (P x Q)

No

Yes Yes

No No


23 Credit risk, own credit risk

Previous

guidance in

What was stated Problems

IAS 39 Financial

Instruments:

Recognition and

Measurement

IFRS 9 Financial

Instruments

Adjustments for credit risk should

be made if market participants

would reflect that risk when

valuing a financial instrument.

• There was inconsistent application

of the requirements relating to the

accounting of own credit. Some

entities took into account own

credit, others did not.

IFRS 13 Fair Value Measurement

(a) clarifies that the fair value of a liability includes an entity’s own credit risk;

(b) replaces ‘settlement’ by ‘transfer of a liability’ in the definition of fair value; and

(c) introduces the concept of symmetry between assets and liabilities to measure the fair value

of a liability


24

• A fair value measurement takes into account the characteristics of the asset or

liability if market participants would when pricing the asset or liability.

• Counterparty’s credit risk and the entity’s own credit risk are characteristics of

the asset or liability being measured.

Credit risk, own credit risk continued

Credit risk (IFRS 7 Financial

Instruments: Disclosures)

The risk that one party to a financial instrument will cause a

financial loss for the other party by failing to discharge an

obligation.

Own credit risk (IFRS 13)

Own credit risk is a component of non-performance risk.

IFRS 13 defines non-performance risk as the risk that an entity will

not fulfil an obligation. Non-performance risk includes, but may not

be limited to, the entity’s own credit risk.

Own credit risk is the fair value changes in liability arising from

changes in the financial instrument’s credit quality.


Portfolios of financial instruments

• 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.

• Conditions to be met: – must have documented risk management strategy

– provide information on basis of net risk exposure to key management

personnel

– only for portfolios of instruments measured at FV

• Accounting policy decision

• Does not affect presentation in IAS 32. – Allocations shall be performed on a reasonable and consistent basis.

25


Portfolios of financial instruments continued

• 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”

26

Market risk: The risk that the price will fluctuate

because of changes in market prices

(currency risk, interest rate risk and other price risk)


Portfolios of financial instruments continued

• 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.

27

Credit risk: The risk the entity or the counterparty will

not pay or otherwise perform as agreed





Fair value when the volume or level of activity

has significantly decreased

Fair value when the volume or level of activity has significantly decreased

• Fair value reflects current market conditions

• A decrease in market activity means further work is

involved in measuring fair value – selecting appropriate valuation techniques

– identifying inputs to valuation techniques (including risk

adjustments)

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• Indications that a market is not active: – few recent transactions

– price quotations not developed using current information

– wide bid-ask spreads or significant increases in spreads

– absence, or decline in, the market for new issues

– little public information

• A decrease in market activity does not mean that all

transactions are not orderly – must determine whether each observed transaction

is orderly


30

Fair value when the volume or level of activity has significantly decreased continued

• Indications a transaction is not orderly: – inadequate exposure to market

– marketed to single market participant

– seller is distressed

– seller was forced

– transaction price is outlier

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Fair value when the volume or level of activity has significantly decreased continued





Effective date

Effective date

• Effective 1 January 2013

• Earlier application permitted

• Prospective application, no comparatives

33


Thank you – Vielen Dank 34


IFRS 13 Fair Value Measurement - World...

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