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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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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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
Fair value in IFRSs
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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
6Fair value measurements today continued
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
7Fair value measurements today continued
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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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
Why an exit price?
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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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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
What will change?
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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
18
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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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
What will stay the same?
What is being carried over to the new
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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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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
IFRS Foundation
educational material
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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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
Price needs adjustment
Income approach
(eg discounted cash flow)
Directly identifiable cash flows
Observable inputs
Rarely seen in practice
Observable inputs
Rarely seen in practice
Price needs adjustment
Unobservable inputs Unobservable inputs Unobservable inputs
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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
Next steps
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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
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.
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