Fair Value Measurement (IFRS 13)

Fair value is the price that would be received to sell an asset or paid to transfer a
liability (exit price) in an orderly transaction (not a forced sale) between market
participants (market-based view) at the measurement date (current price).

Fixation on deep and liquid markets
Fair value hierarchy
Level 1:Marking to market
Level 2:Marking to model
Level 3:Inputs are unobservable, derived from extrapolation and cannot be
evidenced by observable data

Definitions Financial Instruments (IAS32)
Financial Instruments are any contracts that give rise to both a financial asset in
one entity and a financial liability in another entity
A financial asset might be cash, an equity instrument, a right to receive cash (a
receivable or debtor), or another financial asset from another entity
A financial liability is an obligation to deliver cash or another financial asset to
another entity.

NARRATIVE DISCLOSURE (IFRS7)
Explanation of the way in which financial instruments affect the risk profile of an
entity
An explanation of the entitys strategy relating to financial instruments e.g.
hedging policy
Details of any change in strategy
Narrative disclosure is mandatory

Interest rate risk exposure to interest rate changes
Currency risk exposure to changes in exchange rates
Price risk exposure to changes in market prices
Credit risk default risk
Liquidity risk lack of a market

Measurement (IAS 39)
All financial instruments (including derivatives) are initially recognised on the
statement of position at fair value (sometimes zero!)
Transaction costs can be included in the value of the asset or liability unless the
asset or liability is held for trading.

All financial assets and liabilities that are held for trading are re measured at
each statement of position date at fair value
Financial assets and liabilities held to maturity (e.g. fixed interest bonds) can be
held at amortised cost
Gains and losses on derivatives go to the income statement, or through reserves
if the gain or loss relates to an effective hedge.



FRS9 replacement of IAS39
FRS9 replaces some aspects of IAS39.
Some IAS39 rules appear to have been relaxed following the credit crunch of
2007-2009 when accountants were blamed for precipitating the crash with their
mark to market rules
FRS9 comes into force on 1.1.13 but earlier adoption is allowed.
It is a work in progress and only the first phase classification and
measurement has been issued. Phase two concerns impairment and phase three
relates to hedge accounting.
Issuing an incomplete standard is very unusual!

IFRS9
Changes the logic to a business model test and a cash flow characteristics test.
If a financial instrument is held to realise changes in fair value then changes in
value should go through profit and loss. Same as IAS39 held for trading category.
If a financial instrument is held for cash flows then cost and the effective interest
rate can be used. Changes in value are ignored. Same as IAS39 held to maturity
category.
All financial assets are measured either at amortised cost or fair value
However, firms can have a fair value through profit and loss option for some
assets and liabilities if this reduces an accounting mismatch between assets and
liabilities. For example, liabilities paying regular interest could be measured at
fair value because similar assets are held for value changes. RBS gain on own
debt continues!
FRS9 only relates to assets, not liabilities!