Hilary Eastman, IASB Staff

November 2010
International Financial Reporting Standards
Mensurao de Valor Justo

Hilary Eastman, IASB Staff
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
Agenda
Fair value in IFRSs Why an exit price?
What will change?

What will stay the same? IFRS Foundation educational material Next steps
Fair value in IFRSs
Fair value measurements today

Requirements
IFRS 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 Initial recognition
Subsequent measurement
(for some)
Fair value measurements today continued

Requirements
IFRS IAS 17 Leases IAS 19 Employee Benefits (plan assets) Initial recognition
IAS 20 Government Grants

IAS 26 Accounting and Reporting by Retirement Benefit Plans (plan investments) IAS 28 Investments in Associates (investments held by venture capital firms)

Requirements
IFRS IAS 36 Impairment of Assets Initial recognition
Subsequent measurement (recoverable amount)
IAS 39 Financial Instruments: Recognition and Measurement IAS 41 Biological Assets IFRIC 12 Service Concession Arrangements
(construction or upgrade services)
(for some) (financial asset)
IFRIC 13 Customer Loyalty Programmes

Options
IFRS IFRS 1 First Time Adoption of IFRSs Initial recognition (deemed cost) (cost)
IAS 16 Property, Plant and Equipment
IAS 27 Consolidated and Separate Financial Statements

IAS 38 Intangible Assets IAS 40 Investment Property (cost) (cost)
The 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
Why an exit price?
Clarify the measurement objective

Current definition of fair value lacks clarity
The amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arms length transaction
10
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?

Clarify the measurement objective continued

Proposed definition of fair value
11
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

Exit price notion A current price Market-based view
Not a liquidation price or a forced sale

Clarify the measurement objective continued
12
An exit price reflects expectations about future cash inflows and 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
What will change?
Differences between current guidance and new standard

Consistent exit market Explicit reference to highest and best use of an asset
14
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

The exit transaction

IFRSs are inconsistent about the market in which market participants would transact
15
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
Highest and best use
16
Concept is implicit in IFRSs, new standard will make it explicit
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
Fair value hierarchy: Levels 1, 2 and 3

Yes
17
Is there a quoted price for an identical asset or liability? (Level 1 input)
No
Use the Level 1 input = Level 1 measurement
Must use without adjustment

Yes
Are there any observable inputs other than quoted prices for an identical asset or liability?
No
Significant use of Level 2 inputs (observable inputs that are not Level 1) = Level 2 measurement
Significant use of unobservable inputs = Level 3 measurement
Fair value when markets become inactive
18
IFRSs are not explicit about how to measure fair value when 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
Disclosures
Fair value hierarchy
19
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

What will stay the same?
What is being carried over to the new standard?

Fair value reflects characteristics of asset or liability Market participants vs knowledgeable, willing parties
21
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 (eg agriculture, asset impairments)
IFRS Foundation educational material
What 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
23
How do you measure fair value?

The asset or liability (unit of account)
24
Valuation premise
Highest and best use
Exit transaction Market participant assumptions Selection of and inputs to valuation techniques Fair value measurement Presentation and disclosure
Attribute value to asset or liability at unit of account level
Indicated value for unit of valuation
Example: Selecting a valuation technique

Market approach
Market price is available Price is for an identical asset or liability and must be used No adjustment is necessary or allowed
25
Level 1
Income approach (eg discounted cash flow)

Directly identifiable cash flows
Cost approach (eg replacement cost)

Not income producing No identical market price Price needs adjustment Observable inputs Rarely seen in practice
Level 2
Price needs adjustment Observable inputs
Observable inputs Rarely seen in practice
Level 3
Price needs adjustment Unobservable inputs
Unobservable inputs
Unobservable inputs
Next steps
What will happen next?

2010 2011
27
Oct 2010 Jan 2011
Q1 2011
Joint redeliberations
Measurement uncertainty Portfolios of financial instruments Premiums and discounts Third party guarantees Scope of disclosures Effective date and transition
Final IFRS on fair value measurement

Q2 2011
IFRS Foundation educational material
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.
28

Hilary Eastman, IASB Staff

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November 2010

International Financial Reporting Standards

Mensurao de Valor Justo

What will change?

International Financial Reporting Standards

Fair value in IFRSs

Fair value measurements today

Fair value measurements today continued

IAS 20 Government Grants

Fair value measurements today continued

Subsequent measurement (recoverable amount)

(construction or upgrade services)

(for some) (financial asset)

IFRIC 13 Customer Loyalty Programmes

Fair value measurements today continued

IAS 16 Property, Plant and Equipment

IAS 27 Consolidated and Separate Financial Statements

The fair value measurement project

create a single source of guidance

International Financial Reporting Standards

Why an exit price?

Clarify the measurement objective

Who are the knowledgeable, willing parties?

Clarify the measurement objective continued

market participants at the measurement date

Not a liquidation price or a forced sale

Clarify the measurement objective continued

International Financial Reporting Standards

What will change?

Differences between current guidance and new standard

Explicit three-level fair value hierarchy

Some new disclosures about fair value measurements

The exit transaction

Exit transaction takes place in the principal market

Or (if no principal market) in the most advantageous market

Highest and best use

Concept is implicit in IFRSs, new standard will make it explicit

Fair value hierarchy: Levels 1, 2 and 3

Is there a quoted price for an identical asset or liability? (Level 1 input)

Use the Level 1 input = Level 1 measurement

Must use without adjustment

Significant use of unobservable inputs = Level 3 measurement

Fair value when markets become inactive

Measurement uncertainty or sensitivity analysis

Difference between highest and best use and current use

International Financial Reporting Standards

What will stay the same?

What is being carried over to the new standard?

Determination of an active market

International Financial Reporting Standards

IFRS Foundation educational material

What do we mean by how to?

How do you measure fair value?

Highest and best use

Attribute value to asset or liability at unit of account level

Indicated value for unit of valuation

Example: Selecting a valuation technique

Income approach (eg discounted cash flow)

Cost approach (eg replacement cost)

Price needs adjustment Observable inputs

Observable inputs Rarely seen in practice

Price needs adjustment Unobservable inputs

International Financial Reporting Standards