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IFRS 13 Fair Value Measurement

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© IFRS Foundation
Agenda 3

• Part I: context and scope


• Part II: measurement of fair value
• Part III: valuation approaches and techniques
• Part IV: disclosures
• Part V: effective date and transition

© IFRS Foundation
Part I
Context and scope

© IFRS Foundation
Part I: context and scope 5

• Why IFRS 13 is necessary


• Scope—when IFRS 13 applies
• Scope—what IFRS 13 does not apply to

© IFRS Foundation
Before IFRS 13–dispersed and
conflicting guidance 6

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

Topic 820 in US GAAP (codified SFAS 157)

IFRS 13
• Single source of measurement guidance
• Clear measurement objective
• Consistent and transparent disclosures about fair
value

© IFRS Foundation
The previous definition of fair value 7

Fair value definition Its weaknesses


It did not specify whether an entity
The amount for which an is buying or selling the asset

asset could be It was unclear about what ‘settling’


meant because it did not refer to
exchanged the creditor
or a liability settled
It was unclear about whether it was
between knowledgeable, market-based
willing parties in an arm’s It did not state explicitly when the
length transaction. ? exchange or settlement takes place

© IFRS Foundation
When does IFRS 13 apply? 8

• When another IFRS requires or permits fair value


measurements or disclosures about fair value
measurements
• IFRS 13 also applies to measurements, such as fair
value less cost to sell, based on fair value or
disclosures about those measurements

© IFRS Foundation
When does IFRS 13 apply? 9

For example, if you own a biological asset…

IAS 41
A biological asset shall be What
measured on initial recognition and and
at the end of each reporting period when
at its fair value less cost to sell

IFRS 13 How

© IFRS Foundation
What does IFRS 13 not apply to? 10

Excluded from the • IFRS 2 and IAS 17


scope
Disclosures in IFRS 13 • Plan assets (IAS 19)
not required for • Retirement benefit plan
investments (IAS 26)
• Assets for which recoverable
amount is fair value less cost
of disposal (IAS 36)
Not required for • IAS 2 (net realisable value)
measurement similar to • IAS 36 (value in use)
fair value
© IFRS Foundation
Part II
Measurement of fair value

© IFRS Foundation
Part II: measurement of fair value 12

• Definition of fair value and measurement principles


• Considerations specific to non-financial assets
• Considerations specific to liabilities

© IFRS Foundation
Definition of fair value and
measurement principles

© IFRS Foundation
IFRS 13’s ‘new’ definition of fair value 14

New fair value definition Comments


It specifies that the entity is selling
… the price that would be the asset
received to
It refers to the transfer of a liability
sell an asset or paid to
transfer a liability in an It is not a forced or distressed sale
orderly transaction It is clear it is market-based
between market
participants at the It states explicitly when the sale or
transfer takes place
measurement date.

© IFRS Foundation
Fair value at initial recognition 15

• 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
© IFRS Foundation
A hypothetical transaction price 16

Principal market (or most


advantageous market)

Market Market
participant participant
buyer seller

an asset
at the
Fair value measurement
of a liability date

© IFRS Foundation
Who would transact for the item? 17

• Market participants are buyers and sellers in the


principal (or most advantageous) market who are:

Independent Knowledgeable

Able to enter into a Willing to enter into


transaction a transaction
• Market participants act in their economic best
interest
– Maximise the value of the asset
– Minimise the value of the liability
© IFRS Foundation
What is being measured? 18

• Unit of account
– IAS 41: A biological asset shall be measured …
at its fair value less costs to sell…
• Characteristics
– Which characteristics would a market participant
buyer take into account?
– age and remaining economic life
– condition
– location
– restrictions on use or sale
– contractual terms
© IFRS Foundation
Where would the transaction take
place? 19

Fair value is the price in the …


Or, if no principal market, the
Principal market
most advantageous market
The market with the greatest The market that maximises the
volume and level of activity for amount that would be received to
the asset or liability sell the asset and minimises the
amount that would be paid to
transfer the liability
• 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
© IFRS Foundation
Transaction and transport costs 20

Description Included in fair value?

Transaction The costs to sell the asset No (Although they are


or transfer the liability that considered in the
costs are directly attributable to assessment of which
the disposal of the asset market is most
or the transfer of the advantageous)
liability They are a characteristic of
the transaction, not of the
asset or liability

Transport The costs that would be Yes Transport changes a


incurred to transport an characteristic of the asset
costs asset from its current (its location)
location to its exit market

© IFRS Foundation
How do we arrive at a market-based
measurement? 21

Is there a quoted price in an active market for an identical asset or liability?

Yes No
Replicate a market price through a
Use this quoted price to
valuation technique* (using observable+
measure fair value (Level 1) and unobservable inputs: Levels 2 and 3)

Must use without adjustment No significant Use of significant


unobservable unobservable
(Level 3) inputs‡ = (Level 3) inputs‡ =
* Valuation techniques include the
Level 2 measurement Level 3 measurement
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.
© IFRS Foundation
Considerations specific to
non-financial assets

© IFRS Foundation
Highest and best use 23

• Fair value assumes a non-financial asset is


used by market participants at its highest and
best use
–the use of a non-financial asset by market
participants that maximises the value of
the asset
– physically possible
– legally permissible
– financially feasible

© IFRS Foundation
Highest and best use continued 24

• Highest and best use is determined from the


perspective of market participants, even if the entity
intends a different use.
• However, an entity’s current use of a non-financial
asset is presumed to be its highest and best use
unless market or other factors suggest that a
different use by market participants would maximise
the value of the asset.

© IFRS Foundation
Highest and best use continued 25

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


current use
– if for competitive reasons an entity does not
intend to use the asset at its highest and best
use, the fair value of the asset should still be
measured assuming its highest and best use by
market participants (defensive value)
• Does not apply to financial instruments or liabilities

© IFRS Foundation
Valuation premise 26

• A non-financial asset either:


– provides maximum value through its use in combination
with other assets and liabilities as a group
– is its value influenced by it being ‘operated’ with other
assets?
– an example: equipment used in production facility
– market participants are assumed to hold
complementary assets
– provides maximum value through its use on a stand-alone
basis
– is its value independent of its use with other assets?
– an example: a vehicle or an investment property
• Does not apply to financial instruments or liabilities
© IFRS Foundation
Considerations specific to liabilities

© IFRS Foundation
Transfer notion–liabilities and an
entity’s own equity instruments 28

• Fair value assumes a transfer to a market


participant who takes on the obligation. The transfer
assumes:

Liability or equity remains outstanding

Restrictions on transfer are already reflected in


inputs; no additional adjustment required
Fair value of a liability reflects the effect of
non-performance risk

© IFRS Foundation
Decision tree—liability measurement 29

Yes
Is there an No
observable market
price to transfer the
Fair value = instrument? Does somebody hold the
observable market corresponding asset?
price of instrument
Yes No

Fair value = Fair value = fair value of Fair value = another


observable market the corresponding asset valuation
price of asset technique*
Yes Is there an observable * Using the
No market price for the perspective of a
instrument traded as an market participant that
owes the liability or
Fair value = asset? issued the claim on
another valuation equity
technique Level 2 or 3
© IFRS Foundation
No corresponding asset 30

Two possible ways to approach it:


1. Use the future cash flows that a market participant
would expect to incur in fulfilling the obligation,
including the compensation that a market
participant would require for taking on the
obligation. Such compensation includes:
– the cost to fulfil the obligation plus a return for
undertaking the activity; and
– a risk premium to compensate for the risk that
actual cash flows might differ from expected
cash flows.
© IFRS Foundation
No corresponding asset continued 31

2. Use the amount that a market participant would


receive to enter into or issue an identical liability or
equity instrument.

© IFRS Foundation
Part III
Valuation approaches and
techniques

© IFRS Foundation
Part III: valuation techniques 33

• Valuation approaches
• Valuation techniques—illustration for unquoted
equity instruments
• Bid and ask spread, premiums and discounts
• Measuring the fair value of portfolios

© IFRS Foundation
Valuation approaches

© IFRS Foundation
Valuation approaches 35

Measure fair value using valuation techniques that


are appropriate in the circumstances and for which
sufficient data are available.

• Market approach
– prices from market transactions for identical or
similar assets or liabilities, for example:
– using market multiples (eg of earnings or cash flows)
from a set of comparable companies and applying
those multiples to the earnings or cash flows of the
company being valued

© IFRS Foundation
Valuation approaches continued 36

• Cost approach
– the cost to acquire or reconstruct a substitute
asset of comparable utility, adjusted for physical,
functional and economic obsolescence
– often used for PP&E and some intangibles
• Income approach
– converts future amounts (eg cash flows) to a
single current discounted amount, for example:
– present values
– option pricing models
– multi-period excess earnings method
© IFRS Foundation
Selecting a valuation approach 37

Market approach Income approach Cost approach


Market price is available (eg discounted cash flow) (eg replacement cost)

• Price for
identical item • Not directly
Level 1

• Directly identifiable cash


• Must be used flows
income-producing
• No identical market price
without • Price needs adjustment
adjustment
• Price needs
• Observable • Observable
Level 2

adjustment
inputs inputs
• Observable
• Rare • Rare
inputs
• Price needs
Level 3

adjustment • Unobservable • Unobservable


• Unobservable inputs inputs
inputs
© IFRS Foundation
Valuation techniques—illustration
for unquoted equity instruments

© IFRS Foundation
Measuring the fair value of unquoted
equity instruments
• Scope of this particular illustration:
– Unquoted equity instruments  not quoted in an
active market
– Non-controlling interest within the scope of IFRS 9
• A range of valuation techniques can be used.
• Judgement is involved
– in the selection of a valuation technique (given
specific facts and circumstances, some
techniques might be more appropriate than
others)
– when applying the valuation technique
© IFRS Foundation
Valuation approaches and techniques 40

Valuation Valuation techniques


approaches
Market approach Transaction price paid for an identical or
a similar instrument of an investee
Comparable company valuation multiples

Income approach Discounted cash flow (DCF) method


Dividend discount model (DDM)
Constant-growth DDM
Capitalisation model

A combination of Adjusted net asset method


approaches may be
used
© IFRS Foundation
Market approach 41

• Uses prices and other relevant information that have


been generated by market transactions that involve
identical or comparable assets.
• Techniques that are most commonly referred to for
valuing unquoted equity instruments are related to the
data sources that they use:
– transaction price paid for an identical or a similar
instrument of an investee
– comparable company valuation multiples derived from
quoted prices (ie trading multiples) or from prices paid in
transactions such as mergers and acquisitions (ie
transaction multiples)
© IFRS Foundation
Valuation multiples 42

• Valuation basis:
– Equity value
– Enterprise value (EV)
𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐸𝑉)
• Multiple =
𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 𝑚𝑒𝑎𝑠𝑢𝑟𝑒

• Performance measures:
– EBITDA, EBIT, EBITA
– Earnings, ie net income (E)
– Book value, ie value of an entity’s shareholders
equity (B)
– Revenue © IFRS Foundation
Fair value measurement using
valuation multiples–four steps 43

• Identify comparable company peers.


• Select the performance measure that is most
relevant to assessing the value for the investee.
• Apply the appropriate valuation multiple to the
relevant performance measure of the investee to
obtain an indicated fair value of the investee’s
equity value or the investee’s enterprise value.
• Make appropriate adjustments to ensure
comparability (eg non-controlling interest discount).

© IFRS Foundation
Commonly used valuation multiples 44

• Earnings multiples commonly used when valuing:


established business with an identifiable stream of
continuing and stable earnings:
– 𝐸𝑉 Τ𝐸𝐵𝐼𝑇𝐷𝐴, 𝐸𝑉 Τ𝐸𝐵𝐼𝑇 , 𝐸𝑉 Τ𝐸𝐵𝐼𝑇𝐴
– 𝑃Τ𝐸 (where P is entity’s market capitalisation)
• Book value multiples: where entities use their equity
capital bases to generate earnings (eg businesses
that have not yet generated positive earnings)
– 𝑃Τ𝐵
• Revenue multiples: 𝐸𝑉 Τ𝑅𝑒𝑣𝑒𝑛𝑢𝑒

© IFRS Foundation
Example–applying comparable
company peers’ multiples 45

• Investor has 5% non-controlling interest in Entity J


(private company) and measures it at fair value.
• Financial information about Entity J
– Normalised EBITDA = CU*100 million
– Debt at FV = CU350 million
• Six comparable public company peers (same
business and geographical region)
• EV/EBITDA multiple was chosen because there are
differences in capital structure and depreciation
policies between J and peers.
• No relevant non-operating items.
* CU = currency units © IFRS Foundation
Example–applying comparable
company peers’ multiples continued 46

Step 1  Identify comparable peers


• The investor has selected six comparable public
company peers that operate in the same business
and geographical region as Entity J.
Step 2  Select the performance measure that is
most relevant to assessing the value for the investee.
• The investor has chosen the EV/EBITDA multiple to
value Entity J because there are differences in the
capital structure and depreciation policies between
Entity J’s comparable company peers and Entity J.
© IFRS Foundation
Example–applying comparable
company peers’ multiples continued 47

Step 3  Apply valuation multiple to obtain fair value


• Trading multiples of the comparable public company
peers are:

Upon further analysis, these entities are


considered comparable (ie similar risk,
growth and cash
flow-generating profiles

© IFRS Foundation
Example–applying comparable
company peers’ multiples continued 48

Step 3 continued
• Investor selected average multiple (ie 8.5x)
because it appropriately reflects Entity J’s
characteristics relative to its peers.
• 𝐸𝑉 = 𝐸𝐵𝐼𝑇𝐷𝐴 × 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑒 = 𝐶𝑈100𝑚 × 8.5 =
𝐶𝑈850𝑚
• 𝑈𝑛𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐹𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐸𝑉 − 𝐷𝑒𝑏𝑡 @𝐹𝑉 =
𝐶𝑈850𝑚 − 𝐶𝑈350𝑚 = 𝐶𝑈500𝑚

© IFRS Foundation
Example–applying comparable
company peers’ multiples continued 49

Step 4  Make appropriate adjustments to ensure


comparability
• No non-controlling interest discount is required
because the valuation multiples used to
measure the fair value of Entity J were derived
from the trading prices of the comparable public
company peers and are consistent with holding
a five per cent non-controlling equity interest in
Entity J.

© IFRS Foundation
Example–applying comparable
company peers’ multiples continued 50

Step 4 continued
• Discount for the lack of liquidity  assessed to
be 30% on the basis of relevant studies
applicable in the region and industry as well as
on the specific facts and circumstances.
• Therefore
𝐹𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐶𝑈500𝑚 × 1 − 0.3 = 𝐶𝑈350𝑚
• And the fair value of 5% non-controlling interest
is CU17.5m (ie CU350m×0.05)

© IFRS Foundation
Income approach 51

• Income approach converts future amounts


(eg cash flows) to a single current (ie
discounted) amount.
–Discounted Cash Flow method (DCF)
–Dividend Discount Model (DDM)
–Constant growth DDM
–Capitalisation model

© IFRS Foundation
Enterprise value 52

• Enterprise value = discounted FCFF @ WACC


– FCFF (Free Cash Flow to Firm): a common definition among
others  cash flow from assets before any debt payments but
after making reinvestments that are needed for future growth
or the cash flows available to all capital providers (debt/equity)
– WACC: discount rate that reflects the cost of raising both debt
and equity financing, in proportion to their use (ie the
Weighted Average Cost of Capital)
• 𝐹𝐶𝐹𝐹 = 𝐸𝐵𝐼𝑇 × 1 − 𝑡 + 𝐷&𝐴 − 𝑅𝑅 − 𝑁𝑒𝑡 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 𝑖𝑛 𝑁𝑊𝐶
– D&A = Depreciation and amortisation
– RR = Reinvestment requirements
– NWC = Net working capital
– t = income tax rate
© IFRS Foundation
WACC: cost of debt capital
component and computation 53

𝐷 𝐸
𝑊𝐴𝐶𝐶 = × (1 − 𝑡) × 𝑘𝑑 + × 𝑘𝑒
(𝐷 + 𝐸) (𝐷 + 𝐸)
• Computing WACC requires cost of equity capital
and cost of debt capital (𝑘𝑒 , 𝑘𝑑 respectively) and
market participants’ expectations of the investee’s
long-term optimal capital structure
• There are a number of approaches for estimating 𝑘𝑑
– Based on recent borrowings
– By reference to an actual or synthetic credit
rating and default spread
© IFRS Foundation
WACC: cost of equity capital
component 54

• Cost of equity capital (𝑘𝑒 ) is often estimated using


CAPM:
𝑘𝑒 = 𝑟𝑓 + 𝑟𝑚 − 𝑟𝑓 × 𝛽
where:
𝑟𝑓 is the expected rate of return on a risk-free asset
𝑟𝑚 is the required market rate of return on a fully
diversified portfolio
𝛽 is the measure of the systematic risk for the
individual shares

© IFRS Foundation
Example–DCF method using
enterprise value 55

• An investor has 5% non-controlling interest in Entity


R.
• FCFF of Y1 to Y5 of CU100m and terminal value
from Y5 onwards is CU1,121.8m (assumption:
inflation is offset by market shrinkange, no growth in
nominal terms)
• WACC  8.9%
• Fair value of debt = CU240m
• Non-controlling interest discount  CU8m
• Discount for the lack of liquidity  CU4.09m
© IFRS Foundation
Example–DCF method using
enterprise value continued 56

© IFRS Foundation
Example–DCF method using
enterprise value continued 57

© IFRS Foundation
A combination of approaches–
adjusted net asset method 58

• Involves deriving the fair value of an investee’s equity


instruments by reference to the fair value of its assets
and liabilities (recognised and unrecognised).
• Appropriate for an investee whose value is mainly
derived from the holding of assets (rather than from
deploying those assets as part of a broader business).
• Requires measurement of the fair value of the
individual assets and liabilities.
• Non-controlling interest and liquidity discounts may be
applicable.

© IFRS Foundation
Bid and ask spread,
premiums and discounts

© IFRS Foundation
Pricing within a bid-ask spread 60

The price at For an asset, the For a liability, the


which the dealer non-dealer non-dealer
will… entity’s… entity’s…
Bid price buy exit price entry price

Ask (offer) price sell entry price exit price

© IFRS Foundation
Pricing within a bid-ask spread continued 61

• 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

© IFRS Foundation
Premiums and discounts 62

• 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
© IFRS Foundation
Measuring the fair value of
portfolios

© IFRS Foundation
Portfolios of financial instruments 64

• 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.
• This practice was already allowed in IAS 39/IFRS 9
• The “exception” was permitted because:
– derivatives often cannot be sold, but management
can mitigate risk exposure by entering into an
offsetting position
– portfolio composition is entity-specific (depends on
entity’s risk preferences)
© IFRS Foundation
Portfolios of financial instruments
continued 65

• Conditions that need to be met:


– Entity must have documented risk management strategy
– The entity provides information on the basis of the 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.
• Portfolio-level adjustments may need to be allocated to the
unit of account for presentation purposes.

© IFRS Foundation
Portfolios of financial instruments
continued 66

• 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”
Market risk: the risk that the price will fluctuate
because of changes in market prices
(currency risk, interest rate risk and other
price risk).
© IFRS Foundation
Portfolios of financial instruments
continued 67

• 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.

Credit risk: the risk the entity or the


counterparty will not pay or otherwise perform
as agreed.
© IFRS Foundation
Part IV: Disclosures

© IFRS Foundation
General 69

• Fair value at end of reporting period


• Level in hierarchy
• Transfers between levels
• Valuation techniques and inputs used
• If highest and best use is different from
current use

© IFRS Foundation
General continued 70

• Disclosures also required for unrecognised


amounts (ie that are only disclosed) or
amounts recognised using a different
measure (eg amortised cost)
–eg financial asset at amortised cost, but
IFRS 7 requires disclosure of asset’s fair
value
• Quantitative disclosures in a table unless
another format is better
© IFRS Foundation
General continued 71

Illustrative Example 15 - Fair values at the end of the


reporting period and level of the fair value hierarchy
for recurring fair value measurements…
Fair value measurements at the end of the
(CU in millions) reporting period using
Quoted prices in
active markets Significant other Significant
for identical observable unobservable
assets inputs inputs Total gains
Description 31/12/X9 (Level 1) (Level 2) (Level 3) (losses)

Recurring fair value measurements

Trading equity securities (a):


Real estate industry 93 70 23
Oil and gas industry 45 45
Other 15 15
Total trading equity securities 153 130 23
Other equity securities (a):
Financial services industry 150 150
Healthcare industry 163 110 53
Energy industry 32 32
Private equity fund investments (b) 25 25
Other 15 15
Total other equity securities 385 275 110
Debt securities: © IFRS Foundation
Foreign exchange contracts 43 43
Credit contracts 38 38
Commodity futures contracts 78 78
General
Commodity forward contracts
Total derivatives
continued 20
236 78
20
120 38
72
Investment properties:
Illustrative Example 15 - Fair
Commercial—Asia 31 values at the end of the31
Commercial—Europe
reporting period and level 27
of the
Total investment properties
58
fair value hierarchy 27
58
for non-recurring fair value measurements…
Total recurring fair value measurements 1,424 577 341 506

Non-recurring fair value measurements

Assets held for sale(c) 26 26 (15)


Total non-recurring fair value measurements 26 26 (15)

(a)
On the basis of its analysis of the nature, characteristics and risks of the securities, the entity has determined that presenting them by
industry is appropriate.
(b)
On the basis of its analysis of the nature, characteristics and risks of the investments, the entity has determined that presenting them
as a single class is appropriate.
(c)
In accordance with IFRS 5, assets held for sale with a carrying amount of CU35 million were written down to their fair value of CU26
million, less costs to sell of CU6 million (or CU20 million), resulting in a loss of CU15 million, which was included in profit or loss for the
period.
(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)

© IFRS Foundation
More information about Level 3 73

• Quantitative disclosure of unobservable


inputs and assumptions used
• Reconciliation of opening to closing balances
• Description of valuation process in place

© IFRS Foundation
More information about Level 3 continued 74

• Sensitivity analysis:
– narrative discussion about sensitivity to changes
in unobservable inputs, including inter-
relationships between inputs that magnify or
mitigate the effect on the measurement
– quantitative sensitivity analysis for financial
instruments
• More detail in determining classes

© IFRS Foundation
More information about Level 3 continued 75

Illustrative Example 17 – Quantitative information


about significant unobservable inputs used
Quantitative information about fair value measurements using significant unobservable inputs (Level 3)
(CU in millions)

Fair value at
Description 31/12/X9 Valuation technique(s) Unobservable input Range (weighted average)

Other equity securities:


Healthcare industry 53 Discounted cash flow w eighted average cost of capital 7% - 16% (12.1%)
long-term revenue grow th rate 2% - 5% (4.2%)
long-term pre-tax operating margin 3% - 20% (10.3%)
discount for lack of marketability (a) 5% - 20% (17%)
(a)
control premium 10% - 30% (20%)
Market comparable companies (b) 10 - 13 (11.3)
EBITDA multiple
revenue multiple(b) 1.5 - 2.0 (1.7)
discount for lack of marketability (a) 5% - 20% (17%)
control premium(a) 10% - 30% (20%)
Energy industry 32 Discounted cash flow w eighted average cost of capital 8% - 12% (11.1%)
long-term revenue grow th rate 3% - 5.5% (4.2%)
long-term pre-tax operating margin 7.5% - 13% (9.2%)
discount for lack of marketability (a) 5% - 20% (10%)
(a)
control premium 10% - 20% (12%)
Market comparable companies (b) 6.5 - 12 (9.5)
EBITDA multiple
revenue multiple(b) 1.0 - 3.0 (2.0)
discount for lack of marketability (a) 5% - 20% (10%)
control premium(a) 10% - 20% (12%)
(c)
Private equity fund investments 25 Net asset value n/a n/a
© IFRS Foundation
More information about Level 3 continued 76

Illustrative Example 18 – Valuation processes:


An entity might disclose the following:
(a) For the group within the entity that decides the entity’s valuation policies and
procedures:
– its description;
– to whom that group reports; and
– the internal reporting procedures in place (eg whether and, if so, how pricing,
risk management or audit committees discuss and assess the fair value
measurements);
(b) the frequency and methods for calibration, back testing and other testing
procedures of pricing models;
(c) the process for analysing changes in fair value measurements from period to
period;
(d) how the entity determined that third-party information, such as broker quotes or
pricing services, used in the fair value measurement was developed in accordance
with the IFRS; and
(e) the methods used to develop and substantiate the unobservable inputs used in
a fair value measurement.
© IFRS Foundation
More information about Level 3 continued 77

Illustrative Example 19 – Narrative discussion about


sensitivity to changes in unobservable inputs:
The significant unobservable inputs used in the fair value
measurement of the entity’s residential mortgage-backed
securities are prepayment rates, probability of default and
loss severity in the event of default. Significant increases
(decreases) in any of those inputs in isolation would result
in a significantly lower (higher) fair value measurement.
Generally, a change in the assumption used for the
probability of default is accompanied by a directionally
similar change in the assumption used for the loss
severity and a directionally opposite change in the
assumption used for prepayment rates.
© IFRS Foundation
Part V: Effective date and
transition

© IFRS Foundation
Effective date and transition 79

• Effective 1 January 2013


• Earlier application permitted
• Prospective application, no comparatives

© IFRS Foundation