Fair value

IAS 32, IAS 36, IFRS 1, IFRS 9, IFRS 13 Definition Fair value

Fair value is 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.

IFRS 16 Definition Fair value: For the purpose of applying the lessor accounting requirements in IFRS 16 Leases, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.Costs

IFRS 2 Definition Fair value:

The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.

The key term that drives measurement is fair value: 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. Fair value is an exit price (e.g. the price to sell an asset rather than the price to buy that asset). An exit price embodies expectations about the future cash inflows and cash outflows associated with an asset or liability from the perspective of a market participant (i.e. based on buyers and sellers who have certain characteristics, such as being independent and knowledgeable about the asset or liability).

Fair value is a market-based measurement, rather than an entity-specific measurement, and is measured using assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfill a liability is not relevant in measuring fair value.

Something else -   Amortised Cost

Fair value is measured assuming a transaction in the principal market for the asset or liability (i.e. the market with the highest volume and level of activity). In the absence of a principal market, it is assumed that the transaction would occur in the most advantageous market. This is the market that would maximize the amount that would be received to sell an asset or minimize the amount that would be paid to transfer a liability, taking into account transaction and transportation costs. In either case, the entity needs to have access to that market, although it does not necessarily have to be able to transact in that market on the measurement date.

A fair value measurement is made up of one or more inputs, which are the assumptions that market participants would make in valuing the asset or liability. The most reliable evidence of fair value is a quoted price in an active market. When this is not available, entities use a valuation approach to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

These inputs also form the basis of the fair value hierarchy, which is used to categorize a fair value measurement (in its entirety) into one of three levels. This categorization is relevant for disclosure purposes. The disclosures about fair value measurements are extensive, with more disclosures being required for measurements in the lowest category (Level 3) of the hierarchy.

Something else -   Adjusted market pricing - How 2 best value it in IFRS 13

In summary:

Fair value

IFRS 13 consolidates the fair value guidance from across the various standards into a single standard. It clarifies the definition of fair value and provides additional disclosure requirements. It does not change when fair value can or should be used as it only addresses how to measure fair value.

IFRS 13 formalises the definition of market participants which is lacking in other standards. Market participants are buyers and sellers in the principal (or most advantageous) market who are independent of each other, knowledgeable about the asset or liability and able and willing to enter into a transaction for the asset or liability. Fair value is determined using market participants assumptions, not entity-specific assumptions. When measuring fair value it should be assumed that market participants act in their economic best interest.

A fair value measurement requires an entity to determine all of the following:Stock exchange

Between IASB and FASB and its (more prominent) members extensive discussion have been (and are) ongoing. Fair value has been perceived to better capture ‘economic substance’, historical cost might be deemed to be an inappropriate measure, despite the latter possibly being a more accurate representation of what it purports to represent (historical cost).  IASB is perceived being more pro-fair value than FASB. In summary there are two opinions:

Something else -   IFRS 13 Fair value measurement

The fair value perspective emphasises the role of financial reporting in serving investors in capital markets. It seeks accounting information that has a forward-looking content, impounding future cash flows from a non entity specific market perspective. It is most likely to achieve this when the reference markets are complete and competitive; ideally perfect markets would be accessible.

The alternative perspective also seeks to serve investors, broadly defined, but it gives priority to existing shareholders and regards stewardship as an important and distinct function of financial reporting. It too seeks accounting information that is relevant to forecasting future cash flows, but it assumes that this will often be achieved by providing information that is useful input to investors’ valuation models, rather than direct valuation of future cash flows. Such information may be entity specific. This approach assumes that information asymmetry and imperfect and incomplete markets are common.

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Fair value

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Something else -   ECL

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