IFRS 13 Disclosure fair value sensitivity

IFRS 13 Disclosure fair value sensitivity – For fair value measurements categorised within Level 3 of the fair value hierarchy, IFRS 13 93(h)(i) requires an entity to provide a measurement sensitivity analysis. The objective of that analysis is to provide users of financial statements with information about the measurement uncertainty inherent in fair value measurements categorised within Level 3 of the fair value hierarchy at the measurement date. IFRS 13 Disclosure fair value sensitivity

However, entities with significant balances in Level 3 of the fair value hierarchy (for example, entities owning investment properties) might find that a quantitative analysis is required to meet the requirements of IAS 1, because the assumptions are critical judgements made in determining the carrying values of those assets (IAS 1 29). IFRS 13 Disclosure fair value sensitivity

An entity takes into account the effect of correlation between unobservable inputs if such correlation is relevant when estimating the effect on the fair value measurement of a change in an unobservable input.

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When disclosing how an entity calculated the effect on the fair value measurement of changing one or more of the unobservable inputs to a different amount that could have reasonably been used in the circumstances, an entity might compare the unobservable inputs used in the fair value measurement with the different amounts used in the measurement uncertainty analysis.

The sensitivity analysis is required only in a narrative form, but tables may off course always be used, just a theoretical example is as follows:

Measurement sensitivity analysis for fair value measurements

Practical disclosure illustrations of sensitivity narratives

1. Measurement sensitivity analysis for fair value measurements using significant unobservable inputs (Level 3)

In addition, an entity should provide any other information that will help users of its financial statements to evaluate the quantitative information disclosed. For example, an entity might describe the relative subjectivity and limitations of the unobservable inputs and the range of unobservable inputs used.

2. Example from Annual report 2018 Rio Tinto plc

Sensitivity analysis in respect of level 3 derivatives

The values of aluminium forward contracts and options that are determined using unobservable inputs are calculated using appropriate discounted cash flow and option model valuation techniques. The most significant of these assumptions relate to long-term pricing wherein aluminium prices are increased by a projected inflation after the ten-year LME curve. A 10% increase in long-term metal pricing assumptions would result in a US$22 million (31 December 2017: US$41 million) decrease in carrying value. A 10% decrease in long-term metal pricing assumptions would result in a US$14 million (31 December 2017: US$22 million) increase in carrying value.

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3. Example from Annual report 2018 Rio Tinto plc

Sensitivity analysis in respect of goodwill impairment

Net book value goodwill

IFRS 13 Disclosure fair value sensitivity

IFRS 13 Disclosure fair value sensitivity

2018

USD Millions

2017

USD Millions

Richards Bay Minerals

474

552

Impairment tests for goodwillIFRS 13 Disclosure fair value sensitivity

Richards Bay Minerals

Richards Bay Minerals’ annual impairment review resulted in no impairment charge for 2018 (2017: no impairment charge). The recoverable amount has been assessed by reference to fair value less costs of disposal, in line with the policy set out in note 1(i) and classified as level 3 under the fair value hierarchy. Fair value less costs of disposal was determined by estimating cash flows until the end of the life-of-mine plan including anticipated expansions. In arriving at fair value less costs of disposal, a post-tax discount rate of 8.8% (2017: 8.7%) has been applied to the post-tax cash flows expressed in real terms.

The key assumptions to which the calculation of fair value less costs of disposal for Richards Bay Minerals is most sensitive and the corresponding decrease in fair value less costs of disposal are set out below:

IFRS 13 Disclosure fair value sensitivity IFRS 13 Disclosure fair value sensitivity

USD millions

5% decrease in the titanium slag price

174

1% increase in the discount rate applied to post-tax cash flows

195

10% strengthening of the South African rand South African rand

328

Other assumptions include the long-term pig iron and zircon prices and operating costs. Future selling prices and operating costs have been estimated in line with the policy set out in note 1(i). The recoverable amount of the Cash Generating Unit exceeds the carrying value when each of these sensitivities are applied whilst keeping all other assumptions constant.

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4. Example from Annual report 2018 Glencore plc

Price sensitivity analysis

IFRS 13 Disclosure fair value sensitivity

2018

2017

Non-discretionary dividend obligation – Level 3

Assets

IFRS 13 Disclosure fair value sensitivity

Liabilities

-188

-513

Valuation techniques:

Discounted cash flow model

Significant unobservable inputs:

  • Forecast commodity prices;
  • Discount rates using weighted average cost of capital methodology;
  • Production models;
  • Operating costs; and
  • Capital expenditures.

The resultant liability is essentially a discounted cash flow valuation of the underlying mining operation. Increases/decreases in forecast commodity prices will result in an increase/decrease to the value of the liability though this will be partially offset by associated increases/decreases in the assumed production levels, operating costs and capital expenditures which are inherently linked to forecast commodity prices. The valuation remains sensitive to price and a 10% increase/decrease in commodity price assumptions would result in a $111 million adjustment to the current carrying value.

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

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