Recurring and Non-recurring fair value measurement

Recurring and Non-recurring fair value measurement

Recurring fair value measurements relate to those where measurement is required at the end of each reporting period-end in comparison to non-recurring fair value measurements which are driven by a particular event or transaction. Recurring and Non-recurring fair value measurement

Recurring fair value measurements would include a policy choice under IAS 40 or IAS 16 to record property at fair value or available for sale or fair value through profit or loss financial instruments classification. RUSDecurring and Non-recurring fair value measurement

Non-recurring fair value measurements arise due to a period specific event such as a held for sale classification under IFRS 5 or financial or non-financial instrument impairments where the asset is written down to fair value. Recurring and Non-recurring fair value measurement

While many of the disclosure requirements are the same, the recurring disclosures include additional requirements applicable to the continuous nature of the fair value measurement requirement.

The disclosure requirements, which are most extensive for recurring Level 3 measurements, are summarized in the following table. Recurring and Non-recurring fair value measurement

Requirements (IFRS 13 93, IFRS 13 97, IFRS 13 98, IFRS 13 99)

Subject

Fair value recognised in financial position

Fair value disclosure

Recurring

Non-recurring

Input level

1

2

3

1

2

3

1

2

3

Fair value at end of reporting period

Reasons for the measurement

Level within hierarchy

Transfers within hierarchy, including the policy for the timing of transfers

Description of valuation technique

Changes either to a valuation technique or to both a valuation approach and a valuation technique, and reasons for the changes

Quantitative information about significant unobservable inputs

Reconciliation of opening and closing balance (including information on transfers in or out)

Unrealized gains/losses from remeasurement

Description of valuation processes and policies

Sensitivity to changes in unobservable inputs (narrative)

For non-financial assets when highest and best use differs from actual, the reasons why

For a liability measured at fair value, the existence of an inseparable third-party credit enhancement

Specific point – Level 3 inputs

Calculation of the amount attributable to the change in unrealized gains or losses of Level 3 inputs, that is recognized as part of the total gains or losses for the period [IFRS 13 93(f)]

In practice, meeting this disclosure requirement may be straightforward for some types of instruments; however, identifying the change in unrealRecurring and Non-recurring fair value measurementized gains or losses included in profit or loss for the period may be difficult for those instruments that are subject to periodic cash settlements. In many situations, periodic cash settlements constitute both a realization of gains or losses arising in prior periods (i.e. settlement of the initial carrying amount) and a realization of gains or losses arising in the current period. Recurring and Non-recurring fair value measurement

An entity may define the change in unrealized gains or losses as those gains or losses included in earnings for the current period, relating to assets and liabilities held at the end of the reporting period, exclusive of settlements received or paid in the current period for movements in fair value that occurred in the period. In that case, an entity develops a reasonable method to allocate cash settlements received or paid during the period to the:

  • unrealized gain or loss as of the beginning of the period or the initial carrying amount (which would not affect the realized gains or losses in the period); and Recurring and Non-recurring fair value measurement
  • change in fair value during the period (which would constitute realization of gains or losses in the period).
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To facilitate this separation, the below may be useful in determining the appropriate amount to disclose.

  • The total change in fair value, comprising both realized and unrealized gains or losses, is calculated by comparing the beginning of the period fair value of the applicable asset or liability, adjusted for all cash flows received or paid for the asset or liability during the current reporting period, to the end of period fair value for the asset or liability.
  • Cash flows received or paid during the current reporting period that relate to either changes in fair value that occurred in a prior reporting period, or settlement of the initial carrying amount, do not represent either realized or unrealized gains or losses in the current reporting period. They represent an adjustment to the related account in the statement of financial position. Recurring and Non-recurring fair value measurement
  • Cash flows received or paid during the current reporting period that relate to changes in fair value that occurred in the current reporting period represent realized gains or losses in the current reporting period. Recurring and Non-recurring fair value measurement
  • Unrealized gains or losses for the current period for the applicable asset or liability generally are equal to the difference between the total change in fair value and the amount of realized gains or losses for the current period calculated above. Recurring and Non-recurring fair value measurement

It is also noted that in practice, as an alternative to the methodology described above, either Recurring and Non-recurring fair value measurement

  1. the periodic amount of cash settlements should be considered to be a realization of the current period gain or loss, or
  2. that periodic cash settlements should be excluded in their entirety from the determination of realized gains and losses in the current period (because they are considered to be attributable entirely to the unrealized gain or loss at the beginning of the period).
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Use of either alternative method may not effectively isolate the unrealized gain or loss included in earnings that relates to assets or liabilities still held at the reporting date.

Example – Determination of unrealized gains and losses

Company N executes an at-the-money receive fixed-pay floating interest rate swap with Counterparty C on January 22, 20X2. The swap has a term that ends at December 22, 20X5 and a transaction price of zero. The swap requires periodic settlements, which occur on December 22 of each year that the swap is outstanding, beginning in the second year (i.e. December 22, 20X3, 20X4 and 20X5).

Company N uses an income approach to measure the fair value of the swap by calculating the present value of the cash flows expected to occur in each year based on current market data.

Amount of total FV of the derivative liability that relates to the individual settlement period

As at December 31

FV of expected payment to be

made on December 22:

Total

20×3

20×4

20×5

20×2

$300

$350

$350

$1,000

20×3

$500

$600

$1,100

20×4

$800

$800

20×5

$0

Actual periodic cash settlements by year: Recurring and Non-recurring fair value measurement

December 22, 20X3: $375 paid Recurring and Non-recurring fair value measurement

December 22, 20X4: $580 paid Recurring and Non-recurring fair value measurement

December 22, 20X5: $750 paid Recurring and Non-recurring fair value measurement

Based on this information, Company N discloses the following:

20×2

20×3

20×4

20×5

FV at beginning of reporting period

1,000

1,100

800

Purchases

Sales

Issues

Settlements

-375

-580

-750

Total (gains) or losses in period

1,000

475

280

-50

FV at end of reporting period

1,000

1,100

800

However, Company N must also determine the disclosures required for the change in unrealized gains or losses. Therefore, Company N analyzes all settlements paid or received during the year to determine whether they relate to gains or losses originating in the current period or in a prior reporting period.

For the reporting period ended December 31, 20X2, no cash flows were received or paid on the swap; therefore, any gain or loss would be entirely attributable to the change in unrealized gains or losses for the period (i.e. $1,000).

For the reporting period ended December 31, 20X3, Company N performs the following calculation.

For the reporting period ended December 31, 20X3

FV attributed to the expected cash outflow of the period

300

Actual cash outflow in the period (i.e. settlement)

-375

Over/(under) estimate, representing the change in FV in the current year

-75

Total (gain)/loss in the period

475

Amount attributable to the change in unrealized (gains) or losses in the current year

400

Similarly, Company N also performs these calculations at the next two reporting periods.

For the reporting period ended December 31, 20X4

FV attributed to the expected cash outflow of the period

500

Actual cash outflow in the period (i.e. settlement)

580

Over/(under) estimate, representing the change in FV in the current year

-80

Total (gain)/loss in the period Recurring and Non-recurring fair value measurement

280

Amount attributable to the change in unrealized (gains) or losses in the current year

200

For the reporting period ended December 31, 20X5

FV attributed to the expected cash outflow of the period

800

Actual cash outflow in the period (i.e. settlement)

750

Over/(under) estimate, representing the change in FV in the current year

50

Total (gain)/loss in the period Recurring and Non-recurring fair value measurement

-50

Amount attributable to the change in unrealized (gains) or losses in the current year

As expected, the change in unrealized gains or losses in the final year of the swap would be $0 as the liability is no longer recognized at the end of the reporting period.

Therefore, using this analysis of cash flows, Company N discloses the following information about the change in unrealized gains or losses.

Reporting period ended December 31:

20×2

20×3

20×4

20×5

Total (gain) or loss in current period (see above)

$1,000

$475

$280

-$50

Amount attributable to the change in unrealized (gains) or losses relating to those assets and liabilities held at the end of the reporting period

$1,000

$400

$200

$0

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