Measurement uncertainty

Measurement uncertainty – Uncertainty that arises when the result of applying a measurement basis is imprecise and can be determined only with a range.

Measurement uncertainty arises when a measure cannot be determined directly by observing prices in an active market and must instead be estimated.

The level of measurement uncertainty associated with a particular measurement basis may affect whether information provided by that measurement basis provides a faithful representation of an entity’s financial position and financial performance. A high level of measurement uncertainty does not necessarily prevent the use of a measurement basis that provides relevant information.

However, in some cases the level of measurement uncertainty is so high that information provided by a measurement basis might not provide … Read more

Leveraged buyout IFRS 3 best reporting

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Leveraged buyout IFRS 3 best reporting – In corporate finance, a leveraged buyout (LBO) is a transaction where a company is acquired using debt as the main source of consideration. These transactions typically occur when a private equity (PE) firm borrows as much as they can from a variety of lenders (up to 70 or 80 percent of the purchase price) and funds the balance with their own equity. Leveraged buyout IFRS 3 best reporting

1 The process and business reason

The use of leverage (debt) enhances expected returns to the private equity firm. By putting in as little of their own money as possible, PE firms can achieve a large return on equity (ROE) and internal … Read more

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.

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 … Read more

11 Best fair value measurements under IFRS 13

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11 Best fair value measurements under IFRS 13 – Several IFRS standards provide guidance regarding the scope and application of the fair value option for assets and liabilities. Here they are from 1 to 11…….

1 Investments in associates and joint ventures

Investments held by venture capital organizations and the like are exempt from IAS 28’s requirements only when they are measured at fair value through profit or loss in accordance with IFRS 9. Changes in the fair value of such investments are recognized in profit or loss in the period of change.

The IASB acknowledged that fair value information is often readily available in venture capital organizations and entities in similar industries, even for start-up and … Read more

Commodity finance IFRS the 6 best examples

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Commodity finance IFRS the 6 best examples – A key issue is whether the contract to deliver a non-financial item (the commodity) falls within the scope of IFRS 9 Financial Instruments. Although IFRS 9 would appear to apply only to financial assets and financial liabilities, certain contracts for non-financial items are also within its scope.

The scope of IFRS 9

In determining whether the transaction is within the scope of IFRS 9, key guidance is set out in IFRS 9 2.4. IFRS 9 2.4 notes that

This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or in another financial instrument, or by Read more

IFRS 9 Retain control of the asset

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IFRS 9 Retain control of the asset IFRS 9 Retain control of the assetis part of a decision model for the derecognition of financial assets. The derecognition can be a full derecognition, a full continued recognition, a full derecognition with recognition of new assets or liabilities retained or a continued involvement. The model is starting here. Derecognition of financial assets. IFRS 9 Retain control of the asset IFRS 9 Retain control of the asset

Step 6 Has the entity retained control of the asset? [IFRS 9 3.2.6(c)]  

Under IFRS 9, control in this context is the power to govern so as to obtain benefits. In the context of derecognition under IFRS 9, control is … Read more

Matrix pricing bonds

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Matrix pricing of bonds is an estimation technique used to estimate the market price of securities that are not actively traded. Matrix pricing is primarily used in fixed income, to estimate the price of bonds that do not have an active market. The price of the bond is estimated by comparing it to corporate bonds with an active market, and that have similar maturities, coupon rates, and credit rating. This relative estimation process can be very helpful for debt valuation of private companies, which typically don’t report as much information as public companies.

Another use of matrix pricing is for bond underwriting, which can be used to estimate what the market’s required rate of return on Read more

Inactive markets

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In an active market (not inactive markets), transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. [IFRS 13 Definition] Inactive markets

An orderly transaction assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities. [IFRS 13 Definition] Inactive markets

Source of the illustration below Inactive markets Inactive markets Inactive markets Inactive markets

A fair value measurement may be affected if there has been a significant decrease in the volume or level of activity for that item compared with normal market activity for that item. Judgement … Read more

Probability of default

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The probability of default (PD) represents the likelihood of a borrower defaulting on its financial obligation, either over the next 12 months (12M PD) or over the remaining lifetime (Lifetime PD) of the obligation. See also ‘Definition of Default‘.

PD is defined as the probability of whether borrowers will default on their obligations in the future. For assets which are in stage 1, a 12-month PD is required. For stage 2 assets, a lifetime PD is required for which a PD term structure needs to be built. [see Stage 1 2 3] Probability of default

Historical PD derived from a bank’s internal credit rating data has to be calibrated with forward-looking macroeconomic factors Read more