Valuation techniques

IFRS 2 Fair value of equity instruments granted

IFRS 2 Fair value of equity instruments granted – Share-based payment transactions with employees are measured with reference to the fair value of the equity instruments granted (IFRS 2.11).

The fair value of a equity instrument granted is determined as follows (IFRS 2.16-17):

  • If market prices are available for the actual equity instruments granted – i.e. shares or share options with the same terms and conditions – then the estimate of fair value is based on these market prices. IFRS 2 Fair value of equity instruments granted
  • If market prices are not available for the equity instruments granted, then the fair value of equity instruments granted is estimated using a valuation technique.

IFRS 2 (IFRS … Read more

Leveraged buyout IFRS 3 best reporting

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 rate of return … Read more

3 powerful capital maintenance concepts

3 powerful capital maintenance concepts – There are three (or two a matter of definition) concepts of capital: a financial concept of capital (nominal maintenance and purchasing power maintenance) and a physical concept of capital. Under the financial concept, capital is defined as the net assets or equity of the enterprise, while under the physical concept, capital is defined as the productive capacity of the enterprise expressed in some physical units of measurement, as for example units of output per day.

The selection of the appropriate concept of capital by an enterprise should be based on the needs of the users of its financial statements. So, the financial concept of capital should be and mostly is used by the financial … Read more

Valuation of unquoted equity instruments

Valuation of unquoted equity instruments – The three valuation approaches and techniques described in IFRS 13 are: Valuation of unquoted equity instruments

IFRS 13  does not prescribe a specific valuation technique, but encourages the use of professional judgment together with consideration of all facts and circumstances surrounding the measurement. These three different valuation approaches could be applied in determining the fair value of an unquoted equity instrument. However, regardless of the valuation technique used, the fair value measurement of those equity instruments must reflect market conditions at the investor’s reporting date.

Market approach

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable … Read more

Fair value measurement

Fair Value Measurement can present significant challenges for preparers of financial statements, particularly because it involves using judgment and estimation. Further, it is the market participant view that shapes fair value, so preparers need to monitor whether the valuation models and assumptions they use for financial reporting appropriately reflect those of market participants.

Fair Value Measurement under IFRS 13: Fair value measurement

  1. defines fair value;
  2. sets out in a single IFRS a framework for measuring fair value; and
  3. requires disclosures about fair value measurements.

The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting measurement. In addition, IFRS 13 is applied to an entity’s own equity instruments measured at fair value.

The … Read more

Variable fee approach

[IFRS 17 Insurance Contracts] The Variable Fee Approach (‘VFA’) is a modification of the General Model. The General Model is applied to insurance contracts without participation features or to insurance contracts with participation features that fail the Variable fee scope test. Variable fee approach

Variable fee scope test

Thus, the Variable Fee Approach is applied to insurance contracts with direct participation features that contain the following conditions (‘eligibility criteria’) at initial recognition:

  1. the contractual terms specify that the policyholder participates in a share of a clearly identified pool of underlying items; Variable fee approach
  2. the entity expects to pay to the policyholder an amount equal to a substantial share of the returns from the underlying items; and Variable fee
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IFRS 13 Measure non-financial assets liabilities

IFRS 13 Measure non-financial assets liabilities highlights key considerations in applying the fair value standards to develop the fair value measurements of non-financial assets and non-financial liabilities. It also addresses the considerations applicable to determining the fair value measurements often used to record business combinations and in impairment assessments.

When determining the fair value of non-financial assets and liabilities, it is important to consider the IFRS guidance and the valuation standards from the International Valuation Standards Council, which include chapters on business and business interests, intangible assets, plant and equipment, real property interests, and development property.

The fair value standards IFRS include the following fair value concepts: IFRS 13 Measure non-financial assets liabilities

  1. Selecting the appropriate market IFRS 13 Measure
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Estimating fair value

Estimating fair value Estimating fair value – To start this narrative on fair value measurement three things to keep in mind!!!!

  1. Fair value measurement is an estimation process, not a scientific method: Uncertainty is key, what are the expected cash flows, what type of industry is concerned, at what stage of the Business Life Cycle is the business valued. Some (groups of) assets (and liabilities) or (business) units will therefore always have more precise estimates of fair value than others.

  2. Bias will always mystify fair value estimates: Much as we pay lip service to the notion that we can estimate fair value objectively, bias will find its way into fair value estimates. Honesty about the bias is all that we can

… Read more

IFRS 13 Fair value measurement Content

IFRS 13 Fair value measurement Content provides the explanations on all aspects of IFRS 13 in this website. IFRS 13 provides a common framework for measuring fair value when required or permitted by another IFRS.

IFRS 13 defines fair value as ‘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 13 9]. The key principle is that fair value is the exit price from the perspective of market participants who hold the asset or owe the liability at the measurement date. It is based on the perspective of market participants rather than the entity itself, so fair value is … Read more