The 15 most important IFRS 13 Topics

The 15 most important IFRS 13 Topics – The fair value measurement standard applies to most fair value measurements and disclosures (including measurements based on fair value) that are required or permitted by other standards. The 15 most important IFRS 13 Topics

Overview

  • 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.
  • What is being measured – e.g. a stand-alone asset or a group of assets and/or liabilities – generally depends on the unit of account, which is established under the relevant standard.
  • Fair value is based on assumptions that market participants would use in pricing the asset or liability. ‘Market participants’ are independent of each other, they are knowledgeable and have a reasonable understanding of the asset or liability, and they are willing and able to transact.
  • Fair value measurement assumes that a transaction takes place in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. The 15 most important IFRS 13 Topics
  • In measuring the fair value of an asset or a liability, an entity selects those valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value. The technique used should maximise the use of relevant observable inputs and minimise the use of unobservable inputs.
  • A fair value hierarchy is used to categorise fair value measurements for disclosure purposes. Fair value measurements are categorised in their entirety based on the lowest level input that is significant to the entire measurement. The 15 most important IFRS 13 Topics
  • A day one gain or loss arises when the transaction price for an asset or liability differs from the fair value used to measure it on initial recognition. Such gain or loss is recognised in profit or loss, unless the standard that requires or permits fair value measurement specifies otherwise.
  • A fair value measurement of a non-financial asset considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use, or by selling it to another market participant who will use the asset in its highest and best use.
  • If certain conditions are met, then an entity is permitted to measure the fair value of a group of financial assets and financial liabilities with offsetting risk positions on the basis of its net exposure (portfolio measurement exception). The 15 most important IFRS 13 Topics
  • There is no practical expedient that allows entities to measure the fair value of certain investments at net asset value.
  • The fair value measurement standard contains a comprehensive disclosure framework.

The dirty details

General principals

The fair value measurement standard defines fair value, establishes a framework for measuring fair value and sets out related disclosure requirements. It does not give rise to any requirements on when fair value measurements are required, but instead provides guidance on how fair value should be measured and disclosed when it is required or permitted under other standards.

‘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 – i.e. it is an ‘exit price’. [IFRS 13 9] The 15 most important IFRS 13 Topics

Scope The 15 most important IFRS 13 Topics

The fair value measurement standard applies to: The 15 most important IFRS 13 Topics

  • fair value measurements (both initial and subsequent) that are required or permitted by other standards;
  • fair value measurements that are required or permitted to be disclosed by other standards, but which are not included in the statement of financial position; and The 15 most important IFRS 13 Topics
  • measurements based on fair value, or disclosures about those measurements. [IFRS 13 5–8, IFRS 15 BC25]

The fair value measurement standard has the following specific exclusions in respect of measurement and disclosure:

  • share-based payment transactions (see Share-based payments); The 15 most important IFRS 13 Topics
  • leasing transactions (see Leasing); and The 15 most important IFRS 13 Topics
  • measurements that are similar to fair value but that are not fair value – e.g. net realisable value in measuring inventories (see Inventories). [IFRS 13 6]

IFRS does not include practical expedients that override the requirements of the fair value measurement standard.

The fair value measurement standard has the following specific exclusions in respect of disclosure only:

  • plan assets measured at fair value (see Post-Employment benefits); The 15 most important IFRS 13 Topics
  • retirement benefit plan investments measured at fair value (outside the scope of this publication); and The 15 most important IFRS 13 Topics
  • assets for which the recoverable amount is fair value less costs of disposal (see Impairment of non-financial assets). [IFRS 13 7]

The item being measured and the unit of account

What is being measured – e.g. a stand-alone asset or a group of assets and/or liabilities – generally depends on the unit of account. The fair value measurement standard does not generally specify the unit of account. Instead, this is established under the specific standard that requires or permits the fair value measurement or disclosure. [IFRS 13 14]

There are two exceptions included in the fair value measurement standard itself.

  • In certain circumstances, an entity is required to measure non-financial assets in combination with other assets or other assets and liabilities (see below).
  • The unit of account for financial instruments is generally the individual financial instrument (e.g. a share). However, an entity is permitted to measure the fair value of a group of financial assets and financial liabilities on the basis of the net risk position, if certain conditions are met (see below). [IFRS 13 27, IFRS 13 31-32, IFRS 13 48-49]

In general, IFRS contains little guidance on the unit of account and therefore there may be diversity in practice depending on the underlying item. For example, when the unit of account is an investment in a listed subsidiary, commonly the unit of valuation and therefore the measurement of fair value may be based on the fair value of the individual shares making up the investment or the investment as a whole. The 15 most important IFRS 13 Topics

Market participants

Fair value is based on assumptions that market participants would use in pricing the asset or liability. ‘Market participants’ are buyers and sellers in the principal (or most advantageous) market who have all of the following characteristics:

  • they are independent of each other; The 15 most important IFRS 13 Topics
  • they are knowledgeable; The 15 most important IFRS 13 Topics
  • they are able to enter into a transaction for the asset or liability; and The 15 most important IFRS 13 Topics
  • they are willing to enter into a transaction – i.e. motivated but not forced. [IFRS 13 22] The 15 most important IFRS 13 Topics

Fair value takes into account characteristics of the asset or liability that would be considered by market participants and is not based on the entity’s specific use or plans. Such characteristics may include the condition and location of an asset or restrictions on an asset’s sale or use. [IFRS 13 11]

Principal and most advantageous markets

An entity values assets, liabilities and its own equity instruments assuming a transaction in the principal market for the asset or liability – i.e. the market with the greatest 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. The ‘most advantageous market’ is the market that would either maximise the amount that would be received to sell an asset or minimise the amount that would be paid to transfer a liability, after taking into account transport and transaction costs. [IFRS 13 16–17] The 15 most important IFRS 13 Topics

In the absence of evidence to the contrary, the market in which the entity would normally sell the asset or transfer the liability is assumed to be the principal (or most advantageous) market. [IFRS 13 17] The 15 most important IFRS 13 Topics

The price used to measure fair value is not adjusted for transaction costs, although they are considered in determining the most advantageous market. ‘Transaction costs’ do not include transport costs. If location is a characteristic of an asset, then the price in the principal (or most advantageous) market is adjusted for transport costs. [IFRS 13 25–26]

Valuation approaches and techniques

In measuring the fair value of an asset or a liability, an entity selects those valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value. The technique used should maximise the use of relevant observable inputs and minimise the use of unobservable inputs. [IFRS 13 61, IFRS 13 67]

Valuation techniques used to measure fair value fall into three approaches: The 15 most important IFRS 13 Topics

  • market approach; The 15 most important IFRS 13 Topics
  • income approach; and The 15 most important IFRS 13 Topics
  • cost approach. [IFRS 13 62] The 15 most important IFRS 13 Topics
Inputs to valuation techniques IFRS 13 Fair value measurement Content

Inputs to valuation techniques are the assumptions that market participants would use in pricing the asset or liability. [IFRS 13 Definition]

Inputs are categorised into three levels. The 15 most important IFRS 13 Topics

These inputs include assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value and the risk inherent in the inputs to the valuation technique. [IFRS 13 88]

The most reliable evidence of fair value is a quoted price in an active market. If this is not available, then an entity uses a valuation technique to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. [IFRS 13 61, IFRS 13 67, IFRS 13 77]

In measuring fair value, a premium or discount should not be applied if:

  • it is inconsistent with the relevant unit of account; The 15 most important IFRS 13 Topics
  • it reflects size as a characteristic of the entity’s holding – e.g. a blockage factor; The 15 most important IFRS 13 Topics
  • the characteristic is already reflected in the preliminary value indication; or –– there is a quoted price in an active market for an identical asset or liability – i.e. a Level 1 input. [IFRS 13 69]

A blockage factor is a discount that reflects the number of instruments as a characteristic of the entity’s holding rather than a characteristic of the asset or liability. An entity is prohibited from applying a blockage factor for a fair value measurement for all three levels of the fair value hierarchy. [IFRS 13 69, IFRS 13 80]

A control premium is not applied in measuring the fair value of financial instruments if the unit of account is the individual instrument and the individual instrument does not convey control; this is regardless of the level in the fair value hierarchy. [IFRS 13 69] The 15 most important IFRS 13 Topics

If assets or liabilities have a bid and an ask price, then an entity uses the price within the bid-ask spread that is most representative of fair value in the circumstances. The use of bid prices for long positions and ask prices for short positions is permitted but not required. [IFRS 13 70] The 15 most important IFRS 13 Topics

Fair value hierarchy

The fair value measurement standard includes a fair value hierarchy based on the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). [IFRS 13 72]

Fair value measurements are categorised in their entirety based on the lowest level input that is significant to the entire measurement. [IFRS 13 73]

The resulting categorisation is relevant for disclosure purposes. [IFRS 13 72] The 15 most important IFRS 13 Topics

Fair value at initial recognition

Normally, the transaction price equals fair value; however, there may be situations in which the transaction price and initial fair value differ. This could be due to factors such as transactions between related parties, transactions taking place under duress etc. [IFRS 13 58, IFRS 13 B4] The 15 most important IFRS 13 Topics

A day one gain or loss arises when the transaction price for an asset and/or liability differs from the fair value used to measure it on initial recognition. The fair value measurement standard requires day one gains or losses to be recognised in profit or loss, unless the standard that requires or permits the fair value measurement specifies otherwise. [IFRS 13 60]

The financial instruments standards prohibit the immediate recognition of a day one gain or loss unless fair value is evidenced by a quoted price in an active market for an identical financial asset or liability, or is based on a valuation technique whose variables include only data from observable markets. [IFRS 9 B5.1.2A]

If the entity determines that the fair value on initial recognition differs from the transaction price but it is not evidenced by a valuation technique that uses only data from observable markets, then the carrying amount of the financial asset or financial liability on initial recognition is adjusted to defer the difference between the fair value measurement and the transaction price. This deferred difference is subsequently recognised as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability. [IFRS 9 B5.1.2A] The 15 most important IFRS 13 Topics

Highest and best use

A fair value measurement of a non-financial asset considers a market participant’s ability to generate economic benefits by using the asset at its highest and best use or by selling it to another market participant who will use the asset in its highest and best use. In the absence of evidence to the contrary, the entity’s current use of an asset is assumed to be its highest and best use. [IFRS 13 27, IFRS 13 29] The 1 5 most important IFRS 13 Topics

A fair value measurement of a non-financial asset is based on its use either: The 15 most important IFRS 13 Topics

  • in combination with other assets as a group or in combination with other assets and liabilities; or
  • on a stand-alone basis. [IFRS 13 31] The 15 most important IFRS 13 Topics
Liabilities and own equity instruments

In measuring the fair value of a liability or an own equity instrument, it is assumed that the item is transferred to a market participant at the measurement date – e.g. the liability remains outstanding and the market participant transferee would be required to fulfil it. [IFRS 13 34]

If there is no quoted price for the transfer of an identical or a similar liability or an entity’s own equity instruments, and another market participant holds the identical item as an asset, then the entity measures the item’s fair value from the perspective of such a market participant. [IFRS 13 37]

In other cases, an entity uses a valuation technique to measure the fair value of the item from the perspective of a market participant that owes the liability or that issued the equity instrument. [IFRS 13 40] The 15 most important IFRS 13 Topics

The fair value of a liability reflects the effect of ‘non-performance risk’ – i.e. the risk that an entity will not fulfil an obligation. Non-performance risk includes, but may not be limited to, an entity’s own credit risk. [IFRS 13 42] The 15 most important IFRS 13 Topics

The issuer of a liability with an inseparable third party credit enhancement excludes the enhancement in measuring the fair value of the liability, if the liability and the enhancement are separate units of account. IFRS does not contain explicit guidance about the unit of account for liabilities issued with inseparable credit enhancements. [IFRS 13 44]

The fair value of a financial liability with a demand feature is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. [IFRS 13 47] The 15 most important IFRS 13 Topics

Portfolio measurement exception

An entity that holds a group of financial assets and financial liabilities is exposed to market risks (i.e. interest rate risk, currency risk and other price risk) and to the credit risk of each of the counterparties. If certain conditions are met, then an entity is permitted (but not required) to measure the fair value of a group of financial assets and financial liabilities with offsetting risk positions on the basis of its net exposure (portfolio measurement exception). [IFRS 13 48–49] The 15 most important IFRS 13 Topics

Under the exception, the fair value of the group is measured on the basis of the price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure in an orderly transaction between market participants at the measurement date. [IFRS 13 48] The 15 most important IFRS 13 Topics

If the entity is permitted to use the exception, then it chooses an accounting policy, to be applied consistently, for a particular portfolio. [IFRS 13 51]

Net asset value

IFRS does not include an exception that allows the use of net asset value (NAV) as a practical expedient. An entity may only measure investments on the basis of NAV when NAV is representative of fair value. The 15 most important IFRS 13 Topics

Inactive markets

In an active market, transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. [IFRS 13 Definition]

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] The 15 most important IFRS 13 Topics

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 may be required in determining whether, based on the evidence available, there has been such a significant decrease. [IFRS 13 B37, IFRS 13 B42]

If an entity concludes that the volume or level of activity for an asset or liability has significantly decreased, then further analysis of the transactions or quoted prices is required. A decrease in the volume or level of activity on its own might not indicate that a transaction or a quoted price is not representative of fair value, or that a transaction in that market is not orderly. [IFRS 13 B38]

Disclosures

The fair value measurement standard contains a comprehensive disclosure framework. Fair value disclosures are based on the level within which a measurement falls in the fair value hierarchy. [IFRS 13 91] The 15 most important IFRS 13 Topics

The disclosures differentiate fair value measurements that are recurring from those that are non-recurring. More extensive disclosures are required for Level 3 measurements. Disclosure of quantitative sensitivity analysis is required for recurring fair value measurements of financial assets and financial liabilities categorised within Level 3 of the fair value hierarchy. [IFRS 13 93]

There are no disclosure exemptions for non-public entities under IFRS. The 15 most important IFRS 13 Topics

The disclosure requirements of IFRS 13 are split into two categories. The 15 most important IFRS 13 Topics

  • Disclosures for assets and liabilities measured at fair value in the statement of financial position after initial recognition. These disclosures are more extensive and distinguish between recurring and nonrecurring fair value measurements.
  • Disclosures of fair value measurements that are required or permitted to be disclosed by other IFRS standards, but are not included in the statement of financial position.

Recurring and nonrecurring fair value measurements

Recurring fair value measurements arise from assets and liabilities measured at fair value at the end of each reporting period (e.g. trading securities). Nonrecurring fair value measurements are fair value measurements that are triggered by particular circumstances that may occur during the reporting period (e.g. an asset being classified as held-for-sale or an impaired asset resulting in the need for fair value measurement under a IFRS Standard). The disclosures required for a nonrecurring fair value measurement are applicable in the financial statements for the period in which the fair value measurement occurred. (IFRS 13 93(a)) The 15 most important IFRS 13 Topics

See also Fair value disclosures for a detailed schedules and expectations. The 15 most important IFRS 13 Topics

Required disclosures (most in tabular form) [IFRS 13 99]

IFRS 13 93, IFRS 13 95, IFRS 13 97, IFRS 13 98

Recurring

Nonrecurring

Fair value at end of reporting period The 15 most important IFRS 13 Topics

All

All

Reasons for the measurement The 15 most important IFRS 13 Topics

All

Level within hierarchy The 15 most important IFRS 13 Topics

All

All

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

All

Description of valuation technique and inputs used

2 – 3

2 – 3

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

2 – 3

2 – 3

Quantitative information about significant unobservable inputs

3

3

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

3

Unrealized gains/losses from remeasurement The 15 most important IFRS 13 Topics

3

Description of valuation processes and policies The 15 most important IFRS 13 Topics

3

3

Sensitivity to changes in unobservable inputs The 15 most important IFRS 13 Topics

3

For nonfinancial assets when highest and best use differs from actual, the reasons why

All

All

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

All

All

Description of the valuation techniques used (and if there has been a change in the technique used, the reasons for the change) and disclose the inputs used for assets and liabilities that are not measured at fair value in the statement of financial position but for which fair value is required to be disclosed.

All

All

Disclose quantitative sensitivity information if changing one or more unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly.

3

EXAMPLE – Sensitivity to changes in unobservable inputs for nonfinancial assets

[IFRS 13 93(h)(i)]

The significant unobservable inputs used in the fair value measurement of Company N’s livestock assets are growth rates and mortality rates. The inputs used for growth and mortality are 12% and 5%, respectively. Significant decreases in growth rates, or increases in mortality rates, in isolation would result in a significantly lower fair value measurement. Generally, a change in the assumption used for growth rates should be accompanied by a change in the assumption for mortality rates in the same direction as excessively fast growth increases the risk of mortality. Therefore, the effects of these changes partially offset each other.

EXAMPLE Asset used differently from its highest and best use

[IFRS 13 93(i)]

Company N operates a brewery on a piece of land in an area that has recently been rezoned to allow both residential and industrial use. The highest and best use of the land and buildings of the brewery, based on current land prices at the end of the reporting period, would be to demolish the brewery and build residential property. Company N is using the land and buildings in a manner that differs from its highest and best use to continue its current brewing operations. This is consistent with the long-term strategy and core operations of Company N, which is not in a position to carry out a conversion because the brewery is integral to its operations.

Level of disaggregation for disclosures

IFRS 13 92-94 and IFRS 7 B3 require fair value measurement disclosures to be presented for each class of assets and liabilities. Determining an appropriate balance in the level of aggregation or disaggregation of classes of assets and liabilities requires judgment, and will often require a greater level of detail than the line items presented in the statement of financial position. Disclosures that are aggregated too highly can obscure important information about the risks associated with the fair value measurements. However, disclosures that provide excessive detail can be burdensome and may not provide meaningful information to users of the financial statements. The 15 most important IFRS 13 Topics

In determining the appropriate classes of assets and liabilities, an entity considers the nature, characteristics and risks of the asset or liability (e.g. shared activities or business sectors, vintage, geographic concentration, credit quality or other economic characteristics), and the level of the fair value hierarchy within which the fair value measurement is categorized. Generally, the level of disaggregation will be greater for Level 3 measurements, because they include a greater degree of uncertainty and subjectivity in the use of valuation inputs and techniques than for Level 1 and Level 2 measurements. [IFRS 13 94] The 15 most important IFRS 13 Topics

Commonly, other factors that may be relevant considerations include: The 15 most important IFRS 13 Topics

  • whether another IFRS Standard specifies the disclosure class for an asset or liability (e.g. derivative instruments);
  • the extent of homogeneous or shared risks within the class of assets or liabilities; The 15 most important IFRS 13 Topics
  • differences in valuation inputs and techniques used to determine the fair value measurements;
  • the ranges in values of significant unobservable inputs; for example, if the range of values for an unobservable input used in measuring the fair value of a class of assets is very wide, this may indicate that the information is not sufficiently disaggregated; The 15 most important IFRS 13 Topics
  • the sensitivity of measurements to changes in unobservable inputs; The 15 most important IFRS 13 Topics
  • whether other disclosures in the financial statements provide sufficient information about the classes of assets and liabilities (e.g. a schedule of investments for investment companies); and
  • the significance of the class of assets or liabilities relative to the context of the particular disclosure; for example, a class of assets might not be significant to the fair value hierarchy table at the reporting date, but might be significant within the context of the Level 3 roll forward because of significant sales activity and gains and losses incurred during the period.

If disclosures are provided at a greater level of detail than the line items presented in the statement of financial position, the entity provides information sufficient to reconcile the classes of assets and liabilities used for disclosure purposes to the line items presented in the statement of financial condition. [IFRS 13 94]

EXAMPLE – Disclosure of sensitivity to changes in observable inputs for financial assets

[IFRS 13 93(h)(i)]

Company Z discloses quantitative information about unobservable volatility inputs used to measure the fair values of a class of equity derivatives. This class includes 100 derivatives, 90 of which are valued using a volatility of 20% per annum with the remaining 10 valued using a volatility of 50% per annum.

Company Z considers whether this difference means that its disclosure of unobservable inputs should be disaggregated to a level of two smaller classes, one with 90 derivatives and one with 10.

If Company Z determines that disclosure at the level of the class that includes all 100 derivatives is appropriate and it proposes to disclose the range of values of the volatilities used (i.e. 20–50%), it should also consider disclosing the weighted average of the inputs (assumed to be 23%); otherwise, its disclosures would not indicate that the significant majority of the inputs used are at the low end of the range and therefore the disclosure objectives of IFRS 13 may not be met.

Disclosure difference Reporting date and Fair value measurement date

If an item of property, plant and equipment is revalued to fair value under IAS 16 (property, plant and equipment) at September 30. The entity’s year-end is December 31 and the year-end financial statement disclosures apply to the fair value determined on September 30. [IFRS 13 93(a), IAS 16 31]

Date of into- or out-transfers in the Fair value hierarchy

An entity is required to make an accounting policy choice, to be applied consistently, to determine when transfers between levels of the fair value hierarchy have occurred. The same accounting policy should be applied for transfers into or out of each level. (IFRS 13 95) The 15 most important IFRS 13 Topics

The following are three examples of policies that may be used to determine the date to use when transfers into or out of the levels of the fair value hierarchy have occurred:

  • on the date the event causing the transfer occurs; The 15 most important IFRS 13 Topics
  • at the beginning of the reporting period during which the transfer occurred; or The 15 most important IFRS 13 Topics
  • at the end of the reporting period during which the transfer occurred. The 15 most important IFRS 13 Topics

Fair value measurement of fair value disclosures only

The guidance on how to measure fair value applies to assets and liabilities for which fair value is disclosed even if those assets and liabilities are not recognized at fair value in the statement of financial position, unless the item is specifically scoped out of IFRS 13. (IFRS 13 5) The 15 most important IFRS 13 Topics

For example, an entity that applies the cost model to measure investment properties generally is required to disclose the fair values of those properties. Similarly, an entity discloses the fair values of financial assets and financial liabilities unless, for example, the carrying amount is a reasonable approximation of fair value. In such circumstances, the fair values for disclosure purposes are measured under IFRS 13. (IFRS 7 25, IFRS 7 29) The 15 most important IFRS 13 Topics

Disclosure recurring Level 3 measurements – Unrealised gains or losses

Q: how should an entity calculate the amount attributable to the change in unrealized gains or losses that is recognized as part of the total gains or losses for the period?

Meeting this disclosure requirement may be straightforward for some types of instruments; however, identifying the change in unrealized 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. [IFRS 13.93(f)]

Commonly, 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: The 15 most important IFRS 13 Topics

  • 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
  • change in fair value during the period (which would constitute realization of gains or losses in the period).

To facilitate this separation, the following guidelines 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. The 15 most important IFRS 13 Topics
  • 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. The 15 most important IFRS 13 Topics
  • 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. The 15 most important IFRS 13 Topics

As an alternative to the methodology described above it could also be considered that, either (a) the periodic amount of cash settlements should be considered to be a realization of the current-period gain or loss, or (b) 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). 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. The 15 most important IFRS 13 Topics

EXAMPLE – Determination of unrealised 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 of December 31

FV of expected payment to be made on December 22:

Total FV

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:

– December 22, 20X3: $375 paid

– December 22, 20X4: $580 paid

– December 22, 20X5: $750 paid

Based on this information, Company N discloses the following.

20×2

20×3

20×4

20×5

FV opening balance

$0

$1,000

$1,100

$800

Purchases

$0

$0

$0

$0

Sales

$0

$0

$0

$0

Issues

$0

$0

$0

$0

Settlements

$0

$-375

$-580

$-750

Total period (gains) loss

$1,000

$475

$280

$-50

FV closing balance

$1,000

$1,100

$800

$0

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.

20×3

FV attributed to the expected period cash outflow

$300

Actual period cash outflow (= settlement)

$-375

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

$-75

Total period (gain) loss

$475

Amount attributable to the change in unrealised period (gains) or losses

400

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

20×4

20×5

FV attributed to the expected period cash outflow

$500

$800

Actual period cash outflow (= settlement)

$580

$750

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

$-80

$50

Total period (gain) loss

$280

$-50

Amount attributable to the change in unrealised period (gains) or losses

$200

$0

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 period (gain) or loss as per above tables)

$1,000

$475

$280

$-50

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

$1,000

$400

$200

$0

The 15 most important IFRS 13 Topics

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