C1: AASB13: Fair value measurement

Report
C1: AASB13: Fair value measurement
Dean Ardern CPA
National Technical Accounting Manager
Moore Stephens Australia Pty Ltd
Thursday 20 November 2014
3:30PM - 4:20PM
#CPACONGRESS
AASB 13: Fair Value Measurement
Will cover…
• AASB 13 refresher
• Common application issues for
non-financial entities
• Classification in hierarchy
• Implications for NFP entities
Won’t cover…
• Applying measurement models,
incl. portfolio basis for financial
instruments
• Entity’s own equity instruments
• Pricing in bid-ask spread
• Dealing with significant
decrease in the volume/level of
activity in a market
Components of AASB 13
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. (AASB 13, Appendix A)
Unit of Account
Principal (most
advantageous)
market
Market
participants
Transaction
Price
When does AASB 13 apply?
General principle
•When another AAS requires FV measurement or disclosure (incl. FV less costs to sell)
•When another AAS permits FV measurement and the entity adopts the policy
•When an entity voluntarily discloses FV in respect of an item not measured at FV in
its statement of financial position
Scope exclusions
(measurement and
disclosure)
•Equity-settled share-based payments (AASB 2)
•Finance leases (AASB 117) [except for initial measurement of finance leases acquired
in business combinations (AASB 3)]
•Measurements similar to but not FV [eg, net realisable value (AASB 102) and value in
use (AASB 136)]
Disclosure
exceptions
•Defined benefit plan assets (AASB 119)
•Assets for which recoverable amount is fair value less costs of disposal (AASB 136)
•Assets and liabilities not measured or disclosed on a ‘recurring’ basis or ‘nonrecurring’ basis
Accounting Standard
Item
Recognised or Disclosed?
Required or Permitted?
Recognised
Permitted
Recognised and disclosed
Required
Recognised
Required
AASB 1: First-time Adoption of Australian
Accounting Standards
Various , including PPE, subsidiaries, JVs,
associates
AASB 3: Business Combinations
•
•
AASB 5: Non-current Assets Held for Sale and
Discontinued Operations
Non-current assets and disposal groups held
for sale
AASB 12: Disclosure of Interests in Other Entities
Interest in listed JV or associate
Disclosed
Required
AASB 116: Property, Plant and Equipment
Property, plant and equipment
Recognised
Permitted
AASB 128: Investments in Associations and Joint
Ventures
Investment in associate or JV held by venture
capital organisation
Recognised
Permitted
AASB 138: Intangible Assets
Intangible assets for which there is an active
market
Recognised
Permitted
AASB 139: Financial Instruments: Recognition and
Measurement
•
•
Acquisition consideration
Most assets and liabilities acquired
Financial instruments at fair value through
profit or loss
Financial instruments at amortised cost
•
• Recognised
Disclosed when specified
criteria met
•
Required for some instruments,
permitted for others
• Required when specific criteria
met
AASB 140: Investment Property
Investment property
Recognised
Permitted
AASB 141: Agriculture
Biological assets and agricultural products
Recognised
Required
AASB 1004: Contributions
Assets received by NFPs as contributions
Recognised
Required
Unit of account
 Defines what is being measured – level of aggregation (disaggregation)
 FV unit of account – generally determined by Standard that requires/
permits fair value, except that AASB 13:
•
•
requires FV = price x quantity for single asset traded in active market
(ie, ignore ‘blockage’ factors)
permits ‘net’ positions for specific entities that manage groups of financial
assets/ liabilities with offsetting market or credit risks

Restrictions on sale/use – characteristic of entity or asset?

Interaction between unit of account and valuation premise (market
participants) concepts
Unit of account issues
 Shares in listed company pledged as collateral in 3rd party borrowing
 Shares in unlisted company that can only be sold to specified parties or
at specified period
 Lease incentives
 Not-for-profit-specific issues
•
•
property vs. right to use property
donor restrictions over use of property
Principal (most advantageous) market

From entity’s perspective, but:
•
•

question of fact
not determined by managements’ intentions
Principal market – market with greatest volume and level of activity for asset/liability
•
market entity would normally utilise for specific asset/liability

When principal market for asset/liability exists, FV is market price at measurement date

When no principal market exists, then most advantageous market - market that
maximises/minimises amount received/paid to sell/transfer asset/liability (incl. transaction and
transport costs)
•
•
entity must have access, but no need to be able to transact on measurement date
only transport costs included in FV (transaction costs excluded)

If both types of markets exist, must use principal market

In many cases principal market = most advantageous market
Principal (most advantageous) market issues
 Same goods/services sold in two different markets at different
prices and principal market is not the market in which net
proceeds are maximised
 Same goods/services sold in multiple markets and availability of
volume/activity of some or all markets not readily available
Market participants

Provide basis for FV assumptions - market-focused, not entity specific

Identify based on principal or, if applicable, most advantageous market

Need not identify specific market participants
•
•

characteristics of market participants that would generally transact for items (incl. entity’s
competitors)
ignore advantages (eg, synergies) that particular market participants might have
Market participants have all of the following characteristics:
•
•
•
•
•
independent (not related)
knowledgeable and sufficiently informed on asset/liability
able to enter into a transaction
willing to enter into a transaction
act in their own economic interest
Highest and best use




Only applicable to non-financial assets
Current use presumed highest and best, but need to consider all uses (including strategic
non-use)
If alternative use is highest and best, must generate sufficient return for market participants
For not-for-profits, alternative use generally higher and better use (from market perspective)
Characteristics of the asset,
including:
• age and remaining
economic life
• condition
• location
• restrictions on use/sale
• contractual terms
Alternative uses:
• physically possible
• legally permissible
• financially feasible
Valuation premise
(unit of valuation) –
maximise value:
• in combination with other
assets/ liabilities
• on stand-alone basis
Market participant/highest and best use issues
 Identifying all potential alternative uses/market participants
 Potential for re-zoning property
 Holding assets for strategic/defensive (non-operating) purposes
Transaction

With respect to the item subject to FV measurement, it is a
hypothetical transaction. Therefore, ignore:
•
•

whether management actually intends to transact
entity has the ability to enter into transaction
Transaction assumed to:
•
•
•
•
•
occur in principal (or most advantageous) market
occur on measurement date
be orderly (not forced or liquidation related)
involve market participants (see previous slide)
take place under measurement date conditions
Price

Conceptually, exit (rather than entry) price

Initial transaction (entry) price could represent FV provided that:
•
•
•
•
both transactions occur in the same market
both transactions are for similar or the same units of account
both transactions are not between related parties
seller is not distressed or forced
•
Exclude transaction costs
•
Include transportation costs if location is relevant characteristic
•
Priority given to quoted market price in active market for identical item, otherwise
maximise use of observable inputs
•
For non-financial assets, highest and best use establishes valuation premise, which
in turn determines FV of asset
Transaction/price issues
 Transaction/price matches unit of account
 Extent of adjustments to prices arising from related party transactions
 Agreement to sell property subsequent to year end at discount to FV
 Implications of using entity-specific inputs for recoverable amounts
Fair value of liabilities

FV measurement of liability contemplates transfer (not settlement or
extinguishment) to market participant on measurement date:
•
•

assume liability remains outstanding and market participant transferee fulfil obligation
reflects effect of ‘non-performance risk’
Non-performance risk – credit standing or likelihood that obligation will not
be fulfilled
•
•
•
•
includes, but not limited to, entity’s own credit risk
considered from perspective of liability, not entity
assumed same before and after transfer of liability
adjusted in all periods liability is FV measured
Fair value of liabilities

Quoted transfer prices generally unavailable for liabilities

If identical item held by another entity as asset available, measure FV of liability from
perspective of market participant holding asset

When quoted price not available, and identical item not held by another party as asset, FV
liability using valuation technique from perspective of market participant owing liability using:
1.
a present value technique, taking account of:
o
o
2.

market participants’ expectations about the costs of fulfilling obligation
compensation that market participant would require for taking on obligation, including return required for:
 undertaking the activity (opportunity cost)
 risk premium
amount market participant would receive to issue an identical liability, using assumptions market
participants would use when pricing the identical item in principal (most advantageous) market
Per AASB 139, FV of financial liability with demand feature not less than amount payable on
demand, discounted from first date amount required to be paid
Fair value hierarchy
Quoted price in
active market?
yes
no
Adjusted?
Level 1
no
Replicate quoted price
in active market using
another valuation
technique
Any significant
unobservable inputs?
yes
no
yes
Level 2
Level 3
Examples of Level 2 and Level 3 inputs
Level 2
• transaction prices in markets that that are not active
for identical items
• quoted prices in active markets for similar items
• transaction prices in markets that are not active for
similar items
• interest rates derived from quoted bond prices
• quoted foreign exchange and interest rates (forward
currency and swap rates)
• implied volatilities derived from quoted option prices
• credit spreads derived from quoted credit default
swap prices
Level 3
• interest rates in a currency that are not observable
and cannot be confirmed by observable market data
for the term of the item
• volatility for a share option derived from historical
share prices
• credit risk based on historical data on credit losses
• observable inputs used as proxies for unobservable
inputs
Fair value hierarchy input examples





Prices derived from a third-party pricing service or brokers
Units in an unlisted investment fund are regularly bought and sold but only
between the fund manager and related parties
Closing price of a share on a national stock exchange that is impacted by a public
announcement subsequent to the close of the market but still on the measurement
date
Subscription to shares through initial public offering
Item of PPE that is measured using CPI as a proxy for a more specific price index
NFP-specific fair value issues

Highest and best use
•
•
•

Current/depreciated replacement cost
•
•
•

legally permissible (statutory protections)
public sector-specific assets
price adjustment for restrictions over use that transfer with asset
fair value hierarchy level
use of indexes
disclosures re unobservable inputs
Interaction between quality of asset register, hierarchy categorisation
and level of disclosures
AASB project on NFP public sector implementation issues

NFP constituent (local government) feedback primarily relating to
Level 3 measurements of non-financial assets

Constituent concerns included:
•
•
•
•

grouping assets into broader classes is difficult (different nature and risks),
which increases extent of FV disclosures
cost and complexity of disclosures, particularly sensitivity analyses and
disclosures about interrelationships between inputs
arguably not beneficial to users (complexity and length of disclosures)
consistency of categorisation of inputs across entities
AASB decided at September 2014 meeting to undertake project to review
whether disclosures under AASB 13 be modified for NFP public sector entities

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