IFRS 13 Fair Value

Measurement

IFRS Foundation

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Agenda

Part I: context and scope

Part II: measurement of fair value
Part III: valuation approaches and techniques
Part IV: disclosures
Part V: effective date and transition

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Part I
Context and scope

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Part I: context and scope

Why IFRS 13 is necessary
Scopewhen IFRS 13 applies
Scopewhat IFRS 13 does not apply to

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Before IFRS 13dispersed and

conflicting guidance
IAS 36

IAS 39/IFRS 9

IAS 40

IAS 41

Etc.

Topic 820 in US GAAP (codified SFAS 157)

IFRS 13
Single source of measurement guidance
Clear measurement objective
Consistent and transparent disclosures about fair
value

IFRS Foundation

The previous definition of fair value

Fair value definition

Its weaknesses

The amount for which an

asset could be
exchanged
or a liability settled
between knowledgeable,
willing parties in an arms
length transaction. ?

It did not specify whether an entity

is buying or selling the asset
It was unclear about what settling
meant because it did not refer to
the creditor
It was unclear about whether it was
market-based
It did not state explicitly when the
exchange or settlement takes
place

IFRS Foundation

When does IFRS 13 apply?

When another IFRS requires or permits fair value

measurements or disclosures about fair value
measurements
IFRS 13 also applies to measurements, such as fair
value less cost to sell, based on fair value or
disclosures about those measurements

IFRS Foundation

When does IFRS 13 apply?

For example, if you own a biological asset

IAS 41
A biological asset shall be
measured on initial recognition and
at the end of each reporting period
at its fair value less cost to sell

IFRS 13

What
and
when

How
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What does IFRS 13 not apply to?

Excluded from the
scope

10

IFRS 2 and IAS 17

Disclosures in IFRS 13 Plan assets (IAS 19)

not required for
Retirement benefit plan
investments (IAS 26)
Assets for which recoverable
amount is fair value less cost
of disposal (IAS 36)
Not required for
IAS 2 (net realisable value)
measurement similar to IAS 36 (value in use)
fair value
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Part II
Measurement of fair value

IFRS Foundation

Part II: measurement of fair value

Definition of fair value and measurement principles
Considerations specific to non-financial assets
Considerations specific to liabilities

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Definition of fair value and

measurement principles

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IFRS 13s new definition of fair value

14

New fair value definition

Comments

the price that would be

received to
sell an asset or paid to
transfer a liability in an

It specifies that the entity is selling

the asset

orderly transaction
between market
participants at the
measurement date.

It refers to the transfer of a liability

It is not a forced or distressed sale
It is clear it is market-based
It states explicitly when the sale or
transfer takes place

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Fair value at initial recognition

15

Transaction price (entry price) = Fair value

(exit price) unless:
Transaction takes place in different markets
Transactions are for different units of
account
Seller is distressed or forced
Transactions are between related parties

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A hypothetical transaction price

16

Principal market (or most

advantageous market)

Market
participant
buyer

Market
participant
seller
an asset

Fair value
of

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a liability

at the
measurement
date

Who would transact for the item?

17

Market participants are buyers and sellers in the

principal (or most advantageous) market who are:
Independent

Knowledgeable

Able to enter into a Willing to enter into

transaction
a transaction
Market participants act in their economic best
interest
Maximise the value of the asset
Minimise the value of the liability
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What is being measured?

18

Unit of account
IAS 41: A biological asset shall be measured
at its fair value less costs to sell
Characteristics
Which characteristics would a market participant
buyer take into account?

age and remaining economic life

condition
location
restrictions on use or sale
contractual terms
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Where would the transaction take

place?

19

Fair value is the price in the

Principal market
The market with the greatest
volume and level of activity for
the asset or liability

Or, if no principal market, the

most advantageous market
The market that maximises the
amount that would be received to
sell the asset and minimises the
amount that would be paid to
transfer the liability

In most cases, these markets will be the same

arbitrage opportunities will be competed away

The entity must have access to the principal (or most

advantageous) market
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Transaction and transport costs

Description

20

Included in fair value?

Transaction
costs

The costs to sell the asset No

or transfer the liability that
are directly attributable to
the disposal of the asset
or the transfer of the
liability

Transport
costs

The costs that would be

incurred to transport an
asset from its current
location to its exit market

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(Although they are

considered in the
assessment of which
market is most
advantageous)
They are a characteristic of
the transaction, not of the
asset or liability

Yes Transport changes a

characteristic of the asset
(its location)

How do we arrive at a market-based

measurement?

21

Is there a quoted price in an active market for an identical asset or liability?

Yes

Use this quoted price to

measure fair value (Level 1)

Must use without adjustment

No
Replicate a market price through a
valuation technique* (using observable+
and unobservable inputs: Levels 2 and 3)

No significant
unobservable
(Level 3) inputs =

Use of significant
unobservable
(Level 3) inputs =

* Valuation techniques include the

Level 2 measurement
Level 3 measurement
market approach, income approach
and cost approach.
+ Maximise the use of relevant observable inputs and minimise the use of unobservable
inputs. Observable inputs include market data (prices and other information that is publicly
available).
Unobservable inputs include the entitys own data (budgets, forecasts), which must be
adjusted if market participants would use different assumptions.
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Considerations specific to
non-financial assets

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Highest and best use

23

Fair value assumes a non-financial asset is

used by market participants at its highest and
best use
the use of a non-financial asset by market
participants that maximises the value of
the asset
physically possible
legally permissible
financially feasible
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Highest and best use continued

24

Highest and best use is determined from the

perspective of market participants, even if the entity
intends a different use.
However, an entitys current use of a non-financial
asset is presumed to be its highest and best use
unless market or other factors suggest that a
different use by market participants would maximise
the value of the asset.

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Highest and best use continued

25

Highest and best use is usually (but not always) the

current use
if for competitive reasons an entity does not
intend to use the asset at its highest and best
use, the fair value of the asset should still be
measured assuming its highest and best use by
market participants (defensive value)
Does not apply to financial instruments or liabilities

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Valuation premise

26

A non-financial asset either:

provides maximum value through its use in combination
with other assets and liabilities as a group
is its value influenced by it being operated with other
assets?
an example: equipment used in production facility
market participants are assumed to hold
complementary assets
provides maximum value through its use on a stand-alone
basis
is its value independent of its use with other assets?
an example: a vehicle or an investment property

Does not apply to financial instruments or liabilities

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Considerations specific to liabilities

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Transfer notionliabilities and an

entitys own equity instruments

28

Fair value assumes a transfer to a market

participant who takes on the obligation. The transfer
assumes:
Liability or equity remains outstanding
Restrictions on transfer are already reflected in
inputs; no additional adjustment required
Fair value of a liability reflects the effect of
non-performance risk
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Decision treeliability measurement

Yes

Fair value =
observable market
price of instrument

Is there an
observable market
price to transfer the
instrument?

No

Does somebody hold

the corresponding
asset?

Yes

Fair value =
observable market
price of asset
Yes
No

Fair value =
another valuation
technique

29

No

Fair value = fair value of

the corresponding asset

Fair value = another

valuation
technique*

Is there an observable
market price for the
instrument traded as an
asset?

* Using the
perspective of a
market participant that
owes the liability or
issued the claim on
equity

Level 2 or 3
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No corresponding asset

30

Two possible ways to approach it:

1. Use the future cash flows that a market participant
would expect to incur in fulfilling the obligation,
including the compensation that a market
participant would require for taking on the
obligation. Such compensation includes:
the cost to fulfil the obligation plus a return for
undertaking the activity; and
a risk premium to compensate for the risk that
actual cash flows might differ from expected
cash flows.
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No corresponding asset continued

31

2. Use the amount that a market participant would

receive to enter into or issue an identical liability or
equity instrument.

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Part III
Valuation approaches and
techniques

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Part III: valuation techniques

Valuation approaches
Valuation techniquesillustration for unquoted
equity instruments
Bid and ask spread, premiums and discounts
Measuring the fair value of portfolios

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Valuation approaches

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Valuation approaches

35

Measure fair value using valuation techniques that

are appropriate in the circumstances and for which
sufficient data are available.
Market approach
prices from market transactions for identical or
similar assets or liabilities, for example:
using market multiples (eg of earnings or cash flows)
from a set of comparable companies and applying
those multiples to the earnings or cash flows of the
company being valued
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Valuation approaches continued

36

Cost approach
the cost to acquire or reconstruct a substitute
asset of comparable utility, adjusted for physical,
functional and economic obsolescence
often used for PP&E and some intangibles
Income approach
converts future amounts (eg cash flows) to a
single current discounted amount, for example:
present values
option pricing models
multi-period excess earnings method
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Selecting a valuation approach

37

Market price is available

(eg discounted cash flow)

(eg replacement cost)

Level 1

Cost approach

Price for
identical item
Must be used
without
adjustment

Level 2

Income approach

Price needs
adjustment
Observable
inputs

Observable
inputs
Rare

Observable
inputs
Rare

Level 3

Market approach

Price needs
adjustment
Unobservable
inputs

Unobservable
inputs

Unobservable
inputs

Directly identifiable cash

flows

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Not directly
income-producing
No identical market price
Price needs adjustment

Valuation techniquesillustration
for unquoted equity instruments

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Measuring the fair value of unquoted

equity instruments
Scope of this particular illustration:
Unquoted equity instruments not quoted in an
active market
Non-controlling interest within the scope of IFRS 9
A range of valuation techniques can be used.
Judgement is involved
in the selection of a valuation technique (given
specific facts and circumstances, some
techniques might be more appropriate than
others)
when applying the valuation technique
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Valuation approaches and techniques

Valuation
approaches
Market approach

40

Valuation techniques
Transaction price paid for an identical or
a similar instrument of an investee
Comparable company valuation multiples

Income approach

Discounted cash flow (DCF) method

Dividend discount model (DDM)
Constant-growth DDM
Capitalisation model
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Market approach

41

Uses prices and other relevant information that have

been generated by market transactions that involve
identical or comparable assets.
Techniques that are most commonly referred to for
valuing unquoted equity instruments are related to the
data sources that they use:
transaction price paid for an identical or a similar
instrument of an investee
comparable company valuation multiples derived from
quoted prices (ie trading multiples) or from prices paid in
transactions such as mergers and acquisitions (ie
transaction multiples)
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Valuation multiples

42

Valuation basis:

Equity value
Enterprise value (EV)
Multiple
Performance measures:
EBITDA, EBIT, EBITA
Earnings, ie net income (E)
Book value, ie value of an entitys shareholders
equity (B)
Revenue
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Fair value measurement using

valuation multiplesfour steps

43

Identify comparable company peers.

Select the performance measure that is most
relevant to assessing the value for the investee.
Apply the appropriate valuation multiple to the
relevant performance measure of the investee to
obtain an indicated fair value of the investees
equity value or the investees enterprise value.
Make appropriate adjustments to ensure
comparability (eg non-controlling interest discount).

IFRS Foundation

Commonly used valuation multiples

44

Earnings multiples commonly used when valuing:

established business with an identifiable stream of

continuing and stable earnings:
,
(where P is entitys market capitalisation)
Book value multiples: where entities use their equity
capital bases to generate earnings (eg businesses
that have not yet generated positive earnings)
Revenue multiples:

IFRS Foundation

Exampleapplying comparable
company peers multiples

45

Investor has 5% non-controlling interest in Entity J

(private company) and measures it at fair value.
Financial information about Entity J
Normalised EBITDA = CU*100 million
Debt at FV = CU350 million
Six comparable public company peers (same
business and geographical region)
EV/EBITDA multiple was chosen because there are
differences in capital structure and depreciation
policies between J and peers.
No relevant non-operating items.
* CU = currency units

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Exampleapplying comparable
company peers multiples continued

46

Step 1 Identify comparable peers

The investor has selected six comparable public
company peers that operate in the same business
and geographical region as Entity J.
Step 2 Select the performance measure that is
most relevant to assessing the value for the investee.
The investor has chosen the EV/EBITDA multiple to
value Entity J because there are differences in the
capital structure and depreciation policies between
Entity Js comparable company peers and Entity J.
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Exampleapplying comparable
company peers multiples continued

47

Step 3 Apply valuation multiple to obtain fair value

Trading multiples of the comparable public company
peers are:

Upon further analysis, these entities are

considered comparable (ie similar risk,
growth and cash
flow-generating profiles

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Exampleapplying comparable
company peers multiples continued

Step
3 continued
Investor selected average multiple (ie 8.5x)
because it appropriately reflects Entity Js
characteristics relative to its peers.

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Exampleapplying comparable
company peers multiples continued

49

Step 4 Make appropriate adjustments to

ensure comparability
No non-controlling interest discount is required
because the valuation multiples used to
measure the fair value of Entity J were derived
from the trading prices of the comparable public
company peers and are consistent with holding
a five per cent non-controlling equity interest in
Entity J.

IFRS Foundation

Exampleapplying comparable
company peers multiples continued
Step 4

50

continued

Discount for the lack of liquidity assessed to

be 30% on the basis of relevant studies
applicable in the region and industry as well as
on the specific facts and circumstances.
Therefore
And the fair value of 5% non-controlling interest
is CU17.5m (ie CU350m0.05)
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Income approach

51

Income approach converts future amounts

(eg cash flows) to a single current (ie
discounted) amount.
Discounted Cash Flow method (DCF)
Dividend Discount Model (DDM)
Constant growth DDM
Capitalisation model

IFRS Foundation

Enterprise value

52

Enterprise value = discounted FCFF @ WACC

FCFF (Free Cash Flow to Firm): a common definition among
others cash flow from assets before any debt payments but
after making reinvestments that are needed for future growth
or the cash flows available to all capital providers (debt/equity)
WACC: discount rate that reflects the cost of raising both debt
and equity financing, in proportion to their use (ie the
Weighted Average Cost of Capital)

D&A = Depreciation and amortisation

RR = Reinvestment requirements
NWC = Net working capital
t = income tax rate
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WACC: cost of debt capital

component and computation

53

Computing WACC requires cost of equity capital

and cost of debt capital (, respectively) and market
participants expectations of the investees longterm optimal capital structure
There are a number of approaches for estimating
Based on recent borrowings
By reference to an actual or synthetic credit
rating and default spread

IFRS Foundation

WACC: cost of equity capital

component
Cost of equity capital () is often estimated using

CAPM:
where:
is the expected rate of return on a risk-free asset
is the required market rate of return on a fully
diversified portfolio
is the measure of the systematic risk for the
individual shares
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ExampleDCF method using

enterprise value

55

An investor has 5% non-controlling interest in Entity

R.
FCFF of Y1 to Y5 of CU100m and terminal value
from Y5 onwards is CU1,121.8m (assumption:
inflation is offset by market shrinkange, no growth in
nominal terms)
WACC 8.9%
Fair value of debt = CU240m
Non-controlling interest discount CU8m
Discount for the lack of liquidity CU4.09m
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ExampleDCF method using

enterprise value continued

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ExampleDCF method using

enterprise value continued

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A combination of approaches
adjusted net asset method

58

Involves deriving the fair value of an investees equity

instruments by reference to the fair value of its assets
and liabilities (recognised and unrecognised).
Appropriate for an investee whose value is mainly
derived from the holding of assets (rather than from
deploying those assets as part of a broader business).
Requires measurement of the fair value of the
individual assets and liabilities.
Non-controlling interest and liquidity discounts may be
applicable.
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Bid and ask spread,

premiums and discounts

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Pricing within a bid-ask spread

Bid price

60

The price at
which the dealer
will

For an asset, the

non-dealer
entitys

For a liability, the

non-dealer
entitys

buy

exit price

entry price

entry price

exit price

Ask (offer) price sell

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Pricing within a bid-ask spread

continued

61

If an asset or a liability measured at fair value has a

bid and an ask price, use the price within the bidask spread that is most representative of fair value
Mid-market pricing or other pricing conventions can
be used as a practical expedient for fair value
measurements within a bid-ask spread if these
conventions do not contravene the principle

IFRS Foundation

Premiums and discounts

62

Any premium or discount applied must be

consistent with:
characteristics of asset or liability
the unit of account in the IFRS requiring fair
value
No block discounts
an adjustment to a quoted price for reduction
that would occur if a market participant were to
sell a large holding of assets or liabilities in one
or a few transactions
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Measuring the fair value of

portfolios

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Portfolios of financial instruments

64

IFRS 13 permits an entity to measure a group of

financial assets and financial liabilities on the basis of
the net risk exposure to either market risks or credit
risks.
This practice was already allowed in IAS 39/IFRS 9
The exception was permitted because:
derivatives often cannot be sold, but management
can mitigate risk exposure by entering into an
offsetting position
portfolio composition is entity-specific (depends on
entitys risk preferences)
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Portfolios of financial instruments

continued

65

Conditions that need to be met:

Entity must have documented risk management strategy
The entity provides information on the basis of the net risk
exposure to key management personnel
Only for portfolios of instruments measured at FV
Accounting policy decision
Does not affect presentation in IAS 32.
Allocations shall be performed on a reasonable and
consistent basis.
Portfolio-level adjustments may need to be allocated to the
unit of account for presentation purposes.

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Portfolios of financial instruments

continued

66

If there are offsetting market risks:

can apply bid-ask spread to net open risk
position
offsetting risks must be substantially the same
duration of instruments leading to exposure to
market risk must be substantially the same
Market risk: the risk that the price will fluctuate
because of changes in market prices
(currency risk, interest rate risk and other
price risk).
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Portfolios of financial instruments

continued

67

If the entity is exposed to the credit risk of a

particular counterparty, an entity shall include the
effect of:
its net exposure to the credit risk of the counterparty.
the counterpartys net exposure to its credit risk.
any existing arrangements that mitigate credit risk
exposure if market participants expect that such
arrangements would be legally enforceable in the event of
default.

Credit risk: the risk the entity or the

counterparty will not pay or otherwise perform
as agreed.
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Part IV: Disclosures

IFRS Foundation

General

69

Fair value at end of reporting period

Level in hierarchy
Transfers between levels
Valuation techniques and inputs used
If highest and best use is different from
current use

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General continued

70

Disclosures also required for unrecognised

amounts (ie that are only disclosed) or
amounts recognised using a different
measure (eg amortised cost)
eg financial asset at amortised cost, but
IFRS 7 requires disclosure of assets fair
value
Quantitative disclosures in a table unless
another format is better
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General continued

71

Illustrative Example 15 - Fair values at the end of the

reporting period and level of the fair value hierarchy
for recurring fair value measurements

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General continued

72

Illustrative Example 15 - Fair values at the end of the

reporting period and level of the fair value hierarchy
for non-recurring fair value measurements

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More information about Level 3

73

Quantitative disclosure of unobservable

inputs and assumptions used
Reconciliation of opening to closing balances
Description of valuation process in place

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More information about Level 3

continued

74

Sensitivity analysis:
narrative discussion about sensitivity to changes
in unobservable inputs, including interrelationships between inputs that magnify or
mitigate the effect on the measurement
quantitative sensitivity analysis for financial
instruments
More detail in determining classes

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More information about Level 3

continued

Illustrative Example 17 Quantitative information

about significant unobservable inputs used

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75

More information about Level 3

continued

76

Illustrative Example 18 Valuation processes:

An entity might disclose the following:
(a) For the group within the entity that decides the entitys valuation policies and
procedures:
its description;
to whom that group reports; and
the internal reporting procedures in place (eg whether and, if so, how pricing,
risk management or audit committees discuss and assess the fair value
measurements);
(b) the frequency and methods for calibration, back testing and other testing
procedures of pricing models;
(c) the process for analysing changes in fair value measurements from period to
period;
(d) how the entity determined that third-party information, such as broker quotes or
pricing services, used in the fair value measurement was developed in accordance
with the IFRS; and
(e) the methods used to develop and substantiate the unobservable inputs used in
a fair value measurement.
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More information about Level 3

continued

77

Illustrative Example 19 Narrative discussion about

sensitivity to changes in unobservable inputs:
The significant unobservable inputs used in the fair value
measurement of the entitys residential mortgage-backed
securities are prepayment rates, probability of default and
loss severity in the event of default. Significant increases
(decreases) in any of those inputs in isolation would result
in a significantly lower (higher) fair value measurement.
Generally, a change in the assumption used for the
probability of default is accompanied by a directionally
similar change in the assumption used for the loss
severity and a directionally opposite change in the
assumption used for prepayment rates.
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Part V: Effective date and

transition

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Effective date and transition

Effective 1 January 2013
Earlier application permitted
Prospective application, no comparatives

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