Professional Documents
Culture Documents
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Disclaimer and allowed use 2
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Part I
Context and scope
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Part I: context and scope 5
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Before IFRS 13–dispersed and
conflicting guidance 6
IFRS 13
• Single source of measurement guidance
• Clear measurement objective
• Consistent and transparent disclosures about fair
value
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The previous definition of fair value 7
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When does IFRS 13 apply? 8
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When does IFRS 13 apply? 9
IAS 41
A biological asset shall be What
measured on initial recognition and and
at the end of each reporting period when
at its fair value less cost to sell
IFRS 13 How
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What does IFRS 13 not apply to? 10
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Part II: measurement of fair value 12
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Definition of fair value and
measurement principles
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IFRS 13’s ‘new’ definition of fair value 14
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Fair value at initial recognition 15
Market Market
participant participant
buyer seller
an asset
at the
Fair value measurement
of a liability date
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Who would transact for the item? 17
Independent Knowledgeable
• 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
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How do we arrive at a market-based
measurement? 21
Yes No
Replicate a market price through a
Use this quoted price to
valuation technique* (using observable+
measure fair value (Level 1) and unobservable inputs: Levels 2 and 3)
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Highest and best use 23
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Highest and best use continued 24
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Highest and best use continued 25
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Valuation premise 26
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Transfer notion–liabilities and an
entity’s own equity instruments 28
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Decision tree—liability measurement 29
Yes
Is there an No
observable market
price to transfer the
Fair value = instrument? Does somebody hold the
observable market corresponding asset?
price of instrument
Yes No
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Part III
Valuation approaches and
techniques
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Part III: valuation techniques 33
• Valuation approaches
• Valuation techniques—illustration 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
• 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
• Price for
identical item • Not directly
Level 1
adjustment
inputs inputs
• Observable
• Rare • Rare
inputs
• Price needs
Level 3
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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 40
• Valuation basis:
– Equity value
– Enterprise value (EV)
𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 (𝐸𝑉)
• Multiple =
𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 𝑚𝑒𝑎𝑠𝑢𝑟𝑒
• Performance measures:
– EBITDA, EBIT, EBITA
– Earnings, ie net income (E)
– Book value, ie value of an entity’s shareholders
equity (B)
– Revenue © IFRS Foundation
Fair value measurement using
valuation multiples–four steps 43
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Commonly used valuation multiples 44
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Example–applying comparable
company peers’ multiples 45
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Example–applying comparable
company peers’ multiples continued 48
Step 3 continued
• Investor selected average multiple (ie 8.5x)
because it appropriately reflects Entity J’s
characteristics relative to its peers.
• 𝐸𝑉 = 𝐸𝐵𝐼𝑇𝐷𝐴 × 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑒 = 𝐶𝑈100𝑚 × 8.5 =
𝐶𝑈850𝑚
• 𝑈𝑛𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐹𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐸𝑉 − 𝐷𝑒𝑏𝑡 @𝐹𝑉 =
𝐶𝑈850𝑚 − 𝐶𝑈350𝑚 = 𝐶𝑈500𝑚
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Example–applying comparable
company peers’ multiples continued 49
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Example–applying comparable
company peers’ multiples continued 50
Step 4 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
𝐹𝑉 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐶𝑈500𝑚 × 1 − 0.3 = 𝐶𝑈350𝑚
• And the fair value of 5% non-controlling interest
is CU17.5m (ie CU350m×0.05)
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Income approach 51
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Enterprise value 52
𝐷 𝐸
𝑊𝐴𝐶𝐶 = × (1 − 𝑡) × 𝑘𝑑 + × 𝑘𝑒
(𝐷 + 𝐸) (𝐷 + 𝐸)
• Computing WACC requires cost of equity capital
and cost of debt capital (𝑘𝑒 , 𝑘𝑑 respectively) and
market participants’ expectations of the investee’s
long-term optimal capital structure
• There are a number of approaches for estimating 𝑘𝑑
– Based on recent borrowings
– By reference to an actual or synthetic credit
rating and default spread
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WACC: cost of equity capital
component 54
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Example–DCF method using
enterprise value 55
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Example–DCF method using
enterprise value continued 57
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A combination of approaches–
adjusted net asset method 58
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Bid and ask spread,
premiums and discounts
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Pricing within a bid-ask spread 60
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Pricing within a bid-ask spread continued 61
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Premiums and discounts 62
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Portfolios of financial instruments 64
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Portfolios of financial instruments
continued 66
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General 69
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General continued 70
(a)
On the basis of its analysis of the nature, characteristics and risks of the securities, the entity has determined that presenting them by
industry is appropriate.
(b)
On the basis of its analysis of the nature, characteristics and risks of the investments, the entity has determined that presenting them
as a single class is appropriate.
(c)
In accordance with IFRS 5, assets held for sale with a carrying amount of CU35 million were written down to their fair value of CU26
million, less costs to sell of CU6 million (or CU20 million), resulting in a loss of CU15 million, which was included in profit or loss for the
period.
(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)
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More information about Level 3 73
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More information about Level 3 continued 74
• Sensitivity analysis:
– narrative discussion about sensitivity to changes
in unobservable inputs, including inter-
relationships 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 75
Fair value at
Description 31/12/X9 Valuation technique(s) Unobservable input Range (weighted average)
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Effective date and transition 79
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