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Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

During the development of IFRS 13, the IASB received information from entities in emerging and transition economies that had concerns about applying the fair value measurement principles in IFRS 13 in their jurisdictions. Common concerns included the following:

(a) The fair value measurement guidance is not detailed enough to allow them to measure fair value on a consistent basis.

(b) There is limited availability of practitioners in their jurisdictions who have the skills to apply the guidance (and as a result entities might be unfamiliar with applying the necessary judgements).

(c) There is limited access to market data to develop fair value measurements because there are few deep and liquid markets, there are often few willing buyers and sellers and prices often fluctuate considerably within short periods of time.

(d) Models, inputs and assumptions may be new and may not be comparable across entities because of rapidly developing socio-economic changes.

(e) Measuring fair value (and preparing the resulting disclosures) could be expensive.

The IASB noted that because fair value is used in many IFRSs, knowledge about its application is necessary for applying IFRSs generally and noted that the concerns raised are not specific to entities in emerging and transition economies. Entities in developed economies faced similar challenges during the global financial crisis that started in 2007 and asked the IASB for guidance for measuring the fair value of equity instruments without active markets given the requirement to recognise them at fair value in IFRS 9. Furthermore, the IASB concluded that there should not be a different threshold for measuring fair value depending on jurisdiction. Only by performing fair value measurements will entities applying IFRSs learn how to do those measurements appropriately and robustly.

Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

Therefore, the IASB concluded that entities applying IFRSs would benefit from educational material to accompany IFRS 13. The IFRS Foundation sometimes publishes educational material that is leveraged from the standard-setting process to reinforce the goal of promoting the adoption and consistent application of a single set of high quality international accounting standards. The IASB asked the staff to develop educational material on fair value measurement that describes at a high level the thought process for measuring assets, liabilities and an entity’s own equity instruments at fair value consistent with the objective of a fair value measurement.

The IASB concluded that any educational material developed must benefit all entities equally. Thus, the educational material cannot benefit entities in emerging and transition economies without being made available to entities in developed economies.

The IASB staff and the FASB staff will liaise during the development of the educational material.

Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

Convergence with US GAAP

As noted above, the fair value measurement project was a joint project with the FASB. The boards worked together to ensure that fair value has the same meaning in IFRSs and in US GAAP and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style).

The boards worked together to ensure that, to the extent possible, IFRS 13 and Topic 820 are identical. The following style differences remain:

(a) There are differences in references to other IFRSs and US GAAP— For example, regarding related party transactions, IFRS 13 refers to IAS 24 Related Party Disclosures and Topic 820 refers to Topic 850 Related Party Disclosures.

(b) There are differences in style—For example, IFRS 13 refers to an entity and Topic 820 refers to a reporting entity.

(c) There are differences in spelling—For example, IFRS 13 refers to labour costs and Topic 820 refers to labor costs.

(d) There are differences in whether references are to a particular jurisdiction or are generic—For example, IFRS 13 refers to risk-free government securities and Topic 820 refers to US Treasury securities.

The boards concluded that those differences will not result in inconsistent interpretations in practice by entities applying IFRSs or US GAAP.

Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

In addition, IFRS 13 and Topic 820 have the following differences:

(a) There are different accounting requirements in IFRSs and US GAAP for measuring the fair value of investments in investment companies. Topic 946 Financial Services—Investment Companies in US GAAP requires an investment company to recognise its underlying investments at fair value at each reporting period. Topic 820 provides a practical expedient that permits an entity with an investment in an investment company to use as a measure of fair value in specific circumstances the reported net asset value without adjustment. IFRS 10 Consolidated Financial Statements requires an investment company to consolidate its controlled underlying investments. Because IFRSs do not have accounting requirements that are specific to investment companies, the IASB decided that it would be difficult to identify when such a practical expedient could be applied given the different practices for calculating net asset values in jurisdictions around the world. For example, investment companies may report in accordance with national GAAP, which may have recognition and measurement requirements that differ from those in IFRSs (ie the underlying investments might not be measured at fair value, or they might be measured at fair value in accordance with national GAAP, not IFRSs). The boards are reviewing the accounting for investment companies as part of a separate project.

(b) There are different requirements for measuring the fair value of a financial liability with a demand feature. In US GAAP, Topic 825 Financial Instruments and Topic 942 Financial Services— Depository and Lending describe the fair value measurement of a deposit liability as the amount payable on demand at the reporting date. In IFRSs, IFRS 13 states that the fair value measurement of a financial liability with a demand feature (eg demand deposits) cannot be less than the present value of the amount payable on demand. That requirement in IFRS 13 was relocated unchanged from IAS 39 and IFRS 9 as a consequence of the IASB’s fair value measurement project.

Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

(c) There are different disclosure requirements in IFRSs and US GAAP. For example:

(i) Because IFRSs generally do not allow net presentation for derivatives, the amounts disclosed for fair value measurements categorised within Level 3 of the fair value hierarchy might differ. The boards are reviewing the presentation requirements for offsetting financial assets and financial liabilities in their joint project on the accounting for financial instruments.

(ii) IFRSs require a quantitative sensitivity analysis for financial instruments that are measured at fair value and categorised within Level 3 of the fair value hierarchy (that disclosure was previously in IFRS 7). The boards will analyse the feasibility of incorporating information about interrelationships between unobservable inputs into a quantitative measurement uncertainty analysis disclosure. After completing that analysis, the boards will decide whether to require such a disclosure.

(iii) Topic 820 has different disclosure requirements for non-public entities. The FASB concluded that some of the disclosures should not be required for non-public entities because of the characteristics of the users of the financial statements of those entities. The FASB considered the ability of those users to access information about the financial position of the entity and the relevance to those users of the information that would be provided by the requirements in the disclosure amendments. In contrast, the IASB recently completed a project on the accounting for small and medium-sized entities. As a result, the IFRS for Small and Medium-Sized Entities addresses the accounting for entities that do not have public accountability, and the disclosures about their fair value measurements.

Basis For Conclusions on IFRS 13 Application In Emerging And Transition Economics

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