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Basis for conclusions on IFRS 13 measurement

Basis for conclusions on IFRS 13 measurement

Basis for conclusions on IFRS 13 measurement

Clarifying the measurement objective

IFRS 13 defines fair value   as:

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.

IFRS 13 also provides a framework that is based on an objective to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (ie an exit price from the perspective of a market participant that holds the asset or owes the liability at the measurement  date).

Basis for conclusions on IFRS 13 measurement

That  definition  of  fair  value  retains  the  exchange  notion  contained     in  the previous definition of fair value in IFRSs:

The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length  transaction.

Like  the  previous  definition  of  fair  value,  the  revised  definition   assumes  a hypothetical and orderly exchange transaction (ie it is not an actual sale or a forced transaction or distress sale). However, the previous definition of fair value:

  • did not specify whether an entity is buying or selling the asset;
  • was unclear about what is meant by settling a liability because it did not refer to the creditor, but to knowledgeable, willing parties; and
  • did not state explicitly whether the exchange or settlement takes place at the measurement date or at some other

Basis for conclusions on IFRS 13 measurement

The  IASB  concluded  that  the  revised  definition  of  fair  value remedies those deficiencies.    It  also  conveys  more  clearly  that  fair  value  is  a market-based measurement, and not an entity-specific measurement, and that fair value reflects current market conditions (which reflect market participants’, not the entity’s, current expectations about future market conditions).

In determining how to define fair value in IFRSs, the IASB considered work done in its project to revise IFRS 3. In that project, the IASB considered whether differences between the definitions of fair value in US GAAP (an explicit exit price) and IFRSs (an exchange amount, which might be interpreted in some situations as an entry price) would result in different measurements of assets acquired and liabilities assumed in a business combination. That was a particularly important issue because in many business combinations the assets and liabilities are non-financial.

The IASB asked valuation experts to take part in a case study involving the valuation of the identifiable assets acquired and liabilities assumed in a sample business combination. The IASB learned that differences between an exit price and an exchange amount (which might be interpreted as an entry price in a business combination) were unlikely to arise, mainly because transaction costs are not a component of fair value in either definition. The IASB observed that although the definitions used different words, they articulated essentially the same concepts.

Basis for conclusions on IFRS 13 measurement

However,  the  valuation  experts  identified  potential  differences  in  particular areas. The valuation experts told the IASB that an exit price for an asset acquired or a liability assumed in a business combination might differ from an exchange amount if:

  • an entity’s intended use for an acquired asset is different from its highest and best use by market participants (ie when the acquired asset provides defensive value); or
  • a liability is measured on the basis of settling it with the creditor rather than transferring it to a third party and the entity determines that there is a difference between those measurements. Paragraphs BC80–BC82 discuss perceived differences between the settlement and transfer notions.

With respect to highest and best use, the IASB understood that the ways of measuring assets on the basis of their defensive value (ie the value associated with improving the prospects of the entity’s other assets by preventing the acquired asset from being used by competitors) in accordance with US GAAP at the time IFRS 3 was issued were still developing. As a consequence, the IASB thought it was too early to assess the significance of any differences that might result. With respect to liabilities, it was also not clear at that time whether entities would use different valuation techniques to measure the fair value of liabilities assumed in a business combination. In the development of IFRS 13, the IASB observed the discussions of the FASB’s Valuation Resource Group to learn from the implementation of SFAS 157 and Topic 820 in US  GAAP.

Basis for conclusions on IFRS 13 measurement

Fair value as a current exit price

The definition of fair value in IFRS 13 is a current exit price.     That definition in and of itself is not a controversial issue. Many respondents thought the proposal to define fair value as a current, market-based exit price was appropriate because that definition retains the notion of an exchange between unrelated, knowledgeable and willing parties in the previous definition of fair value in IFRSs, but provides a clearer measurement objective. Other respondents thought an entry price would be more appropriate in some situations (eg at initial recognition, such as in a business  combination).

However, the issue of when fair value should be used as a measurement basis in IFRSs is controversial.       There is disagreement about the following:

  • which assets and liabilities should be measured at fair value (eg whether fair value should be restricted to assets and liabilities with quoted prices in active markets that the entity intends to sell or transfer in the near term);
  • when those assets and liabilities  should  be  measured  at  fair  value  (eg whether the measurement basis should change when markets have become less active); and
  • where any changes in fair value should be

Basis for conclusions on IFRS 13 measurement

The International Financial Reporting Standards Foundation, or IFRS Foundation, is a nonprofit accounting organization. Its main objectives include the development and promotion of the International Financial Reporting Standards (IFRSs) through the International Accounting Standards Board (IASB), which it oversees.

The foundation was formerly named the International Accounting Standards Committee (IASC) Foundation until a renaming on 1 July 2010, and as of 2012 is governed by a board of 22 trustees.

The IFRS Foundation also develops and maintains the IFRS Taxonomy, which is the representation of the IFRSs in eXtensible Business Reporting Language (XBRL), via its XBRL team. The team is supported by the XBRL Advisory Council and the XBRL Quality Review Team, which respectively provide strategic advice and reviews developed taxonomies.Additionally, in 2012 the foundation issued a call for industry participants in a project to develop “common industry practice concepts” for the taxonomy.

XBRL provides a “common, electronic format for business and financial reporting”, which will contribute to the global convergence of accounting standards towards IFRS; the director of XBRL activities at the IFRS Foundation, Olivier Servais, hopes that “everybody will be using it” in future.As of March 2012, the IFRS Taxonomies have “considerably fewer” tags than GAAP taxonomies, and the Security and Exchange Commission has not approved the IFRS Taxonomy for use in XBRL filings in the United States.

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