Financial Statements prepared and presented in accordance with International Financial Reporting Standards (IFRS) are prepared under a modified historical cost basis with a growing emphasis on fair values. A substantial number of standards either mandate or permit the recognition or disclosure of the value of assets and liabilities at fair value. Assets that could or have to be fair valued include property, intangible assets, biological assets and, of course, financial instruments.
IFRS 13 Fair Value Measurement that was issued on 12 May 2011 defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. This standard is applicable for annual periods beginning on or after 1 January 2013, though early adoption is permitted, in which case that fact is disclosed in the financial statements.
IFRS 13 does not create any new requirements about when fair value measurements are required, but instead provides guidance on how fair value should be measured and disclosed when required or permitted under other IFRSs. It replaces the guidance included in the individual IFRSs with a single source of authorative guidance on how to measure fair value.
IFRS 13 has changed a number of concepts on how to measure fair values under IFRSs. It 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. It requires fair value to be measured as an exit price from the perspective of market participants in the “principal” market, even if you normally transact in a different market. To increase consistency and comparability, IFRS 13 establishes a fair value hierarchy based on the inputs to valuation techniques used to measure fair value. The inputs are categorised into three levels – the highest priority is given to unadjusted quoted prices in active markets for identical assets or liabilities, and the lowest priority is given to unobservable inputs.
Fair value measurements will remain an area of significant judgement when prices in active markets are not available. IFRS 13 seeks to reduce the subjectivity of these measurements by requiring that relevant observable inputs are maximised and unobservable inputs minimised. Even if a fair value measurement itself does not change, the new standard includes new disclosure requirements that may require additional data collection: on unobservable inputs used for fair value measurements, sensitivity to these inputs and inter-relationships between them; on unrealised gains and losses; and on the fair value hierarchy.
The impact that the recent changes brought about by this standard are expected to have, both on the valuation of various assets as well as the disclosures relating to those values are going to be discussed during a conference entitled Forthcoming developments in IFRS – Do you need to plan? hosted by KPMG on 21 June. During the conference, a panel of subject matter experts with extensive experience in valuations will also discuss the impact that IFRS 13 is expected to have in particular on the valuations of non-current assets and financial instruments.
About the conference
For more information about the IFRS conference contact Delia Mifsud Inguanez on +356 25631297 or [email protected]
David Caruana, Transactions & Restructuring, Partner KPMG
David Pace, Transactions & Restructuring, Director KPMG