Contents

IFRS 13 FAIR VALUE MEASUREMENT ILLUSTRATIVE EXAMPLES
HIGHEST AND BEST USE AND VALUATION PREMISEIE2
Example 1—Asset groupIE3
Example 2—LandIE7
Example 3—Research and development projectIE9
USE OF MULTIPLE VALUATION TECHNIQUESIE10
Example 4—Machine held and usedIE11
Example 5—Software assetIE15
PRINCIPAL (OR MOST ADVANTAGEOUS) MARKETIE18
Example 6—Level 1 principal (or most advantageous) marketIE19
TRANSACTION PRICES AND FAIR VALUE AT INITIAL RECOGNITIONIE23
Example 7—Interest rate swap at initial recognitionIE24
RESTRICTED ASSETSIE27
Example 8—Restriction on the sale of an equity instrumentIE28
Example 9—Restrictions on the use of an assetIE29
MEASURING LIABILITIESIE30
Example 10—Structured noteIE34
Example 11—Decommissioning liabilityIE35
Example 12—Debt obligation: quoted priceIE40
Example 13—Debt obligation: present value techniqueIE43
MEASURING FAIR VALUE WHEN THE VOLUME OR LEVEL OF ACTIVITY FOR AN ASSET OR A LIABILITY HAS SIGNIFICANTLY DECREASEDIE48
Example 14—Estimating a market rate of return when the volume or level of activity for an asset has significantly decreasedIE49
FAIR VALUE DISCLOSURESIE59
Example 15—Assets measured at fair valueIE60
Example 16—Reconciliation of fair value measurements categorised within Level 3 of the fair value hierarchyIE61
Example 17—Valuation techniques and inputsIE63
Example 18—Valuation processesIE65
Example 19—Information about sensitivity to changes in significant unobservable inputsIE66
APPENDIX
Amendments to guidance on other IFRSs

IFRS 13 Fair Value MeasurementIllustrative Examples

These examples accompany, but are not part of, IFRS 13. They illustrate aspects of IFRS 13 but are not intended to provide interpretative guidance.

IE1

These examples portray hypothetical situations illustrating the judgements that might apply when an entity measures assets and liabilities at fair value in different valuation situations. Although some aspects of the examples may be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern would need to be evaluated when applying IFRS 13.

Highest and best use and valuation premise

IE2

Examples 1⁠–⁠3 illustrate the application of the highest and best use and valuation premise concepts for non‑financial assets. [Refer:paragraphs 27⁠–⁠33 and B3]

Example 1—Asset group

IE3

An entity acquires assets and assumes liabilities in a business combination [Refer:IFRS 3]. One of the groups of assets acquired comprises Assets A, B and C. Asset C is billing software integral to the business developed by the acquired entity for its own use in conjunction with Assets A and B (ie the related assets) [Refer:paragraph B3(e)]. The entity measures the fair value of each of the assets individually, consistently with the specified unit of account for the assets. The entity determines that the highest and best use of the assets is their current use and that each asset would provide maximum value to market participants principally through its use in combination with other assets or with other assets and liabilities (ie its complementary assets and the associated liabilities). [Refer:paragraph 31(a)] There is no evidence to suggest that the current use of the assets is not their highest and best use. [Refer:paragraph 29]

IE4

In this situation, the entity would sell the assets in the market in which it initially acquired the assets (ie the entry and exit markets from the perspective of the entity are the same). [Refer:paragraph 16] Market participant [Refer:paragraphs 22 and 23] buyers with whom the entity would enter into a transaction in that market have characteristics [Refer:paragraph 23] that are generally representative of both strategic buyers (such as competitors) and financial buyers (such as private equity or venture capital firms that do not have complementary investments) and include those buyers that initially bid for the assets. Although market participant buyers might be broadly classified as strategic or financial buyers, in many cases there will be differences among the market participant buyers within each of those groups, reflecting, for example, different uses for an asset and different operating strategies.

IE5

As discussed below, differences between the indicated fair values of the individual assets relate principally to the use of the assets by those market participants within different asset groups:

(a)

Strategic buyer asset group. The entity determines that strategic buyers have related assets that would enhance the value of the group within which the assets would be used (ie market participant synergies). Those assets include a substitute asset for Asset C (the billing software), which would be used for only a limited transition period and could not be sold on its own at the end of that period. Because strategic buyers have substitute assets, Asset C would not be used for its full remaining economic life. The indicated fair values of Assets A, B and C within the strategic buyer asset group (reflecting the synergies resulting from the use of the assets within that group) are CU360,1 CU260 and CU30, respectively. The indicated fair value of the assets as a group within the strategic buyer asset group is CU650.

(b)

Financial buyer asset group. The entity determines that financial buyers do not have related or substitute assets that would enhance the value of the group within which the assets would be used. Because financial buyers do not have substitute assets, Asset C (ie the billing software) would be used for its full remaining economic life. The indicated fair values of Assets A, B and C within the financial buyer asset group are CU300, CU200 and CU100, respectively. The indicated fair value of the assets as a group within the financial buyer asset group is CU600.

IE6

The fair values of Assets A, B and C would be determined on the basis of the use of the assets as a group within the strategic buyer group (CU360, CU260 and CU30). [Refer:paragraph 31(a)] Although the use of the assets within the strategic buyer group does not maximise the fair value of each of the assets individually, it maximises the fair value of the assets as a group (CU650).

Example 2—Land

IE7

An entity acquires land in a business combination [Refer:IFRS 3]. The land is currently developed for industrial use as a site for a factory. The current use of land is presumed to be its highest and best use unless market or other factors suggest a different use [Refer:paragraph 29]. Nearby sites have recently been developed for residential use as sites for high‑rise apartment buildings. On the basis of that development and recent zoning and other changes to facilitate that development, the entity determines that the land currently used as a site for a factory could be developed as a site for residential use (ie for high‑rise apartment buildings) because market participants would take into account the potential to develop the site for residential use when pricing the land. [Refer:paragraph 29]

IE8

The highest and best use of the land would be determined by comparing both of the following:

(a)

the value of the land as currently developed for industrial use (ie the land would be used in combination with other assets, such as the factory, or with other assets and liabilities).

(b)

the value of the land as a vacant site for residential use, taking into account the costs of demolishing the factory and other costs (including the uncertainty about whether the entity would be able to convert the asset to the alternative use) necessary to convert the land to a vacant site (ie the land is to be used by market participants on a stand‑alone basis [Refer:paragraph 31(b)]).

The highest and best use of the land would be determined on the basis of the higher of those values [Refer:paragraphs 27⁠–⁠30]. In situations involving real estate appraisal, the determination of highest and best use might take into account factors relating to the factory operations, including its assets and liabilities [Refer:paragraph 31(a)].

Example 3—Research and development project

IE9

An entity acquires a research and development (R&D) project in a business combination [Refer:IFRS 3]. The entity does not intend to complete the project. If completed, the project would compete with one of its own projects (to provide the next generation of the entity’s commercialised technology). Instead, the entity intends to hold (ie lock up) the project to prevent its competitors from obtaining access to the technology. In doing this the project is expected to provide defensive value [Refer:paragraph 30], principally by improving the prospects for the entity’s own competing technology. To measure the fair value of the project at initial recognition, the highest and best use of the project would be determined on the basis of its use by market participants. [Refer:paragraphs 22, 23 and 29] For example:

(a)

The highest and best use [Refer:paragraphs 27⁠–⁠30] of the R&D project would be to continue development if market participants would continue to develop the project and that use would maximise the value of the group of assets or of assets and liabilities in which the project would be used (ie the asset would be used in combination with other assets or with other assets and liabilities). [Refer:paragraph 31(a)] That might be the case if market participants do not have similar technology, either in development or commercialised. The fair value of the project would be measured on the basis of the price that would be received in a current transaction to sell the project, assuming that the R&D would be used with its complementary assets and the associated liabilities and that those assets and liabilities would be available to market participants.

(b)

The highest and best use of the R&D project would be to cease development if, for competitive reasons, market participants would lock up the project and that use would maximise the value of the group of assets or of assets and liabilities in which the project would be used. [Refer:paragraph 31(a)] That might be the case if market participants have technology in a more advanced stage of development that would compete with the project if completed and the project would be expected to improve the prospects for their own competing technology if locked up. The fair value of the project would be measured on the basis of the price that would be received in a current transaction to sell the project, assuming that the R&D would be used (ie locked up) with its complementary assets and the associated liabilities and that those assets and liabilities would be available to market participants.

(c)

The highest and best use of the R&D project would be to cease development if market participants would discontinue its development. That might be the case if the project is not expected to provide a market rate of return if completed and would not otherwise provide defensive value if locked up. The fair value of the project would be measured on the basis of the price that would be received in a current transaction to sell the project on its own (which might be zero). [Refer:paragraph 31(b)]

Use of multiple valuation techniques

IE10

The IFRS notes that a single valuation technique will be appropriate in some cases. In other cases multiple valuation techniques will be appropriate. Examples 4 and 5 illustrate the use of multiple valuation techniques. [Refer:paragraphs 61⁠–⁠66 and B5⁠–⁠B30]

Example 4—Machine held and used

IE11

An entity acquires a machine in a business combination [Refer:IFRS 3]. The machine will be held and used in its operations. The machine was originally purchased by the acquired entity from an outside vendor and, before the business combination, was customised by the acquired entity for use in its operations. However, the customisation of the machine was not extensive. The acquiring entity determines that the asset would provide maximum value to market participants through its use in combination with other assets or with other assets and liabilities (as installed or otherwise configured for use). There is no evidence to suggest that the current use of the machine is not its highest and best use [Refer:paragraph 29]. Therefore, the highest and best use of the machine is its current use in combination with other assets or with other assets and liabilities. [Refer:paragraph 31(b)]

IE12

The entity determines that sufficient data are available to apply the cost approach [Refer:paragraphs B8 and B9] and, because the customisation of the machine was not extensive, the market approach [Refer:paragraphs B5⁠–⁠B7]. The income approach [Refer:paragraphs B10 and B11] is not used because the machine does not have a separately identifiable income stream from which to develop reliable estimates of future cash flows. Furthermore, information about short‑term and intermediate‑term lease rates for similar used machinery that otherwise could be used to project an income stream (ie lease payments over remaining service lives) is not available. The market and cost approaches are applied as follows:

(a)

The market approach [Refer:paragraphs B5⁠–⁠B7] is applied using quoted prices for similar machines adjusted for differences between the machine (as customised) and the similar machines. The measurement reflects the price that would be received for the machine in its current condition (used) and location (installed and configured for use). The fair value indicated by that approach ranges from CU40,000 to CU48,000.

(b)

The cost approach [Refer:paragraphs B8 and B9] is applied by estimating the amount that would be required currently to construct a substitute (customised) machine of comparable utility. The estimate takes into account the condition of the machine and the environment in which it operates, including physical wear and tear (ie physical deterioration), improvements in technology (ie functional obsolescence), conditions external to the condition of the machine such as a decline in the market demand for similar machines (ie economic obsolescence) and installation costs. The fair value indicated by that approach ranges from CU40,000 to CU52,000.

IE13

The entity determines that the higher end of the range indicated by the market approach is most representative of fair value and, therefore, ascribes more weight to the results of the market approach [Refer:paragraph 63]. That determination is made on the basis of the relative subjectivity of the inputs, taking into account the degree of comparability between the machine and the similar machines. In particular:

(a)

the inputs used in the market approach (quoted prices for similar machines) require fewer and less subjective adjustments than the inputs used in the cost approach.

(b)

the range indicated by the market approach overlaps with, but is narrower than, the range indicated by the cost approach.

(c)

there are no known unexplained differences (between the machine and the similar machines) within that range.

Accordingly, the entity determines that the fair value of the machine is CU48,000.

IE14

If customisation of the machine was extensive or if there were not sufficient data available to apply the market approach (eg because market data reflect transactions for machines used on a stand‑alone basis, such as a scrap value for specialised assets, rather than machines used in combination with other assets or with other assets and liabilities), the entity would apply the cost approach. When an asset is used in combination with other assets or with other assets and liabilities, the cost approach assumes the sale of the machine to a market participant buyer with the complementary assets and the associated liabilities [Refer:paragraph 31(b)]. The price received for the sale of the machine (ie an exit price) would not be more than either of the following:

(a)

the cost that a market participant buyer would incur to acquire or construct a substitute machine of comparable utility; or

(b)

the economic benefit that a market participant buyer would derive from the use of the machine.

Example 5—Software asset

IE15

An entity acquires a group of assets [Refer:IAS 16 paragraph 24]. The asset group includes an income‑producing software asset internally developed for licensing to customers and its complementary assets (including a related database with which the software asset is used) and the associated liabilities. To allocate the cost of the group to the individual assets acquired, the entity measures the fair value of the software asset. The entity determines that the software asset would provide maximum value to market participants [Refer:paragraphs 22 and 23] through its use in combination with other assets or with other assets and liabilities (ie its complementary assets and the associated liabilities [Refer:paragraph 31(a)]). There is no evidence to suggest that the current use of the software asset is not its highest and best use [Refer:paragraph 29]. Therefore, the highest and best use of the software asset is its current use. (In this case the licensing of the software asset, in and of itself, does not indicate that the fair value of the asset would be maximised through its use by market participants on a stand‑alone basis. [Refer:paragraph 31(b)])

IE16

The entity determines that, in addition to the income approach [Refer:paragraphs B10 and B11], sufficient data might be available to apply the cost approach [Refer:paragraphs B8 and B9] but not the market approach [Refer:paragraphs B5⁠–⁠B7]. Information about market transactions for comparable software assets is not available. The income and cost approaches are applied as follows:

(a)

The income approach is applied using a present value technique [Refer:paragraphs B12⁠–⁠B30]. The cash flows used in that technique reflect the income stream expected to result from the software asset (licence fees from customers) over its economic life. The fair value indicated by that approach is CU15 million.

(b)

The cost approach is applied by estimating the amount that currently would be required to construct a substitute software asset of comparable utility (ie taking into account functional and economic obsolescence). The fair value indicated by that approach is CU10 million.

IE17

Through its application of the cost approach, the entity determines that market participants would not be able to construct a substitute software asset of comparable utility. Some characteristics of the software asset are unique, having been developed using proprietary information, and cannot be readily replicated. The entity determines that the fair value of the software asset is CU15 million, as indicated by the income approach. [Refer:paragraph 63]

Principal (or most advantageous) market

IE18

Example 6 illustrates the use of Level 1 inputs to measure the fair value of an asset that trades in different active markets at different prices. [Refer:paragraphs 15⁠–⁠21 and 76⁠–⁠80]

Example 6—Level 1 principal (or most advantageous) market

IE19

An asset is sold in two different active markets at different prices. An entity enters into transactions in both markets [Refer:paragraph 17] and can access [Refer:paragraph 76] the price in those markets for the asset at the measurement date. In Market A, the price that would be received is CU26, transaction costs [Refer:paragraph 25 and Appendix A] in that market [Refer:paragraph 26] are CU3 and the costs to transport the asset to that market are CU2 (ie the net amount that would be received is CU21). In Market B, the price that would be received is CU25, transaction costs in that market are CU1 and the costs to transport the asset to that market are CU2 (ie the net amount that would be received in Market B is CU22).

IE20

If Market A is the principal market [Refer:paragraph 16(a)] for the asset (ie the market with the greatest volume and level of activity for the asset), the fair value of the asset would be measured using the price that would be received in that market, after taking into account transport costs (CU24).

IE21

If neither market is the principal market for the asset, the fair value of the asset would be measured using the price in the most advantageous market. [Refer:paragraph 16(b)] The most advantageous market is the market that maximises the amount that would be received to sell the asset, after taking into account transaction costs and transport costs (ie the net amount that would be received in the respective markets).

IE22

Because the entity would maximise the net amount that would be received for the asset in Market B (CU22), the fair value of the asset would be measured using the price in that market (CU25), less transport costs (CU2), resulting in a fair value measurement of CU23. Although transaction costs are taken into account when determining which market is the most advantageous market, the price used to measure the fair value of the asset is not adjusted for those costs (although it is adjusted for transport costs).

Transaction prices and fair value at initial recognition

IE23

The IFRS clarifies that in many cases the transaction price, ie the price paid (received) for a particular asset (liability), will represent the fair value of that asset (liability) at initial recognition, but not presumptively. Example 7 illustrates when the price in a transaction involving a derivative instrument might (and might not) equal the fair value of the instrument at initial recognition. [Refer:paragraphs 57⁠–⁠60, 64 and B4]

Example 7—Interest rate swap at initial recognition

IE24

Entity A (a retail counterparty) enters into an interest rate swap in a retail market with Entity B (a dealer) for no initial consideration (ie the transaction price is zero). Entity A can access only the retail market. Entity B can access both the retail market (ie with retail counterparties) and the dealer market (ie with dealer counterparties).

IE25

From the perspective of Entity A, the retail market in which it initially entered into the swap is the principal market [Refer:paragraph 16(a)] for the swap. If Entity A were to transfer its rights and obligations under the swap, it would do so with a dealer counterparty in that retail market. In that case the transaction price (zero) would represent the fair value of the swap to Entity A at initial recognition, ie the price that Entity A would receive to sell or pay to transfer the swap in a transaction with a dealer counterparty in the retail market (ie an exit price). That price would not be adjusted for any incremental (transaction) costs [Refer:paragraph 25] that would be charged by that dealer counterparty.

IE26

From the perspective of Entity B, the dealer market (not the retail market) is the principal market for the swap. If Entity B were to transfer its rights and obligations under the swap, it would do so with a dealer in that market. Because the market in which Entity B initially entered into the swap is different from the principal market for the swap, the transaction price (zero) would not necessarily represent the fair value of the swap to Entity B at initial recognition. If the fair value differs from the transaction price (zero), Entity B applies IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments [Refer:IFRS 9 paragraphs 5.1.1A and B5.1.2A] to determine whether it recognises that difference as a gain or loss at initial recognition.

Restricted assets

IE27

The effect on a fair value measurement arising from a restriction on the sale or use of an asset by an entity will differ depending on whether the restriction would be taken into account by market participants when pricing the asset. Examples 8 and 9 illustrate the effect of restrictions when measuring the fair value of an asset. [Refer:paragraphs 11(b) and 75]

Example 8—Restriction on the sale of an equity instrument

IE28

An entity holds an equity instrument (a financial asset) for which sale is legally or contractually restricted for a specified period. (For example, such a restriction could limit sale to qualifying investors.) The restriction is a characteristic of the instrument and, therefore, would be transferred to market participants. [Refer:paragraph 11(b)] In that case the fair value of the instrument would be measured on the basis of the quoted price for an otherwise identical unrestricted equity instrument of the same issuer that trades in a public market, adjusted to reflect the effect of the restriction. The adjustment would reflect the amount market participants would demand because of the risk relating to the inability to access a public market for the instrument for the specified period. The adjustment will vary depending on all the following:

(a)

the nature and duration of the restriction;

(b)

the extent to which buyers are limited by the restriction (eg there might be a large number of qualifying investors); and

(c)

qualitative and quantitative factors specific to both the instrument and the issuer.

Example 9—Restrictions on the use of an asset

[Refer:paragraphs 11(b) and 75]

IE29

A donor contributes land in an otherwise developed residential area to a not‑for‑profit neighbourhood association. The land is currently used as a playground. The donor specifies that the land must continue to be used by the association as a playground in perpetuity. Upon review of relevant documentation (eg legal and other), the association determines that the fiduciary responsibility to meet the donor’s restriction would not be transferred to market participants if the association sold the asset, ie the donor restriction on the use of the land is specific to the association. Furthermore, the association is not restricted from selling the land. Without the restriction on the use of the land by the association, the land could be used as a site for residential development. In addition, the land is subject to an easement (ie a legal right that enables a utility to run power lines across the land). Following is an analysis of the effect on the fair value measurement of the land arising from the restriction and the easement:

(a)

Donor restriction on use of land. Because in this situation the donor restriction on the use of the land is specific to the association, the restriction would not be transferred to market participants. [Refer:paragraphs 22 and 23] Therefore, the fair value of the land would be the higher of its fair value used as a playground (ie the fair value of the asset would be maximised through its use by market participants in combination with other assets or with other assets and liabilities [Refer:paragraph 31(a)]) and its fair value as a site for residential development (ie the fair value of the asset would be maximised through its use by market participants on a stand‑alone basis [Refer:paragraph 31(b)]), regardless of the restriction on the use of the land by the association.

(b)

Easement for utility lines. Because the easement for utility lines is specific to (ie a characteristic of) the land, it would be transferred to market participants with the land. Therefore, the fair value measurement of the land would take into account the effect of the easement, regardless of whether the highest and best use [Refer:paragraphs 27⁠–⁠30] is as a playground or as a site for residential development.

Measuring liabilities

IE30

A fair value measurement of a liability [Refer:paragraphs 34⁠–⁠36] assumes that the liability, whether it is a financial liability or a non‑financial liability, is transferred to a market participant [Refer:paragraphs 22 and 23] at the measurement date (ie the liability would remain outstanding and the market participant transferee would be required to fulfil the obligation; it would not be settled with the counterparty or otherwise extinguished on the measurement date [Refer:paragraph 34(a)]).

IE31

The fair value of a liability reflects the effect of non‑performance risk [Refer:paragraphs 42⁠–⁠44]. Non‑performance risk relating to a liability includes, but may not be limited to, the entity’s own credit risk. An entity takes into account the effect of its credit risk (credit standing) on the fair value of the liability in all periods in which the liability is measured at fair value because those that hold the entity’s obligations as assets would take into account the effect of the entity’s credit standing when estimating the prices they would be willing to pay.

IE32

For example, assume that Entity X and Entity Y each enter into a contractual obligation to pay cash (CU500) to Entity Z in five years. Entity X has a AA credit rating and can borrow at 6 per cent, and Entity Y has a BBB credit rating and can borrow at 12 per cent. Entity X will receive about CU374 in exchange for its promise (the present value of CU500 in five years at 6 per cent). Entity Y will receive about CU284 in exchange for its promise (the present value of CU500 in five years at 12 per cent). The fair value of the liability to each entity (ie the proceeds) incorporates that entity’s credit standing.

IE33

Examples 10⁠–⁠13 illustrate the measurement of liabilities and the effect of non‑performance risk (including an entity’s own credit risk) on a fair value measurement.

Example 10—Structured note

IE34

On 1 January 20X7 Entity A, an investment bank with a AA credit rating, issues a five‑year fixed rate note to Entity B. The contractual principal amount to be paid by Entity A at maturity is linked to an equity index. No credit enhancements are issued in conjunction with or otherwise related to the contract (ie no collateral is posted and there is no third‑party guarantee [Refer:paragraph 44]). Entity A designated this note as at fair value through profit or loss. The fair value of the note (ie the obligation of Entity A) during 20X7 is measured using an expected present value technique [Refer:paragraphs B23⁠–⁠B30]. Changes in fair value are as follows:

(a)

Fair value at 1 January 20X7. The expected cash flows used in the expected present value technique are discounted at the risk‑free rate using the government bond curve at 1 January 20X7, plus the current market observable AA corporate bond spread to government bonds, if non‑performance risk is not already reflected in the cash flows [Refer:paragraph B14(c)], adjusted (either up or down) for Entity A’s specific credit risk (ie resulting in a credit‑adjusted risk‑free rate). Therefore, the fair value of Entity A’s obligation at initial recognition takes into account non‑performance risk, including that entity’s credit risk, which presumably is reflected in the proceeds.

(b)

Fair value at 31 March 20X7. During March 20X7 the credit spread for AA corporate bonds widens, with no changes to the specific credit risk of Entity A. The expected cash flows used in the expected present value technique are discounted at the risk‑free rate using the government bond curve at 31 March 20X7, plus the current market observable AA corporate bond spread to government bonds, if non‑performance risk is not already reflected in the cash flows [Refer:paragraph B14(c)], adjusted for Entity A’s specific credit risk (ie resulting in a credit‑adjusted risk‑free rate). Entity A’s specific credit risk is unchanged from initial recognition. Therefore, the fair value of Entity A’s obligation changes as a result of changes in credit spreads generally. Changes in credit spreads reflect current market participant assumptions about changes in non‑performance risk generally, changes in liquidity risk and the compensation required for assuming those risks.

(c)

Fair value at 30 June 20X7. As of 30 June 20X7 there have been no changes to the AA corporate bond spreads. However, on the basis of structured note issues corroborated with other qualitative information, Entity A determines that its own specific creditworthiness has strengthened within the AA credit spread. The expected cash flows [Refer:paragraph B14(c)] used in the expected present value technique are discounted at the risk‑free rate using the government bond yield curve at 30 June 20X7, plus the current market observable AA corporate bond spread to government bonds (unchanged from 31 March 20X7), if non‑performance risk is not already reflected in the cash flows, adjusted for Entity A’s specific credit risk (ie resulting in a credit‑adjusted risk‑free rate). Therefore, the fair value of the obligation of Entity A changes as a result of the change in its own specific credit risk within the AA corporate bond spread.

Example 11—Decommissioning liability

IE35

On 1 January 20X1 Entity A assumes a decommissioning liability in a business combination [Refer:IFRS 3]. The entity is legally required to dismantle and remove an offshore oil platform at the end of its useful life, which is estimated to be 10 years.

IE36

On the basis of paragraphs B23⁠–⁠B30 of the IFRS, Entity A uses the expected present value technique to measure the fair value of the decommissioning liability.

IE37

If Entity A was contractually allowed to transfer its decommissioning liability to a market participant [Refer:paragraphs 22 and 23], Entity A concludes that a market participant would use all the following inputs, probability‑weighted as appropriate, when estimating the price it would expect to receive:

(a)

labour costs;

(b)

allocation of overhead costs;

(c)

the compensation that a market participant would require for undertaking the activity and for assuming the risk associated with the obligation to dismantle and remove the asset. Such compensation includes both of the following:

(i)

profit on labour and overhead costs; and

(ii)

the risk that the actual cash outflows might differ from those expected, excluding inflation;

(d)

effect of inflation on estimated costs and profits;

(e)

time value of money, represented by the risk‑free rate; and

(f)

non‑performance risk relating to the risk that Entity A will not fulfil the obligation, including Entity A’s own credit risk.

IE38

The significant assumptions used by Entity A to measure fair value are as follows:

(a)

Labour costs are developed on the basis of current marketplace wages, adjusted for expectations of future wage increases, required to hire contractors to dismantle and remove offshore oil platforms. Entity A assigns probability assessments to a range of cash flow estimates as follows:

Cash flow estimate (CU) Probability assessment   Expected cash flows (CU)
100,000 25%   25,000
125,000 50%   62,500
175,000 25%   43,750
      CU131,250

The probability assessments are developed on the basis of Entity A’s experience with fulfilling obligations of this type and its knowledge of the market.

(b)

Entity A estimates allocated overhead and equipment operating costs using the rate it applies to labour costs (80 per cent of expected labour costs). This is consistent with the cost structure of market participants.

(c)

Entity A estimates the compensation that a market participant would require for undertaking the activity and for assuming the risk associated with the obligation [Refer:paragraphs B31⁠–⁠B33] to dismantle and remove the asset as follows:

(i)

A third‑party contractor typically adds a mark‑up on labour and allocated internal costs to provide a profit margin on the job. The profit margin used (20 per cent) represents Entity A’s understanding of the operating profit that contractors in the industry generally earn to dismantle and remove offshore oil platforms. Entity A concludes that this rate is consistent with the rate that a market participant would require as compensation for undertaking the activity.

(ii)

A contractor would typically require compensation for the risk that the actual cash outflows might differ from those expected because of the uncertainty inherent in locking in today’s price for a project that will not occur for 10 years. Entity A estimates the amount of that premium to be 5 per cent of the expected cash flows, including the effect of inflation.

(d)

Entity A assumes a rate of inflation of 4 per cent over the 10‑year period on the basis of available market data.

(e)

The risk‑free rate of interest for a 10‑year maturity on 1 January 20X1 is 5 per cent. Entity A adjusts that rate by 3.5 per cent to reflect its risk of non‑performance (ie the risk that it will not fulfil the obligation), including its credit risk [Refer:paragraph 43]. Therefore, the discount rate used to compute the present value of the cash flows is 8.5 per cent.

IE39

Entity A concludes that its assumptions would be used by market participants [Refer:paragraphs 69 and 87]. In addition, Entity A does not adjust its fair value measurement for the existence of a restriction preventing it from transferring the liability [Refer:paragraphs 45 and 46]. As illustrated in the following table, Entity A measures the fair value of its decommissioning liability as CU194,879.

  Expected cash flows (CU)1 January 20X1
Expected labour costs 131,250
Allocated overhead and equipment costs (0.80 × CU131,250) 105,000
Contractor’s profit mark-up [0.20 × (CU131,250 + CU105,000)] 47,250
Expected cash flows before inflation adjustment 283,500
Inflation factor (4% for 10 years) 1.4802
Expected cash flows adjusted for inflation 419,637
Market risk premium (0.05 × CU419,637) 20,982
Expected cash flows adjusted for market risk 440,619
Expected present value using discount rate of 8.5% for 10 years 194,879

Example 12—Debt obligation: quoted price

IE40

On 1 January 20X1 Entity B issues at par a CU2 million BBB‑rated exchange‑traded five‑year fixed rate debt instrument with an annual 10 per cent coupon. Entity B designated this financial liability as at fair value through profit or loss.

IE41

On 31 December 20X1 the instrument is trading as an asset in an active market [Refer:Appendix A (definition of an active market)] at CU929 per CU1,000 of par value after payment of accrued interest. Entity B uses the quoted price of the asset in an active market as its initial input into the fair value measurement of its liability (CU929 × [CU2 million ÷ CU1,000] = CU1,858,000).

IE42

In determining whether the quoted price of the asset in an active market represents the fair value of the liability, Entity B evaluates whether the quoted price of the asset includes the effect of factors not applicable to the fair value measurement of a liability, for example, whether the quoted price of the asset includes the effect of a third‑party credit enhancement if that credit enhancement [Refer:paragraph 39(b)] would be separately accounted for from the perspective of the issuer. Entity B determines that no adjustments are required to the quoted price of the asset. Accordingly, Entity B concludes that the fair value of its debt instrument at 31 December 20X1 is CU1,858,000. Entity B categorises and discloses the fair value measurement of its debt instrument within Level 1 [Refer:paragraphs 76⁠–⁠80] of the fair value hierarchy.[Refer:paragraphs 72⁠–⁠90]

Example 13—Debt obligation: present value technique

IE43

On 1 January 20X1 Entity C issues at par in a private placement a CU2 million BBB‑rated five‑year fixed rate debt instrument with an annual 10 per cent coupon. Entity C designated this financial liability as at fair value through profit or loss.

IE44

At 31 December 20X1 Entity C still carries a BBB credit rating. Market conditions, including available interest rates, credit spreads for a BBB‑quality credit rating and liquidity, remain unchanged from the date the debt instrument was issued. However, Entity C’s credit spread has deteriorated by 50 basis points because of a change in its risk of non‑performance [Refer:paragraphs 42⁠–⁠43]. After taking into account all market conditions, Entity C concludes that if it was to issue the instrument at the measurement date, the instrument would bear a rate of interest of 10.5 per cent or Entity C would receive less than par in proceeds from the issue of the instrument.

IE45

For the purpose of this example, the fair value of Entity C’s liability is calculated using a present value technique [Refer:paragraphs B12⁠–⁠B30]. Entity C concludes that a market participant would use all the following inputs (consistently with paragraphs B12⁠–⁠B30 of the IFRS) when estimating the price the market participant would expect to receive to assume Entity C’s obligation:

(a)

the terms of the debt instrument, including all the following:

(i)

coupon of 10 per cent;

(ii)

principal amount of CU2 million; and

(iii)

term of four years.

(b)

the market rate of interest of 10.5 per cent (which includes a change of 50 basis points in the risk of non‑performance from the date of issue).

IE46

On the basis of its present value technique [Refer:paragraphs B12⁠–⁠B30], Entity C concludes that the fair value of its liability at 31 December 20X1 is CU1,968,641.

IE47

Entity C does not include any additional input into its present value technique for risk or profit that a market participant might require for compensation for assuming the liability [Refer:paragraph 41(a)]. Because Entity C’s obligation is a financial liability, Entity C concludes that the interest rate already captures the risk or profit that a market participant would require as compensation for assuming the liability [Refer:paragraph B32]. Furthermore, Entity C does not adjust its present value technique for the existence of a restriction preventing it from transferring the liability. [Refer:paragraphs 45 and 46]

Measuring fair value when the volume or level of activity for an asset or a liability has significantly decreased

IE48

Example 14 [Refer:paragraphs B37⁠–⁠B47] illustrates the use of judgement when measuring the fair value of a financial asset when there has been a significant decrease in the volume or level of activity for the asset when compared with normal market activity for the asset (or similar assets).

Example 14—Estimating a market rate of return when the volume or level of activity for an asset has significantly decreased

IE49

Entity A invests in a junior AAA‑rated tranche of a residential mortgage‑backed security on 1 January 20X8 (the issue date of the security). The junior tranche is the third most senior of a total of seven tranches. The underlying collateral for the residential mortgage‑backed security is unguaranteed non‑conforming residential mortgage loans that were issued in the second half of 20X6.

IE50

At 31 March 20X9 (the measurement date) the junior tranche is now A‑rated. This tranche of the residential mortgage‑backed security was previously traded through a brokered market. However, trading volume in that market was infrequent, with only a few transactions taking place per month from 1 January 20X8 to 30 June 20X8 and little, if any, trading activity during the nine months before 31 March 20X9.

IE51

Entity A takes into account the factors in paragraph B37 of the IFRS to determine whether there has been a significant decrease in the volume or level of activity for the junior tranche of the residential mortgage‑backed security in which it has invested. After evaluating the significance and relevance of the factors, Entity A concludes that the volume and level of activity of the junior tranche of the residential mortgage‑backed security have significantly decreased [Refer:paragraph B37]. Entity A supported its judgement primarily on the basis that there was little, if any, trading activity for an extended period before the measurement date.

IE52

Because there is little, if any, trading activity to support a valuation technique using a market approach, Entity A decides to use an income approach using the discount rate adjustment technique described in paragraphs B18⁠–⁠B22 of the IFRS to measure the fair value of the residential mortgage‑backed security at the measurement date. Entity A uses the contractual cash flows from the residential mortgage‑backed security (see also paragraphs 67 and 68 of the IFRS).

IE53

Entity A then estimates a discount rate (ie a market rate of return) to discount those contractual cash flows [Refer:paragraph B13(c) and (d)]. The market rate of return is estimated using both of the following:

(a)

the risk‑free rate of interest.

(b)

estimated adjustments [Refer:paragraphs 87 and 88] for differences between the available market data and the junior tranche of the residential mortgage‑backed security in which Entity A has invested. Those adjustments reflect available market data about expected non‑performance and other risks (eg default risk, collateral value risk and liquidity risk) that market participants would take into account when pricing the asset in an orderly transaction at the measurement date under current market conditions.

IE54

Entity A took into account the following information when estimating the adjustments in paragraph IE53(b):

(a)

the credit spread for the junior tranche of the residential mortgage‑backed security at the issue date as implied by the original transaction price.

(b)

the change in the credit spread implied by any observed transactions from the issue date to the measurement date for comparable residential mortgage‑backed securities or on the basis of relevant indices.

(c)

the characteristics of the junior tranche of the residential mortgage‑backed security compared with comparable residential mortgage‑backed securities or indices, including all the following:

(i)

the quality of the underlying assets, ie information about the performance of the underlying mortgage loans such as delinquency and foreclosure rates, loss experience and prepayment rates;

(ii)

the seniority or subordination of the residential mortgage‑backed security tranche held; and

(iii)

other relevant factors.

(d)

relevant reports issued by analysts and rating agencies.

(e)

quoted prices from third parties such as brokers or pricing services.

IE55

Entity A estimates that one indication of the market rate of return that market participants would use when pricing the junior tranche of the residential mortgage‑backed security is 12 per cent (1,200 basis points). This market rate of return was estimated as follows:

(a)

Begin with 300 basis points for the relevant risk‑free rate of interest at 31 March 20X9.

(b)

Add 250 basis points for the credit spread over the risk‑free rate when the junior tranche was issued in January 20X8.

(c)

Add 700 basis points for the estimated change in the credit spread over the risk‑free rate of the junior tranche between 1 January 20X8 and 31 March 20X9. This estimate was developed on the basis of the change in the most comparable index available for that time period.

(d)

Subtract 50 basis points (net) to adjust for differences between the index used to estimate the change in credit spreads and the junior tranche. The referenced index consists of subprime mortgage loans, whereas Entity A’s residential mortgage‑backed security consists of similar mortgage loans with a more favourable credit profile (making it more attractive to market participants). However, the index does not reflect an appropriate liquidity risk premium for the junior tranche under current market conditions. Thus, the 50 basis point adjustment is the net of two adjustments:

(i)

the first adjustment is a 350 basis point subtraction, which was estimated by comparing the implied yield from the most recent transactions for the residential mortgage‑backed security in June 20X8 with the implied yield in the index price on those same dates. There was no information available that indicated that the relationship between Entity A’s security and the index has changed.

(ii)

the second adjustment is a 300 basis point addition, which is Entity A’s best estimate of the additional liquidity risk inherent in its security (a cash position) when compared with the index (a synthetic position). This estimate was derived after taking into account liquidity risk premiums implied in recent cash transactions for a range of similar securities.

IE56

As an additional indication of the market rate of return, Entity A takes into account two recent indicative quotes (ie non‑binding quotes) provided by reputable brokers for the junior tranche of the residential mortgage‑backed security that imply yields of 15⁠–⁠17 per cent. Entity A is unable to evaluate the valuation technique(s) [Refer:paragraphs 61⁠–⁠66] or inputs [Refer:paragraphs 67⁠–⁠71] used to develop the quotes [Refer:paragraphs B45⁠–⁠B47]. However, Entity A is able to confirm that the quotes do not reflect the results of transactions.

IE57

Because Entity A has multiple indications of the market rate of return that market participants would take into account when measuring fair value, it evaluates and weights the respective indications of the rate of return, considering the reasonableness of the range indicated by the results.

IE58

Entity A concludes that 13 per cent is the point within the range of indications that is most representative of fair value under current market conditions. Entity A places more weight on the 12 per cent indication (ie its own estimate of the market rate of return) for the following reasons:

(a)

Entity A concluded that its own estimate appropriately incorporated the risks (eg default risk, collateral value risk and liquidity risk) that market participants would use when pricing the asset in an orderly transaction under current market conditions. [Refer:paragraphs 24 and 88]

(b)

The broker quotes were non‑binding and did not reflect the results of transactions, and Entity A was unable to evaluate the valuation technique(s) or inputs used to develop the quotes [Refer:paragraphs B46 and B47].

Fair value disclosures

IE59

Examples 15⁠–⁠19 illustrate the disclosures required by paragraphs 92, 93(a), (b) and (d)⁠–⁠(h)(i) and 99 of the IFRS.

Example 15—Assets measured at fair value

IE60

For assets and liabilities measured at fair value at the end of the reporting period, the IFRS requires quantitative disclosures about the fair value measurements for each class of assets and liabilities [Refer:paragraph 94]. An entity might disclose the following for assets to comply with paragraph 93(a) and (b) of the IFRS:

(CU in millions)       Fair value measurements at the end of the reporting period using [Refer:paragraph 72]      
Description   31/12/X9   Quoted prices in active markets for identical assets (Level 1)   Significant other observable inputs (Level 2)   Significant unobservable inputs (Level 3)   Total gains (losses)  

Recurring fair value measurements

                   
Trading equity securities:(a)                    
  Real estate industry 93   70   23          
  Oil and gas industry 45   45              
  Other 15   15              
    Total trading equity securities 153   130   23          
 
Other equity securities:(a)                    
  Financial services industry 150   150              
  Healthcare industry 163   110       53      
  Energy industry 32           32      
  Private equity fund investments(b) 25           25      
  Other 15   15              
    Total other equity securities 385   275       110      
 
Debt securities:                    
  Residential mortgage-backed securities 149       24   125      
  Commercial mortgage-backed securities 50           50      
  Collateralised debt obligations 35           35      
  Risk-free government securities 85   85              
  Corporate bonds 93   9   84          
    Total debt securities 412   94   108   210      
 
Hedge fund investments:                      
  Equity long/short 55       55          
  Global opportunities 35       35          
  High-yield debt securities 90           90      
    Total hedge fund investments 180       90   90      
 
Derivatives:                    
  Interest rate contracts 57       57          
  Foreign exchange contracts 43       43          
  Credit contracts 38           38      
  Commodity futures contracts  78   78              
  Commodity forward contracts 20       20          
    Total derivatives 236   78   120   38      
Investment properties:
  Commercial—Asia 31           31      
  Commercial—Europe 27           27      
    Total investment properties 58           58      
  Total recurring fair value measurements 1,424   577   341   506      
 

Non-recurring fair value measurements

                   
Assets held for sale(c) 26       26       15  
  Total non-recurring fair value measurements 26       26       15  
                           

(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)

(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, [Refer:IFRS 5 paragraph 15] 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.

Debt securities [member] Example member IFRS 13.94 Example 823000
Derivatives [member] Example member IFRS 13.94 Example
IFRS 7.6 Example
IFRS 7.IG40B Example
822390, 823000
Hedge fund investments [member] Example member IFRS 13.94 Example 823000
Investment property [member] Example member IAS 1.112 c Common practice
IFRS 13.94 Example
823000, 825100, 990000
Non-current assets held for sale [member] Example member IFRS 13.94 Example
IFRS 5.38 Common practice
823000, 904000
Other equity securities [member] Example member IFRS 13.94 Example 823000
Trading equity securities [member] Example member IFRS 13.94 Example 823000

Example 16—Reconciliation of fair value measurements categorised within Level 3 of the fair value hierarchy

IE61

For recurring fair value measurements categorised within Level 3 of the fair value hierarchy [Refer:paragraphs 7273 and 86], the IFRS requires a reconciliation from the opening balances to the closing balances for each class of assets and liabilities. An entity might disclose the following for assets to comply with paragraph 93(e) and (f) of the IFRS:

  Fair value measurements using significant unobservable inputs (Level 3)
(CU in millions) Other equity securities    Debt securities   Hedge fund investments   Derivatives   Investment properties      
      Healthcare industry    Energy industry    Private equity fund   Residential mortgage-backed securities   Commercial mortgage-backed securities   Collateralised debt obligations   High-yield debt securities   Credit contracts   Asia   Europe   Total  
Opening balance 49   28   20   105   39   25   145   30   28   26   495  
  Transfers into Level 3             60 (a),(b)                         60  
  Transfers out of Level 3             (5) (b), (c)                         (5)  
  Total gains or losses for the period                                            
    Included in profit or loss         5   (23)   (5)   (7)   7   5   3   1   (14)  
    Included in other comprehensive income 3   1                                   4  
  Purchases, issues, sales and settlements                                            
    Purchases 1   3           16   17       18           55  
    Issues                                            
    Sales             (12)           (62)               (74)  
    Settlements                             (15)           (15)  
Closing balance 53   32   25   125   50   35   90   38   31   27   506  
Change in unrealised gains or losses for the period included in profit or loss for assets held at the end of the reporting period [Refer:Basis forConclusions paragraph BC198]         5   (3)   (5)   (7)   (5)   2   3   1   (9)  
 

(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)

[Refer:paragraph 99]

 
(a)

Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from a decrease in market activity for the securities.

(b)

The entity's policy is to recognise transfers into and transfers out of Level 3 as of the date of the event or change in circumstances that caused the transfer. [Refer:paragraph 95]

(c)

Transferred from Level 3 to Level 2 because observable market data became available for the securities. [Refer:paragraph 93(e)(iv)]

IE62

Gains and losses included in profit or loss for the period (above) are presented in financial income and in non‑financial income as follows:

  Financial income   Non-financial income  
(CU in millions)

Total gains or losses for the period included in profit or loss

  (18)     4  

Change in unrealised gains or losses for the [Refer:Basis for Conclusions paragraph BC198] period included in profit or loss for assets held at the end of the reporting period

  (13)     4  
 

(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)

Example 17—Valuation techniques and inputs

IE63

For fair value measurements categorised within Level 2 and Level 3 of the fair value hierarchy, the IFRS requires an entity to disclose a description of the valuation technique(s) [Refer:paragraphs 61⁠–⁠66] and the inputs [Refer:paragraphs 67⁠–⁠71] used in the fair value measurement [Refer:paragraph 93(d)]. For fair value measurements categorised within Level 3 of the fair value hierarchy [Refer:paragraphs 7273 and 86], information about the significant unobservable inputs used must be quantitative [Refer:paragraph 93(d)]. An entity might disclose the following for assets to comply with the requirement to disclose the significant unobservable inputs used in the fair value measurement in accordance with paragraph 93(d) of the IFRS:

Quantitative information about fair value measurements using significant unobservable inputs (Level 3)
  (CU in millions)                
  Description   Fair value at 31/12/X9   Valuation technique(s)   Unobservable input   Range (weighted average)
  Other equity securities:                
    Healthcare industry   53   Discounted cash flow   weighted average cost of capital   7%⁠–⁠16% (12.1%)
                long-term revenue growth rate   2%⁠–⁠5% (4.2%)
                long-term pre-tax operating margin   3%⁠–⁠20% (10.3%)
                discount for lack of marketability(a)   5%⁠–⁠20% (17%)
                control premium(a)   10%⁠–⁠30% (20%)
            Market comparable companies   EBITDA multiple(b)   10⁠–⁠13 (11.3)
                revenue multiple(b)   1.5⁠–⁠2.0 (1.7)
                discount for lack of marketability(a)   5%⁠–⁠20% (17%)
                control premium(a)   10%⁠–⁠30% (20%)
    Energy industry   32   Discounted cash flow   weighted average cost of capital   8%⁠–⁠12% (11.1%)
                long-term revenue growth rate   3%⁠–⁠5.5% (4.2%)
                long-term pre-tax operating margin   7.5%⁠–⁠13% (9.2%)
                discount for lack of marketability(a)   5%⁠–⁠20% (10%)
                control premium(a)   10%⁠–⁠20% (12%)
            Market comparable companies   EBITDA multiple(b)   6.5⁠–⁠12 (9.5)
                revenue multiple(b)   1.0⁠–⁠3.0 (2.0)
                discount for lack of marketability(a)   5%⁠–⁠20% (10%)
                control premium(a)   10%⁠–⁠20% (12%)
    Private equity fund investments   25   Net asset value(c)   n/a   n/a
  Debt securities:                
    Residential mortgage-backed securities   125   Discounted cash flow    constant prepayment rate    3.5%⁠–⁠5.5% (4.5%)
              probability of default    5%⁠–⁠50% (10%)
              loss severity   40%⁠–⁠100% (60%)
    Commercial mortgage-backed securities   50   Discounted cash flow   constant prepayment rate   3%⁠–⁠5% (4.1%)
              probability of default   2%⁠–⁠25% (5%)
              loss severity   10%⁠–⁠50% (20%)
    Collateralised debt obligations   35   Consensus pricing   offered quotes   20⁠–⁠45
              comparability adjustments (%)   ‑10% – +15% (+5%)
  Hedge fund investments:                  
    High-yield debt securities   90   Net asset value(c)   n/a   n/a
  Derivatives:                
    Credit contracts   38   Option model   annualised volatility of credit(d)   10%⁠–⁠20%
                counterparty credit risk(e)   0.5%⁠–⁠3.5%
                own credit risk(e)   0.3%⁠–⁠2.0%
  Investment properties:                
    Commercial—Asia   31   Discounted cash flow   long-term net operating income margin   18%⁠–⁠32% (20%)
                cap rate   0.08⁠–⁠0.12 (0.10)
            Market comparable approach   price per square metre (USD)   $3,000⁠–⁠$7,000 ($4,500)
    Commercial—Europe   27   Discounted cash flow   long-term net operating income margin   15%⁠–⁠25% (18%)
                cap rate   0.06⁠–⁠0.10 (0.08)
            Market comparable approach   price per square metre (EUR)   €4,000⁠–⁠€12,000 (€8,500)
 
 

(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)

(a)

Represents amounts used when the entity has determined that market participants would take into account these premiums and discounts when pricing the investments. [Refer:paragraph 69]

(b)

Represents amounts used when the entity has determined that market participants would use such multiples when pricing the investments. [Refer:paragraphs 82(a), 82(b)89 and B35(h)]

(c)

The entity has determined that the reported net asset value represents fair value at the end of the reporting period.

(d)

Represents the range of the volatility curves used in the valuation analysis that the entity has determined market participants would use when the pricing contracts. [Refer:paragraphs 82(c)(ii) and B35(d)]

(e)

Represents the range of the credit default swap spread curves used in the valuation analysis that the entity has determined market participants would use when pricing the contracts. [Refer:paragraphs 82(c)(i)B35(a) and B36(a)]

Bottom of range [member] Example member IFRS 13.B6 Example
IFRS 14.33 b Disclosure
Effective 2023-01-01 IFRS 17.120 Disclosure
IFRS 2.45 d Disclosure
IFRS 7.7 Common practice
822390, 823000, 824500, 834120, 836600
Capitalisation rate, measurement input [member] Example member IFRS 13.93 d Example 823000
Consensus pricing [member] Example member IFRS 13.B5 Example 823000
Constant prepayment rate, measurement input [member] Example member IFRS 13.93 d Example 823000
Discounted cash flow [member] Example member IFRS 13.B11 a Example 823000
Market comparable companies [member] Example member IFRS 13.B5 Example 823000
Market comparable prices [member] Example member IFRS 13.B5 Example 823000
Net asset value [member] Example member IFRS 13.93 d Example 823000
Option pricing model [member] Example member IFRS 13.B11 b Example 823000
Probability of default, measurement input [member] Example member IFRS 13.93 d Example 823000
Range [axis] Example axis IFRS 13.B6 Example
IFRS 14.33 b Disclosure
Effective 2023-01-01 IFRS 17.120 Disclosure
IFRS 2.45 d Disclosure
IFRS 7.7 Common practice
822390, 823000, 824500, 834120, 836600, 990000
Ranges [member] Example member IFRS 13.B6 Example
IFRS 14.33 b Disclosure
Effective 2023-01-01 IFRS 17.120 Disclosure
IFRS 2.45 d Disclosure
IFRS 7.7 Common practice
822390, 823000, 824500, 834120, 836600, 990000
Revenue multiple, measurement input [member] Example member IFRS 13.93 d Example 823000
Top of range [member] Example member IFRS 13.B6 Example
IFRS 14.33 b Disclosure
Effective 2023-01-01 IFRS 17.120 Disclosure
IFRS 2.45 d Disclosure
IFRS 7.7 Common practice
822390, 823000, 824500, 834120, 836600
Weighted average [member] Example member IFRS 13.B6 Example
IFRS 14.33 b Disclosure
Effective 2023-01-01 IFRS 17.120 Disclosure
IFRS 7.7 Common practice
822390, 823000, 824500, 836600
Weighted average cost of capital, measurement input [member] Example member IFRS 13.93 d Example 823000

IE64

In addition, an entity should provide additional information that will help users of its financial statements to evaluate the quantitative information disclosed [Refer:paragraphs 91 and 92]. An entity might disclose some or all the following to comply with paragraph 92 of the IFRS: 

(a)

the nature of the item being measured at fair value, including the characteristics [Refer:paragraph 11] of the item being measured that are taken into account in the determination of relevant inputs. For example, for residential mortgage‑backed securities, an entity might disclose the following:

(i)

the types of underlying loans (eg prime loans or sub‑prime loans)

(ii)

collateral

(iii)

guarantees or other credit enhancements

(iv)

seniority level of the tranches of securities

(v)

the year of issue

(vi)

the weighted‑average coupon rate of the underlying loans and the securities

(vii)

the weighted‑average maturity of the underlying loans and the securities

(viii)

the geographical concentration of the underlying loans

(ix)

information about the credit ratings of the securities.

Description of nature of class of assets measured at fair value Example text IFRS 13.92 Example 823000
Description of nature of class of entity's own equity instruments measured at fair value Example text IFRS 13.92 Example 823000
Description of nature of class of liabilities measured at fair value Example text IFRS 13.92 Example 823000

(b)

how third‑party information such as broker quotes, pricing services, net asset values and relevant market data was taken into account when measuring fair value. [Refer:paragraphs B45⁠–⁠B47]

Description of how third-party information was taken into account when measuring fair value, assets Example text IFRS 13.92 Example 823000
Description of how third-party information was taken into account when measuring fair value, entity's own equity instruments Example text IFRS 13.92 Example 823000
Description of how third-party information was taken into account when measuring fair value, liabilities Example text IFRS 13.92 Example 823000

Example 18—Valuation processes

IE65

For fair value measurements categorised within Level 3 [Refer:paragraphs 73 and 86] of the fair value hierarchy, the IFRS requires an entity to disclose a description of the valuation processes used by the entity [Refer:paragraph 93(g)]. An entity might disclose the following to comply with paragraph 93(g) of the IFRS:

(a)

for the group within the entity that decides the entity’s valuation policies and procedures:

(i)

its description;

Description of group within entity that decides entity's valuation policies and procedures, assets Example text IFRS 13.93 g Example 823000
Description of group within entity that decides entity's valuation policies and procedures, entity's own equity instruments Example text IFRS 13.93 g Example 823000
Description of group within entity that decides entity's valuation policies and procedures, liabilities Example text IFRS 13.93 g Example 823000

(ii)

to whom that group reports; and

Description of to whom group within entity that decides entity's valuation policies and procedures reports, assets Example text IFRS 13.93 g Example 823000
Description of to whom group within entity that decides entity's valuation policies and procedures reports, entity's own equity instruments Example text IFRS 13.93 g Example 823000
Description of to whom group within entity that decides entity's valuation policies and procedures reports, liabilities Example text IFRS 13.93 g Example 823000

(iii)

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);

Description of internal reporting procedures for discussing and assessing fair value measurements, assets Example text IFRS 13.93 g Example 823000
Description of internal reporting procedures for discussing and assessing fair value measurements, entity's own equity instruments Example text IFRS 13.93 g Example 823000
Description of internal reporting procedures for discussing and assessing fair value measurements, liabilities Example text IFRS 13.93 g Example 823000

(b)

the frequency and methods for calibration [Refer:paragraph 64], back testing and other testing procedures of pricing models;

Description of frequency and methods for testing procedures of pricing models, assets Example text IFRS 13.93 g Example 823000
Description of frequency and methods for testing procedures of pricing models, entity's own equity instruments Example text IFRS 13.93 g Example 823000
Description of frequency and methods for testing procedures of pricing models, liabilities Example text IFRS 13.93 g Example 823000

(c)

the process for analysing changes in fair value measurements from period to period;

Description of process for analysing changes in fair value measurements, assets Example text IFRS 13.93 g Example 823000
Description of process for analysing changes in fair value measurements, entity's own equity instruments Example text IFRS 13.93 g Example 823000
Description of process for analysing changes in fair value measurements, liabilities Example text IFRS 13.93 g Example 823000

(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; [Refer:paragraph B45] and

Description of how entity determined that third-party information used in fair value measurement was developed in accordance with IFRS 13, assets Example text IFRS 13.93 g Example 823000
Description of how entity determined that third-party information used in fair value measurement was developed in accordance with IFRS 13, entity's own equity instruments Example text IFRS 13.93 g Example 823000
Description of how entity determined that third-party information used in fair value measurement was developed in accordance with IFRS 13, liabilities Example text IFRS 13.93 g Example 823000

(e)

the methods used to develop and substantiate the unobservable inputs used in a fair value measurement.

Description of methods used to develop and substantiate unobservable inputs used in fair value measurement, assets Example text IFRS 13.93 g Example 823000
Description of methods used to develop and substantiate unobservable inputs used in fair value measurement, entity's own equity instruments Example text IFRS 13.93 g Example 823000
Description of methods used to develop and substantiate unobservable inputs used in fair value measurement, liabilities Example text IFRS 13.93 g Example 823000

Example 19—Information about sensitivity to changes in significant unobservable inputs

IE66

For recurring fair value measurements categorised within Level 3 of the fair value hierarchy [Refer:paragraphs 72, 73 and 86], the IFRS requires an entity to provide a narrative description of the sensitivity of the fair value measurement to changes in significant unobservable inputs and a description of any interrelationships between those unobservable inputs. An entity might disclose the following about its residential mortgage‑backed securities to comply with paragraph 93(h)(i) of the IFRS:

The significant unobservable inputs used in the fair value measurement of the entity’s 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.

Appendices

AppendixAmendments to guidance on other IFRSs

The following amendments to guidance on other IFRSs are necessary in order to ensure consistency with IFRS 13 Fair Value Measurement and the related amendments to other IFRSs. Amended paragraphs are shown with new text underlined and deleted text struck through.

* * * * *

The amendments contained in this appendix when IFRS 13 was issued in 2011 have been incorporated into the guidance on the relevant IFRSs published in this volume.

Footnotes

1

In these examples, monetary amounts are denominated in ‘currency units (CU)’. (back)