International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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This includes impairment testing of investments in associates accounted for in
accordance with IAS 28 – Investments in Associates and Joint Ventures –
where that standard requires the test to be performed in accordance with
IAS 36 (see Chapter 20); and
• biological assets (including produce growing on a bearer plant), agricultural
produce measured at fair value less costs to sell in accordance with IAS 41 –
Agriculture (see Chapter 38).
In each of these situations, the fair value component is measured in accordance with
IFRS 13. Costs to sell or costs of disposal are determined in accordance with the
applicable standard, for example, IFRS 5.
2.1.3
Short-term receivables and payables
Prior to the issuance of IFRS 13, paragraph B5.4.12 of IFRS 9 allowed entities to measure
short-term receivables and payables with no stated interest rate at invoice amounts
without discounting, when the effect of not discounting was immaterial. [IFRS 9 (2012).B5.2.12].
That paragraph was deleted as a consequence of the IASB issuing IFRS 13.
In the absence of that paragraph, some questioned whether discounting would be
required for such short-term receivables and payables. The IASB amended IFRS 13, as
part of its 2010-2012 cycle of Improvements to IFRSs, to clarify that, when making those
amendments to IFRS 9, it did not intend to remove the ability to measure such short-
term receivables and payables at their invoice amount. The Board also noted that, when
the effects of applying them are immaterial, paragraph 8 of IAS 8 – Accounting Policies,
Changes in Accounting Estimates and Errors – permits entities not to apply accounting
policies set out in IFRSs. [IFRS 13.BC138A, IAS 8.8].
2.2 Scope
exclusions
2.2.1 Share-based
payments
IFRS 2 requires certain share-based payments to be measured at grant date fair value
(see Chapter 30). However, the objective of an IFRS 2 fair value measurement is not
entirely consistent with IFRS 13. Rather than trying to distinguish between these two
measures, the IASB decided to exclude share-based payment transactions that are
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accounted for in accordance with IFRS 2 from the scope of IFRS 13. The grant date fair
value of such share-based payments is, therefore, measured and disclosed in
accordance with IFRS 2, not IFRS 13. [IFRS 13.BC21].
2.2.2 Lease
transactions
As noted at 2 above, the standard does not apply to any leasing transactions
accounted for in accordance with IFRS 16 (or within the scope of IAS 17). The fair
value measurement and disclosures requirements in IFRS 16 (or IAS 17) apply
instead (see Chapter 24 for further discussion on IFRS 16). This scope exception
does not extend to lease assets acquired or liabilities assumed in a business
combination in accordance with IFRS 3. IFRS 13 would apply to that measurement
of fair value. In addition, after adoption of IFRS 16, an entity may need to apply
IFRS 13 to sale and leaseback transactions.
At the time of issuing IFRS 13, the IASB noted that applying IFRS 13’s requirements
might have significantly changed the classification of leases and the timing of
recognising gains or losses for sale and leaseback transactions. In addition, at the time
that the IASB was undertaking its leases project (which resulted in the issuance of
IFRS 16, which replaced IAS 17 (see Chapter 23)), the IASB were concerned that such a
requirement may have required entities to make potentially burdensome significant
changes to their accounting systems for IFRS 13 and the new leases standard.
[IFRS 13.BC22].
While it is clear that leasing transactions that were within the scope of IAS 17 were
excluded from IFRS 13, finance lease receivables and finance lease liabilities under
IAS 17 were financial instruments, per paragraph AG9 of IAS 32 – Financial
Instruments: Presentation, and are, therefore, within the scope of IFRS 7. [IFRS 7.3,
IAS 32.AG9]. As discussed at 2.1.1 above, paragraph 25 of IFRS 7 requires an entity to
disclose, for each class of financial asset and financial liability, a comparison of fair
value to carrying amount (except where the carrying amount is a reasonable
approximation of fair value). [IFRS 7.25, 29(a)]. Since IFRS 7 is not excluded from the
scope of IFRS 13, the fair value of finance lease receivables and finance lease
liabilities under IAS 17 still needed to be measured in accordance with IFRS 13, in
order to provide these IFRS 7 disclosures.
However, when it became effective, IFRS 16 consequentially amended IFRS 7, such that
the fair value of lease liabilities no longer needs to be disclosed. However, the same
disclosure for lease receivables may be required. [IFRS 7.25, 29(d)].
2.2.3
Measurements similar to fair value
Some IFRSs permit or require measurements that are similar to fair value, but are not
fair value. These measures are excluded from the scope of IFRS 13. Such measures may
be derived using techniques that are similar to those permitted in IFRS 13. IAS 36, for
example, requires value in use to be determined using discounted cash flows (see
Chapter 20). An entity may also consider the selling price of an asset, for example, in
determining net realisable value for inventories in accordance with IAS 2 (see
Chapter 22). Despite these similarities, the objective is not to measure fair value.
Therefore, IFRS 13 does not apply to these measurements.
Fair value measurement 947
2.2.4
Exemptions from the disclosure requirements of IFRS 13
As noted above, IFRS 13’s disclosure requirements do not apply to plan assets measured
at fair value in accordance with IAS 19, retirement benefit plan investments measured
at fair value in accordance with IAS 26 and assets for which recoverable amount is fair
value less costs of disposal in accordance with IAS 36.
In addition, the disclosure requirements in IFRS 13 do not apply to any fair value
measurements at initial recognition. That is, the disclosure requirements of IFRS 13 apply
to fair value measurements after initial recognition (this is discussed further at 20 below).
The fair value measurement requirements of IFRS 13 still apply to each of these items, even
though the disclosure requirements do not. Therefore, an entity would measure the item
in accordance with IFRS 13 and then make the required disclosures in accordance with the
applicable standard (i.e. IAS 19, IAS 26, IAS 36) or the standard that requires fair value at
initial recognition. For example, an entity that acquires a brand as part of a business
combination would be required by IFRS 3 to measure the intangible asset at fair value at
initial recognition. The acquirer would measure the asset’s fair value in accordance with
IFRS 13, but would disclose information about that fair value measurement in accordance
with IFRS 3 (since those fair values are measured at initial recognition), not IFRS 13.
2.3
Present value techniques
IFRS 13 provides guidance for using present value techniques, such as a discounted cash
flow (DCF) analysis, to measure fair value (see 21 below for additional discussion on the
; application of present value techniques). However, the use of present value techniques
does not always result in a fair value measurement. As discussed in 2.2.3 above, some
IFRSs use present value techniques to measure assets and liabilities at amounts that are
not intended to represent a fair value measurement. Unless the objective is to measure
fair value, IFRS 13 does not apply.
2.4
Fair value measurement exceptions and practical expedients in
other standards
2.4.1
Fair value measurement exceptions
Some standards provide an exception to a requirement to measure an asset or liability
at fair value. IFRS 13 does not eliminate these exceptions. [IFRS 13.BC8].
IFRS typically limits fair value measurement exceptions to circumstances where fair
value is not reliably measurable and, where applied, requires the application of a cost
model. For example, IAS 41 permits the use of a cost model if, on initial recognition of
a biological asset, an entity is able to rebut the presumption that fair value can be reliably
measured. In addition, it requires an entity to revert to the fair value model if fair value
subsequently becomes reliably measurable. [IAS 41.30]. Additional disclosures are often
required to explain why fair value cannot be reliably measured and, if possible, the range
of estimates within which fair value is highly likely to lie, as is required in IAS 40 for
investment properties, for example. [IAS 40.79(e)(iii)].
In these situations, an entity would need to consider the requirements of IFRS 13 in
order to determine whether fair value can be reliably measured. If the entity concludes
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that it could reliably measure fair value based on the requirements of IFRS 13, even in
situations where observable information is not available, it would not be able to apply
these exceptions.
2.4.2
Practical expedient for impaired financial assets carried at amortised
cost
IAS 39 allowed, as a practical expedient, creditors to measure the impairment of a
financial asset carried at amortised cost based on an instrument’s fair value using an
observable market price. [IAS 39.AG84]. If the practical expedient was used, IFRS 13
applied to the measurement of fair value. When the practical expedient was not used,
the measurement objective was not intended to be fair value (and IFRS 13 did not apply).
Instead, IAS 39’s requirements for measuring the impairment of the financial asset
carried at amortised cost applied.
Under IFRS 9, entities are allowed to use observable market information to estimate the
credit risk of a particular or similar financial instrument, as such the fair value can no
longer be used. Instead, IFRS 9’s requirements for measuring the impairment of the
financial asset carried at amortised cost would apply.
2.5
Measurement exceptions and practical expedients within IFRS 13
2.5.1
Practical expedients in IFRS 13
In addition to maintaining the various practicability exceptions that existed in other
IFRSs (as discussed at 2.4 above), IFRS 13 provides its own practical expedients to assist
with applying the fair value framework in certain instances. These practical expedients,
each of which is discussed separately in this chapter, include the use of mid-market
pricing within a bid-ask spread (see 15 below).
Under US GAAP, the equivalent standard, Topic 820 – Fair Value Measurement – in
the FASB Accounting Standards Codification (ASC 820), provides a practical expedient
to measure the fair value of certain investments in investment companies using net asset
value (NAV) or its equivalent if certain criteria are met. However, IFRS 13 does not
explicitly permit the use of NAV to estimate the fair value of certain alternative
investments. Therefore, under IFRS, NAV cannot be presumed to equal fair value, as
the asset that is being measured is the equity investment in an investment entity, not the
underlying assets (and liabilities) of the investment entity itself. While NAV may
represent the fair value of the equity interest in certain situations (for example, in
situations where an open-ended fund provides a source of liquidity through on-going
subscriptions and redemptions at NAV), one cannot presume this to be the case. Instead,
the characteristics of the investment being measured need be considered when
determining its fair value (differences from US GAAP are discussed further at 23 below).
If a quoted price in an active market for an identical instrument is available (i.e. a Level 1
input), the fair value of the equity instrument would need to be measured using that
price, even if this deviates from NAV. An example where the Level 1 input may differ
from NAV is shares in certain closed-end funds that trade on exchanges at prices that
differ from the reported NAV of the funds.
Fair value measurement 949
In situations where there is no quoted price for an identical instrument, reported NAV
may represent a starting point in estimating fair value. However, adjustments may be
required to reflect the specific characteristics that market participants would consider
in pricing the equity investment in an investment entity. It may be helpful to understand
the factors that would reconcile a reported NAV of the investment entity to the fair
value used by the reporting entity in order to provide explanations to investors, if
necessary, and to support disclosures required by IFRS 13 and other IFRSs. Factors to
consider include, but are not limited to, the following:
(a) Is the reported NAV an appropriate input for use in measuring fair value?
Before concluding that the reported NAV is an appropriate input when measuring
fair value, a reporting entity should evaluate the effectiveness of the investment
entity’s valuation practices, by considering the valuation techniques and inputs
used by the investment entity when estimating NAV. This assists in determining
whether the investment entity’s valuation practices and inputs are aligned with
those that would need to be used by a market participant in respect of the equity
instruments of the investment entity.
(b) Are adjustments to reported NAV needed to reflect characteristics that market
participants would consider in pricing an equity investment?
A reporting entity should consider the characteristics of the equity investment that
are not reflected in reported NAV. The fair value of the underlying assets within
an investment entity would, for example, ignore any restrictions or possible
obligations imposed on the holder of an equity investment in an investment entity.
Obligations may take the form of commitments to contribute further capital, as and
when called for by the investment entity. If market participants would be expected
to place a discount or premium on the reported NAV because of features, risk or
other factors relating to the equity investment, then the fair value measurement of
the investment would need to be adjusted for those factors.
However, in some cases adjustments to NAV may not be required. For example, if
a fund is open to new investors, presumably the fair value of the fund investment
would not be exp
ected to exceed the amount that a new investor would be
required to invest directly with the fund to obtain a similar interest. Similarly, the
hypothetical seller of a fund investment would not be expected to accept lower
proceeds than it would receive by redeeming its investment directly with the fund
(if possible). As such, the willingness and ability of an investment entity to provide
a source of liquidity for the investment through subscriptions and redemptions are
important considerations in assessing whether adjustments to NAV would be
required in determining the exit price of an investment.
Information related to relevant secondary market transactions should be
considered unless they are determined to be disorderly. Limited Partners in such
funds may seek to sell their investments for a variety of reasons, including mergers
or acquisitions, the need for liquidity or a change in strategy, among others. While
premiums have been observed in practice, discounts on sales of investments in
investment entities are also common. Likewise, sales of an investment in an
investment entity to independent third parties at the reported NAV without a
premium or discount, may suggest that no adjustment is needed.
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2.5.2
Measurement exception to the fair value principles for financial
instruments
IFRS 13 makes it clear that the concepts of ‘highest and best use’ and ‘valuation premise’ only
apply to the measurement of non-financial assets. Such concepts could have significantly
changed the valuation of some over-the-counter (OTC) derivatives, many of which are
measured on a portfolio basis. That is, reporting entities typically determine valuation
adjustments related to bid-ask spreads and credit risk for OTC derivative contracts
considering the net exposure of a portfolio of contracts to a particular market risk or credit
risk. To address this concern, IFRS 13 provides an exception to the principles of fair value
when measuring financial instruments with offsetting risks, if certain criteria are met.
The exception allows an entity to estimate the fair value of a portfolio of financial
instruments based on the sale or transfer of its net position for a particular market risk
exposure (rather than to the individual instruments in the portfolio). The exception also