International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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under IFRS 13 are intended to provide financial statement users with additional insight
into the relative subjectivity of various fair value measurements and enhance their
ability to broadly assess an entity’s quality of earnings.
In order to meet the disclosure objectives, the following information, at a minimum,
must be disclosed for all fair value measurements. Disclosures are required for each class
of asset and liability, whether recurring or non-recurring, that are recognised in the
statement of financial position after initial recognition: [IFRS 13.93]
(a) the fair value measurement at the end of the reporting period (see Example 14.25
at 20.3.3 below);
(b) for non-financial assets, if the highest and best use differs from its current use, an
entity must disclose that fact and why the non-financial asset is being used in a
manner that differs from its highest and best use;
(c) the fair value measurement’s categorisation within the fair value hierarchy
(Level 1, 2 or 3 – see Example 14.25 at 20.3.3 below);
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(d) if categorised within Level 2 or Level 3 of the fair value hierarchy:
(i)
a description of the valuation technique(s) used in the fair value measurement;
(ii) the inputs used in the fair value measurement;
(iii) if there has been a change in valuation technique (e.g. changing from a market
approach to an income approach or the use of an additional valuation technique):
• the change; and
• the reason(s) for making it;
(e) quantitative information about the significant unobservable inputs used in the fair
value measurement for those categorised within Level 3 of the fair value hierarchy.
Example 14.27 at 20.3.5.A below illustrates how this information might be disclosed;
(f) if categorised within Level 3 of the fair value hierarchy, a description of the
valuation processes used by the entity (including, for example, how an entity
decides its valuation policies and procedures and analyses changes in fair value
measurements from period to period).
This requirement focuses on valuation processes rather than the specific valuation
techniques, which are covered by the requirements in (d) above.
In addition to these requirements, an entity must provide the disclosures discussed at 20.3.1
and 20.3.2 below depending on whether the measurement is recurring or non-recurring.
20.3.1
Disclosures for recognised recurring fair value measurements
The disclosure requirements in paragraph 93 of IFRS 13 (see 20.3 above and 20.3.1.A and
20.3.1.B below) apply to all fair value measurements that are recognised in the financial
statements on a recurring basis. Given the increased subjectivity, IFRS 13 requires
additional disclosures for fair value measurements categorised within Level 3 of the fair
value hierarchy than for those categorised within Levels 1 or 2 (see 20.3.1.B below).
20.3.1.A
Recurring fair value measurements categorised as Level 1 or Level 2
For recurring fair value measurements that are categorised within either Level 1 or
Level 2 of the fair value hierarchy, an entity must disclose both:
• information required to comply with the disclosure requirements discussed at 20.3
above; and
• for any transfers between Level 1 and Level 2 of the fair value hierarchy:
(i) the amounts of any transfers between Level 1 and Level 2 of the fair
value hierarchy;
(ii) the reasons for those transfers; and
(iii) the entity’s policy for determining when transfers between levels are deemed
to have occurred (see 16.2.2 and 20.2 above for further discussion).
The standard requires transfers into each level to be disclosed and discussed
separately from transfers out of each level. [IFRS 13.93].
Fair value measurement 1073
20.3.1.B
Recurring fair value measurements categorised as Level 3
In addition to the disclosure requirements listed at 20.3 above, recurring fair value
measurements that are categorised within Level 3 of the fair value hierarchy are subject
to additional disclosure requirements:
(a) a reconciliation from the opening balances to the closing balances, disclosing
separately changes during the period (also referred to as the Level 3 roll-forward);
(b) a narrative description of the sensitivity of Level 3 fair value measurements to
changes in unobservable inputs; and
(c) for financial assets and financial liabilities only, quantitative sensitivity analysis for
Level 3 fair value measurements. [IFRS 13.93].
These additional disclosure requirements for Level 3 fair value measurements are
discussed further at 20.3.5 to 20.3.8 below.
20.3.2
Disclosures for recognised non-recurring fair value measurements
Certain disclosure requirements in IFRS 13 do not apply to fair value measurements that
are non-recurring in nature (e.g. a non-current asset (or disposal group) held for sale
measured at fair value less costs to sell in accordance with IFRS 5 where the fair value
less costs to sell is lower than its carrying amount). Specifically, the following disclosures
are not required for non-recurring recognised fair value measurements:
• information about any transfers between Level 1 and Level 2 of the fair value
hierarchy;
• a reconciliation of the opening balances to the closing balances for Level 3
measurements (also referred to as the Level 3 roll-forward);
• a narrative description of the sensitivity of Level 3 fair value measurements to
changes in unobservable inputs; and
• for financial assets and financial liabilities, quantitative sensitivity analysis for
Level 3 fair value measurements. [IFRS 13.93].
Information regarding transfers between hierarchy levels and the Level 3 reconciliation
do not lend themselves to non-recurring measurements and, therefore, are not required.
While discussing the sensitivity of Level 3 measurements to changes in unobservable
inputs might provide financial statement users with some information about how the
selection of these inputs affects non-recurring valuations, the Boards ultimately decided
that this information is most relevant for recurring measurements.
However, entities are required to disclose the reason for any non-recurring fair value
measurements made subsequent to the initial recognition of an asset or liability.
[IFRS 13.93]. For example, the entity may intend to sell or otherwise dispose of it, thereby
resulting in the need for its measurement at fair value less costs to sell based on the
requirements of IFRS 5, if lower than the asset’s carrying amount.
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While obvious for recurring measurements, determining the periods in which the fair
value disclosures should be made for non-recurring measurements is less clear. For
example, assume a listed entity classifies a building as held for sale in accordance with
IFRS 5 at the end of its second quarter and appropriately decreases the carrying value
of the asset to its then fair value less costs to sell. In its interim financial statements, the
entity would make all of the disclosures required by IFRS 13 for non-recurring fair value
measurements. During the second half of t
he financial year, the sale falls through and
the asset is no longer held for sale. In accordance with IFRS 5, the asset is measured at
its carrying amount before the asset (or disposal group) was classified as held for sale,
adjusted for any depreciation, as this is lower than it’s recoverable amount. The entity
continues to account for the asset in accordance with IAS 16. While the carrying value
of the asset at the end of the financial year is no longer at fair value less costs to sell, the
asset was adjusted to fair value less costs to sell during the year. Therefore, in its annual
financial statements, the entity would again disclose the information required by
IFRS 13 for non-recurring fair value measurements. While not explicit in IFRS 13, we
believe this approach is consistent with the interim and annual disclosure requirements
for assets subsequently measured under the revaluation model in IAS 34 and IFRS 5.
In these situations, we recommend that the disclosures clearly indicate that the fair
value information presented is not current, but rather as at the date fair value was
measured. Entities should also indicate if the carrying amount of the asset no longer
equals its fair value.
20.3.3
Fair value hierarchy categorisation
IFRS 13 requires entities to disclose the fair value hierarchy level in which each fair
value measurement is categorised. As noted at 16.2 above, the categorisation of a fair
value measurement of an asset or liability in the fair value hierarchy is based on the
lowest level input that is significant to the fair value measurement in its entirety.
Although the hierarchy disclosure is presented by class of asset or liability, it is
important to understand that the determination of the hierarchy level in which a fair
value measurement falls (and therefore the category in which it will be disclosed) is
based on the fair value measurement for the specific item being measured and is,
therefore, driven by the unit of account for the asset or liability.
For example, in situations where the unit of account for a financial instrument is
the individual item, but the measurement exception for financial instruments is
used (as discussed at 12 above), entities may need to allocate portfolio-level
adjustments to the various instruments that make up the net exposure for purposes
of hierarchy categorisation.
This may seem inconsistent to certain constituents given the discussion at 12 above
about the consideration of size as a characteristic of the net risk exposure when the
measurement exception for financial instruments is used. However, the IASB and
FASB staffs have indicated that the determination of the net risk exposure as the
unit of measurement applies only for measurement considerations and was not
intended to change current practice with respect to disclosures. As such, the entire
net exposure would not be categorised within a single level of the fair value
Fair value measurement 1075
hierarchy (e.g. Level 2), unless all of the individual items that make up the net
exposure would fall within that level.
To illustrate, consider an individual derivative that is valued using the measurement
exception as part of a group of derivative instruments with offsetting credit risk (due to
the existence of a legally enforceable netting agreement). Assuming the portfolio
included instruments that on their own must be categorised within different levels of
the fair value hierarchy (i.e. Level 2 and Level 3), for disclosure purposes, the portfolio-
level adjustment for credit risk (considering the effect of master netting agreements)
may need to be attributed to the individual derivative transactions within the portfolio
or to the group of transactions that fall within each of the levels of the hierarchy. This
example assumes that the portfolio-level adjustment for credit risk is based on
observable market data. If the portfolio-level adjustment was determined using
unobservable inputs, the significance of the adjustment to the measurement of the
individual derivative instruments would need to be considered in order to determine if
categorisation in Level 2 or Level 3 was appropriate.
The following example from IFRS 13 illustrates how an entity might disclose, in tabular
format, the fair value hierarchy category for each class of assets and liabilities measured
at fair value at the end of each reporting period. [IFRS 13.IE60].
Example 14.25: Disclosure of assets measured at fair value and their
categorisation in the fair value hierarchy
(CU in millions)
Fair value measurements at the end of the reporting period using:
Quoted prices in
Significant
active markets
other
Significant
for identical
observable
unobservable
Total
Description
assets
inputs
inputs
gains
31/12/X9
(Level 1)
(Level 2)
(Level 3) (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
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(CU in millions)
Fair value measurements at the end of the reporting period using:
Quoted prices in
Significant
active markets
other
Significant
for identical
observable
unobservable
Total
Description
assets
inputs
inputs
gains
31/12/X9
(Level 1)
(Level 2)
(Level 3) (losses)
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)
(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.