Within IFRS the term 'fair value' is widely used across a number of standards but until now there have been inconsistencies between those standards as to how fair value should be measured.
In May the IASB issued IFRS 13 'Fair value measurement'. The new standard does not change the rules for when an entity is required to use fair value, but does introduce one single definition and a consistent measurement approach to fair value throughout IFRS. The new standard also introduces enhanced fair value disclosures. IFRS 13 is the result of a joint project between the IASB and FASB and was issued in conjunction with equivalent US guidance.
Fair value will be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The standard explains that the fair value will be measured with reference to what is termed the principal market for the asset or liability being measured. In the absence of a principal market, reference should be made to the 'most advantageous market'. The standard defines the principal market as the market with the greatest volume and level of activity for the asset or liability that can be accessed by the entity. Generally, the market in which the entity transacts most frequently will also be the market with the greatest volume and deepest liquidity. Hence, the principal market would likely be the same as the most advantageous market. However, in some cases this will not be the case and applying IFRS 13 could change current measurement bases.
The new standard also states that the value of a non-financial asset must be based on the 'highest and best use' of the asset which is physically possible, legally permissible and financially feasible. IFRS 13 presumes that an entity's current use of an asset is generally its highest and best use, unless market or other factors suggest that a different use of that asset by market participants would maximise its value.
Among the new disclosure requirements is a specific requirement to quantify and disclose any unobservable inputs used in fair value calculations. This could result in disclosures which may be commercially sensitive to some entities. Furthermore, detailed fair value disclosures previously only made in relation to financial instruments will be extended to some nonfinancial assets and liabilities at fair value.
Smith & Williamson commentary
Any steps to increase the consistency and cohesiveness of the IFRS framework should be welcomed. However, preparers need to be aware that IFRS 13 is not simply a codification of best practice, or a gathering together of existing guidance. The standard creates new rules in specific areas and businesses will have to assess how the changes will impact them. For example, some preparers may find that they are not currently using an exit price for all their fair value measurements, and that they need to revise their measurements accordingly. In addition, preparers working in certain industries, such as real estate, may find that the requirement to measure a non-financial asset based on its 'highest and best use' pushes valuations upwards. As a result, many businesses will find that adoption of IFRS 13, which is not retrospective, leads to significant volatility in total comprehensive income in the year of initial application.
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