ifrs_13

IFRS 13 Fair Value Measurement

May 2011

International Financial Reporting Standard®

International Accounting Standards Board (IASB)

The IASB is the independent standard-setting body of the IFRS Foundation

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International Financial Reporting Standard 13

Fair Value Measurement

IFRS 13 Fair Value Measurement is issued by the International Accounting StandardsBoard (IASB), 30 Cannon Street, London EC4M 6XH, United Kingdom.Tel: +44 (0)20 7246 6410Fax: +44 (0)20 7246 6411Email: [email protected]: www.ifrs.org

The IASB, the IFRS Foundation, the authors and the publishers do not acceptresponsibility for loss caused to any person who acts or refrains from acting inreliance on the material in this publication, whether such loss is caused bynegligence or otherwise.

Copyright © 2011 IFRS Foundation®

IFRS 13 and its accompanying documents are published in three parts.

ISBN for this part: 978-1-907877-22-3

ISBN for complete publication (three parts): 978-1-907877-21-6

International Financial Reporting Standards (including International AccountingStandards and SIC and IFRIC Interpretations), Exposure Drafts, and other IASBpublications are copyright of the IFRS Foundation. The approved text ofInternational Financial Reporting Standards and other IASB publications is thatpublished by the IASB in the English language. Copies may be obtained from theIFRS Foundation. Please address publications and copyright matters to:

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IFRS 13 FAIR VALUE MEASUREMENT

3 © IFRS Foundation

CONTENTSparagraphs

INTRODUCTION

INTERNATIONAL FINANCIAL REPORTING STANDARD 13FAIR VALUE MEASUREMENT

OBJECTIVE 1–4

SCOPE 5–8

MEASUREMENT 9–90

Definition of fair value 9–10

The asset or liability 11–14

The transaction 15–21

Market participants 22–23

The price 24–26

Application to non-financial assets 27–33

Application to liabilities and an entity’s own equity instruments 34–47

Application to financial assets and financial liabilities with offsettingpositions in market risks or counterparty credit risk 48–56

Fair value at initial recognition 57–60

Valuation techniques 61–66

Inputs to valuation techniques 67–71

Fair value hierarchy 72–90

DISCLOSURE 91–99

APPENDICES

A Defined terms

B Application guidance

C Effective date and transition

D Amendments to other IFRSs

APPROVAL BY THE BOARD OF IFRS 13 ISSUED IN MAY 2011

BASIS FOR CONCLUSIONS (see separate booklet)

APPENDIXAmendments to the Basis for Conclusions on other IFRSs

ILLUSTRATIVE EXAMPLES (see separate booklet)

APPENDIXAmendments to the guidance on other IFRSs

INTERNATIONAL FINANCIAL REPORTING STANDARD MAY 2011

© IFRS Foundation 4

International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13)is set out in paragraphs 1–99 and Appendices A–D. All the paragraphs haveequal authority. Paragraphs in bold type state the main principles. Termsdefined in Appendix A are in italics the first time they appear in the IFRS.Definitions of other terms are given in the Glossary for International FinancialReporting Standards. IFRS 13 should be read in the context of its objective andthe Basis for Conclusions, the Preface to International Financial Reporting Standardsand the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies,Changes in Accounting Estimates and Errors provides a basis for selecting andapplying accounting policies in the absence of explicit guidance.



Introduction

Overview

IN1 International Financial Reporting Standard 13 Fair Value Measurement(IFRS 13):

(a) defines fair value;

(b) sets out in a single IFRS a framework for measuring fair value; and

(c) requires disclosures about fair value measurements.

IN2 The IFRS applies to IFRSs that require or permit fair value measurementsor disclosures about fair value measurements (and measurements, suchas fair value less costs to sell, based on fair value or disclosures aboutthose measurements), except in specified circumstances.

IN3 The IFRS is to be applied for annual periods beginning on or after1 January 2013. Earlier application is permitted.

IN4 The IFRS explains how to measure fair value for financial reporting.It does not require fair value measurements in addition to those alreadyrequired or permitted by other IFRSs and is not intended to establishvaluation standards or affect valuation practices outside financialreporting.

Reasons for issuing the IFRS

IN5 Some IFRSs require or permit entities to measure or disclose the fair valueof assets, liabilities or their own equity instruments. Because those IFRSswere developed over many years, the requirements for measuring fairvalue and for disclosing information about fair value measurements weredispersed and in many cases did not articulate a clear measurement ordisclosure objective.

IN6 As a result, some of those IFRSs contained limited guidance about how tomeasure fair value, whereas others contained extensive guidance andthat guidance was not always consistent across those IFRSs that refer tofair value. Inconsistencies in the requirements for measuring fair valueand for disclosing information about fair value measurements havecontributed to diversity in practice and have reduced the comparabilityof information reported in financial statements. IFRS 13 remedies thatsituation.



IN7 Furthermore, in 2006 the International Accounting Standards Board(IASB) and the US national standard-setter, the Financial AccountingStandards Board (FASB), published a Memorandum of Understanding,which has served as the foundation of the boards’ efforts to create acommon set of high quality global accounting standards. Consistent withthe Memorandum of Understanding and the boards’ commitment toachieving that goal, IFRS 13 is the result of the work by the IASB and theFASB to develop common requirements for measuring fair value and fordisclosing information about fair value measurements in accordancewith IFRSs and US generally accepted accounting principles (GAAP).

Main features

IN8 IFRS 13 defines fair value as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (ie an exit price).

IN9 That definition of fair value emphasises that fair value is a market-basedmeasurement, not an entity-specific measurement. When measuring fairvalue, an entity uses the assumptions that market participants would usewhen pricing the asset or liability under current market conditions,including assumptions about risk. As a result, an entity’s intention tohold an asset or to settle or otherwise fulfil a liability is not relevant whenmeasuring fair value.

IN10 The IFRS explains that a fair value measurement requires an entity todetermine the following:

(a) the particular asset or liability being measured;

(b) for a non-financial asset, the highest and best use of the asset andwhether the asset is used in combination with other assets or on astand-alone basis;

(c) the market in which an orderly transaction would take place forthe asset or liability; and

(d) the appropriate valuation technique(s) to use when measuring fairvalue. The valuation technique(s) used should maximise the use ofrelevant observable inputs and minimise unobservable inputs.Those inputs should be consistent with the inputs a marketparticipant would use when pricing the asset or liability.



International Financial Reporting Standard 13Fair Value Measurement

Objective

1 This IFRS:

(a) defines fair value;

(b) sets out in a single IFRS a framework for measuring fair value; and

(c) requires disclosures about fair value measurements.

2 Fair value is a market-based measurement, not an entity-specificmeasurement. For some assets and liabilities, observable markettransactions or market information might be available. For other assetsand liabilities, observable market transactions and market informationmight not be available. However, the objective of a fair value measurementin both cases is the same—to estimate the price at which an orderlytransaction to sell the asset or to transfer the liability would take placebetween market participants at the measurement date under current marketconditions (ie an exit price at the measurement date from the perspective ofa market participant that holds the asset or owes the liability).

3 When a price for an identical asset or liability is not observable, an entitymeasures fair value using another valuation technique that maximisesthe use of relevant observable inputs and minimises the use of unobservableinputs. Because fair value is a market-based measurement, it is measuredusing the assumptions that market participants would use when pricingthe asset or liability, including assumptions about risk. As a result, anentity’s intention to hold an asset or to settle or otherwise fulfil a liabilityis not relevant when measuring fair value.

4 The definition of fair value focuses on assets and liabilities because they area primary subject of accounting measurement. In addition, this IFRS shallbe applied to an entity’s own equity instruments measured at fair value.

Scope

5 This IFRS applies when another IFRS requires or permits fair valuemeasurements or disclosures about fair value measurements(and measurements, such as fair value less costs to sell, based on fair valueor disclosures about those measurements), except as specified inparagraphs 6 and 7.



6 The measurement and disclosure requirements of this IFRS do not applyto the following:

(a) share-based payment transactions within the scope of IFRS 2Share-based Payment;

(b) leasing transactions within the scope of IAS 17 Leases; and

(c) measurements that have some similarities to fair value but are notfair value, such as net realisable value in IAS 2 Inventories or value inuse in IAS 36 Impairment of Assets.

7 The disclosures required by this IFRS are not required for the following:

(a) plan assets measured at fair value in accordance with IAS 19Employee Benefits;

(b) retirement benefit plan investments measured at fair value inaccordance with IAS 26 Accounting and Reporting by Retirement BenefitPlans; and

(c) assets for which recoverable amount is fair value less costs ofdisposal in accordance with IAS 36.

8 The fair value measurement framework described in this IFRS applies toboth initial and subsequent measurement if fair value is required orpermitted by other IFRSs.

Measurement

Definition of fair value

9 This IFRS defines fair value as the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date.

10 Paragraph B2 describes the overall fair value measurement approach.

The asset or liability

11 A fair value measurement is for a particular asset or liability. Therefore,when measuring fair value an entity shall take into account thecharacteristics of the asset or liability if market participants would takethose characteristics into account when pricing the asset or liability at themeasurement date. Such characteristics include, for example, the following:

(a) the condition and location of the asset; and



(b) restrictions, if any, on the sale or use of the asset.

12 The effect on the measurement arising from a particular characteristicwill differ depending on how that characteristic would be taken intoaccount by market participants.

13 The asset or liability measured at fair value might be either of the following:

(a) a stand-alone asset or liability (eg a financial instrument or anon-financial asset); or

(b) a group of assets, a group of liabilities or a group of assets andliabilities (eg a cash-generating unit or a business).

14 Whether the asset or liability is a stand-alone asset or liability, a group ofassets, a group of liabilities or a group of assets and liabilities forrecognition or disclosure purposes depends on its unit of account. The unitof account for the asset or liability shall be determined in accordancewith the IFRS that requires or permits the fair value measurement, exceptas provided in this IFRS.

The transaction

15 A fair value measurement assumes that the asset or liability is exchangedin an orderly transaction between market participants to sell the asset ortransfer the liability at the measurement date under current marketconditions.

16 A fair value measurement assumes that the transaction to sell the asset ortransfer the liability takes place either:

(a) in the principal market for the asset or liability; or

(b) in the absence of a principal market, in the most advantageousmarket for the asset or liability.

17 An entity need not undertake an exhaustive search of all possible marketsto identify the principal market or, in the absence of a principal market,the most advantageous market, but it shall take into account allinformation that is reasonably available. In the absence of evidence tothe contrary, the market in which the entity would normally enter into atransaction to sell the asset or to transfer the liability is presumed to bethe principal market or, in the absence of a principal market, the mostadvantageous market.



18 If there is a principal market for the asset or liability, the fair valuemeasurement shall represent the price in that market (whether that priceis directly observable or estimated using another valuation technique),even if the price in a different market is potentially more advantageousat the measurement date.

19 The entity must have access to the principal (or most advantageous) marketat the measurement date. Because different entities (and businesseswithin those entities) with different activities may have access todifferent markets, the principal (or most advantageous) market for thesame asset or liability might be different for different entities(and businesses within those entities). Therefore, the principal (or mostadvantageous) market (and thus, market participants) shall be consideredfrom the perspective of the entity, thereby allowing for differencesbetween and among entities with different activities.

20 Although an entity must be able to access the market, the entity does notneed to be able to sell the particular asset or transfer the particularliability on the measurement date to be able to measure fair value on thebasis of the price in that market.

21 Even when there is no observable market to provide pricing informationabout the sale of an asset or the transfer of a liability at the measurementdate, a fair value measurement shall assume that a transaction takesplace at that date, considered from the perspective of a marketparticipant that holds the asset or owes the liability. That assumedtransaction establishes a basis for estimating the price to sell the asset orto transfer the liability.

Market participants

22 An entity shall measure the fair value of an asset or a liability using theassumptions that market participants would use when pricing the assetor liability, assuming that market participants act in their economic bestinterest.

23 In developing those assumptions, an entity need not identify specificmarket participants. Rather, the entity shall identify characteristics thatdistinguish market participants generally, considering factors specific toall the following:

(a) the asset or liability;

(b) the principal (or most advantageous) market for the asset orliability; and



(c) market participants with whom the entity would enter into atransaction in that market.

The price

24 Fair value is the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction in the principal (or mostadvantageous) market at the measurement date under current marketconditions (ie an exit price) regardless of whether that price is directlyobservable or estimated using another valuation technique.

25 The price in the principal (or most advantageous) market used to measurethe fair value of the asset or liability shall not be adjusted for transactioncosts. Transaction costs shall be accounted for in accordance with otherIFRSs. Transaction costs are not a characteristic of an asset or a liability;rather, they are specific to a transaction and will differ depending on howan entity enters into a transaction for the asset or liability.

26 Transaction costs do not include transport costs. If location is acharacteristic of the asset (as might be the case, for example, for acommodity), the price in the principal (or most advantageous) marketshall be adjusted for the costs, if any, that would be incurred to transportthe asset from its current location to that market.

Application to non-financial assets

Highest and best use for non-financial assets

27 A fair value measurement of a non-financial asset takes into account amarket participant’s ability to generate economic benefits by using theasset in its highest and best use or by selling it to another marketparticipant that would use the asset in its highest and best use.

28 The highest and best use of a non-financial asset takes into account theuse of the asset that is physically possible, legally permissible andfinancially feasible, as follows:

(a) A use that is physically possible takes into account the physicalcharacteristics of the asset that market participants would take intoaccount when pricing the asset (eg the location or size of a property).

(b) A use that is legally permissible takes into account any legalrestrictions on the use of the asset that market participants wouldtake into account when pricing the asset (eg the zoning regulationsapplicable to a property).



(c) A use that is financially feasible takes into account whether a useof the asset that is physically possible and legally permissiblegenerates adequate income or cash flows (taking into account thecosts of converting the asset to that use) to produce an investmentreturn that market participants would require from an investmentin that asset put to that use.

29 Highest and best use is determined from the perspective of marketparticipants, even if the entity intends a different use. However, anentity’s current use of a non-financial asset is presumed to be its highestand best use unless market or other factors suggest that a different use bymarket participants would maximise the value of the asset.

30 To protect its competitive position, or for other reasons, an entity mayintend not to use an acquired non-financial asset actively or it may intendnot to use the asset according to its highest and best use. For example,that might be the case for an acquired intangible asset that the entityplans to use defensively by preventing others from using it. Nevertheless,the entity shall measure the fair value of a non-financial asset assumingits highest and best use by market participants.

Valuation premise for non-financial assets

31 The highest and best use of a non-financial asset establishes the valuationpremise used to measure the fair value of the asset, as follows:

(a) The highest and best use of a non-financial asset might providemaximum value to market participants through its use incombination with other assets as a group (as installed or otherwiseconfigured for use) or in combination with other assets andliabilities (eg a business).

(i) If the highest and best use of the asset is to use the asset incombination with other assets or with other assets andliabilities, the fair value of the asset is the price that wouldbe received in a current transaction to sell the assetassuming that the asset would be used with other assets orwith other assets and liabilities and that those assets andliabilities (ie its complementary assets and the associatedliabilities) would be available to market participants.

(ii) Liabilities associated with the asset and with thecomplementary assets include liabilities that fund workingcapital, but do not include liabilities used to fund assets otherthan those within the group of assets.



(iii) Assumptions about the highest and best use of anon-financial asset shall be consistent for all the assets(for which highest and best use is relevant) of the group ofassets or the group of assets and liabilities within which theasset would be used.

(b) The highest and best use of a non-financial asset might providemaximum value to market participants on a stand-alone basis.If the highest and best use of the asset is to use it on a stand-alonebasis, the fair value of the asset is the price that would be receivedin a current transaction to sell the asset to market participants thatwould use the asset on a stand-alone basis.

32 The fair value measurement of a non-financial asset assumes that theasset is sold consistently with the unit of account specified in other IFRSs(which may be an individual asset). That is the case even when that fairvalue measurement assumes that the highest and best use of the asset isto use it in combination with other assets or with other assets andliabilities because a fair value measurement assumes that the marketparticipant already holds the complementary assets and the associatedliabilities.

33 Paragraph B3 describes the application of the valuation premise conceptfor non-financial assets.

Application to liabilities and an entity’s own equity instruments

General principles

34 A fair value measurement assumes that a financial or non-financialliability or an entity’s own equity instrument (eg equity interests issuedas consideration in a business combination) is transferred to a marketparticipant at the measurement date. The transfer of a liability or anentity’s own equity instrument assumes the following:

(a) A liability would remain outstanding and the market participanttransferee would be required to fulfil the obligation. The liabilitywould not be settled with the counterparty or otherwiseextinguished on the measurement date.

(b) An entity’s own equity instrument would remain outstanding andthe market participant transferee would take on the rights andresponsibilities associated with the instrument. The instrument



would not be cancelled or otherwise extinguished on themeasurement date.

35 Even when there is no observable market to provide pricing informationabout the transfer of a liability or an entity’s own equity instrument(eg because contractual or other legal restrictions prevent the transfer ofsuch items), there might be an observable market for such items if theyare held by other parties as assets (eg a corporate bond or a call option onan entity’s shares).

36 In all cases, an entity shall maximise the use of relevant observable inputsand minimise the use of unobservable inputs to meet the objective of afair value measurement, which is to estimate the price at which anorderly transaction to transfer the liability or equity instrument wouldtake place between market participants at the measurement date undercurrent market conditions.

Liabilities and equity instruments held by other parties as assets

37 When a quoted price for the transfer of an identical or a similar liability orentity’s own equity instrument is not available and the identical item is heldby another party as an asset, an entity shall measure the fair value of theliability or equity instrument from the perspective of a market participantthat holds the identical item as an asset at the measurement date.

38 In such cases, an entity shall measure the fair value of the liability orequity instrument as follows:

(a) using the quoted price in an active market for the identical item heldby another party as an asset, if that price is available.

(b) if that price is not available, using other observable inputs, such asthe quoted price in a market that is not active for the identical itemheld by another party as an asset.

(c) if the observable prices in (a) and (b) are not available, usinganother valuation technique, such as:

(i) an income approach (eg a present value technique that takesinto account the future cash flows that a market participantwould expect to receive from holding the liability or equityinstrument as an asset; see paragraphs B10 and B11).

(ii) a market approach (eg using quoted prices for similar liabilitiesor equity instruments held by other parties as assets;see paragraphs B5–B7).



39 An entity shall adjust the quoted price of a liability or an entity’s ownequity instrument held by another party as an asset only if there arefactors specific to the asset that are not applicable to the fair valuemeasurement of the liability or equity instrument. An entity shall ensurethat the price of the asset does not reflect the effect of a restrictionpreventing the sale of that asset. Some factors that may indicate that thequoted price of the asset should be adjusted include the following:

(a) The quoted price for the asset relates to a similar (but not identical)liability or equity instrument held by another party as an asset.For example, the liability or equity instrument may have aparticular characteristic (eg the credit quality of the issuer) that isdifferent from that reflected in the fair value of the similar liabilityor equity instrument held as an asset.

(b) The unit of account for the asset is not the same as for the liability orequity instrument. For example, for liabilities, in some cases theprice for an asset reflects a combined price for a package comprisingboth the amounts due from the issuer and a third-party creditenhancement. If the unit of account for the liability is not for thecombined package, the objective is to measure the fair value of theissuer’s liability, not the fair value of the combined package.Thus, in such cases, the entity would adjust the observed price forthe asset to exclude the effect of the third-party credit enhancement.

Liabilities and equity instruments not held by other parties as assets

40 When a quoted price for the transfer of an identical or a similar liabilityor entity’s own equity instrument is not available and the identical itemis not held by another party as an asset, an entity shall measure the fairvalue of the liability or equity instrument using a valuation techniquefrom the perspective of a market participant that owes the liability or hasissued the claim on equity.

41 For example, when applying a present value technique an entity mighttake into account either of the following:

(a) the future cash outflows that a market participant would expect toincur in fulfilling the obligation, including the compensation thata market participant would require for taking on the obligation(see paragraphs B31–B33).

(b) the amount that a market participant would receive to enter intoor issue an identical liability or equity instrument, using the



assumptions that market participants would use when pricing theidentical item (eg having the same credit characteristics) in theprincipal (or most advantageous) market for issuing a liability or anequity instrument with the same contractual terms.

Non-performance risk

42 The fair value of a liability reflects the effect of non-performance risk.Non-performance risk includes, but may not be limited to, an entity’s owncredit risk (as defined in IFRS 7 Financial Instruments: Disclosures).Non-performance risk is assumed to be the same before and after thetransfer of the liability.

43 When measuring the fair value of a liability, an entity shall take intoaccount the effect of its credit risk (credit standing) and any other factorsthat might influence the likelihood that the obligation will or will not befulfilled. That effect may differ depending on the liability, for example:

(a) whether the liability is an obligation to deliver cash (a financialliability) or an obligation to deliver goods or services(a non-financial liability).

(b) the terms of credit enhancements related to the liability, if any.

44 The fair value of a liability reflects the effect of non-performance risk onthe basis of its unit of account. The issuer of a liability issued with aninseparable third-party credit enhancement that is accounted forseparately from the liability shall not include the effect of the creditenhancement (eg a third-party guarantee of debt) in the fair valuemeasurement of the liability. If the credit enhancement is accounted forseparately from the liability, the issuer would take into account its owncredit standing and not that of the third party guarantor whenmeasuring the fair value of the liability.

Restriction preventing the transfer of a liability or an entity’s own equity instrument

45 When measuring the fair value of a liability or an entity’s own equityinstrument, an entity shall not include a separate input or an adjustmentto other inputs relating to the existence of a restriction that prevents thetransfer of the item. The effect of a restriction that prevents the transferof a liability or an entity’s own equity instrument is either implicitly orexplicitly included in the other inputs to the fair value measurement.



46 For example, at the transaction date, both the creditor and the obligoraccepted the transaction price for the liability with full knowledge thatthe obligation includes a restriction that prevents its transfer. As a resultof the restriction being included in the transaction price, a separate inputor an adjustment to an existing input is not required at the transactiondate to reflect the effect of the restriction on transfer. Similarly, aseparate input or an adjustment to an existing input is not required atsubsequent measurement dates to reflect the effect of the restriction ontransfer.

Financial liability with a demand feature

47 The fair value of a financial liability with a demand feature (eg a demanddeposit) is not less than the amount payable on demand, discounted fromthe first date that the amount could be required to be paid.

Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk

48 An entity that holds a group of financial assets and financial liabilities isexposed to market risks (as defined in IFRS 7) and to the credit risk(as defined in IFRS 7) of each of the counterparties. If the entity managesthat group of financial assets and financial liabilities on the basis of itsnet exposure to either market risks or credit risk, the entity is permittedto apply an exception to this IFRS for measuring fair value.That exception permits an entity to measure the fair value of a group offinancial assets and financial liabilities on the basis of the price thatwould be received to sell a net long position (ie an asset) for a particularrisk exposure or to transfer a net short position (ie a liability) for aparticular risk exposure in an orderly transaction between marketparticipants at the measurement date under current market conditions.Accordingly, an entity shall measure the fair value of the group offinancial assets and financial liabilities consistently with how marketparticipants would price the net risk exposure at the measurement date.

49 An entity is permitted to use the exception in paragraph 48 only if theentity does all the following:

(a) manages the group of financial assets and financial liabilities onthe basis of the entity’s net exposure to a particular market risk(or risks) or to the credit risk of a particular counterparty inaccordance with the entity’s documented risk management orinvestment strategy;



(b) provides information on that basis about the group of financialassets and financial liabilities to the entity’s key managementpersonnel, as defined in IAS 24 Related Party Disclosures; and

(c) is required or has elected to measure those financial assets andfinancial liabilities at fair value in the statement of financialposition at the end of each reporting period.

50 The exception in paragraph 48 does not pertain to financial statementpresentation. In some cases the basis for the presentation of financialinstruments in the statement of financial position differs from the basisfor the measurement of financial instruments, for example, if an IFRSdoes not require or permit financial instruments to be presented on a netbasis. In such cases an entity may need to allocate the portfolio-leveladjustments (see paragraphs 53–56) to the individual assets or liabilitiesthat make up the group of financial assets and financial liabilitiesmanaged on the basis of the entity’s net risk exposure. An entity shallperform such allocations on a reasonable and consistent basis using amethodology appropriate in the circumstances.

51 An entity shall make an accounting policy decision in accordance withIAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to use theexception in paragraph 48. An entity that uses the exception shall applythat accounting policy, including its policy for allocating bid-askadjustments (see paragraphs 53–55) and credit adjustments(see paragraph 56), if applicable, consistently from period to period for aparticular portfolio.

52 The exception in paragraph 48 applies only to financial assets andfinancial liabilities within the scope of IAS 39 Financial Instruments:Recognition and Measurement or IFRS 9 Financial Instruments.

Exposure to market risks

53 When using the exception in paragraph 48 to measure the fair value of agroup of financial assets and financial liabilities managed on the basis ofthe entity’s net exposure to a particular market risk (or risks), the entityshall apply the price within the bid-ask spread that is most representativeof fair value in the circumstances to the entity’s net exposure to thosemarket risks (see paragraphs 70 and 71).

54 When using the exception in paragraph 48, an entity shall ensure that themarket risk (or risks) to which the entity is exposed within that group offinancial assets and financial liabilities is substantially the same.For example, an entity would not combine the interest rate risk



associated with a financial asset with the commodity price risk associatedwith a financial liability because doing so would not mitigate the entity’sexposure to interest rate risk or commodity price risk. When using theexception in paragraph 48, any basis risk resulting from the market riskparameters not being identical shall be taken into account in the fairvalue measurement of the financial assets and financial liabilities withinthe group.

55 Similarly, the duration of the entity’s exposure to a particular market risk(or risks) arising from the financial assets and financial liabilities shall besubstantially the same. For example, an entity that uses a 12-monthfutures contract against the cash flows associated with 12 months’ worthof interest rate risk exposure on a five-year financial instrument within agroup made up of only those financial assets and financial liabilitiesmeasures the fair value of the exposure to 12-month interest rate risk ona net basis and the remaining interest rate risk exposure (ie years 2–5) ona gross basis.

Exposure to the credit risk of a particular counterparty

56 When using the exception in paragraph 48 to measure the fair value of agroup of financial assets and financial liabilities entered into with aparticular counterparty, the entity shall include the effect of the entity’snet exposure to the credit risk of that counterparty or the counterparty’snet exposure to the credit risk of the entity in the fair value measurementwhen market participants would take into account any existingarrangements that mitigate credit risk exposure in the event of default(eg a master netting agreement with the counterparty or an agreementthat requires the exchange of collateral on the basis of each party’s netexposure to the credit risk of the other party). The fair valuemeasurement shall reflect market participants’ expectations about thelikelihood that such an arrangement would be legally enforceable in theevent of default.

Fair value at initial recognition

57 When an asset is acquired or a liability is assumed in an exchangetransaction for that asset or liability, the transaction price is the pricepaid to acquire the asset or received to assume the liability (an entry price).In contrast, the fair value of the asset or liability is the price that wouldbe received to sell the asset or paid to transfer the liability (an exit price).Entities do not necessarily sell assets at the prices paid to acquire them.Similarly, entities do not necessarily transfer liabilities at the pricesreceived to assume them.



58 In many cases the transaction price will equal the fair value (eg that mightbe the case when on the transaction date the transaction to buy an assettakes place in the market in which the asset would be sold).

59 When determining whether fair value at initial recognition equals thetransaction price, an entity shall take into account factors specific to thetransaction and to the asset or liability. Paragraph B4 describes situationsin which the transaction price might not represent the fair value of anasset or a liability at initial recognition.

60 If another IFRS requires or permits an entity to measure an asset or aliability initially at fair value and the transaction price differs from fairvalue, the entity shall recognise the resulting gain or loss in profit or lossunless that IFRS specifies otherwise.

Valuation techniques

61 An entity shall use valuation techniques that are appropriate in thecircumstances and for which sufficient data are available to measure fairvalue, maximising the use of relevant observable inputs and minimisingthe use of unobservable inputs.

62 The objective of using a valuation technique is to estimate the price atwhich an orderly transaction to sell the asset or to transfer the liabilitywould take place between market participants at the measurement dateunder current market conditions. Three widely used valuationtechniques are the market approach, the cost approach and the incomeapproach. The main aspects of those approaches are summarised inparagraphs B5–B11. An entity shall use valuation techniques consistentwith one or more of those approaches to measure fair value.

63 In some cases a single valuation technique will be appropriate (eg whenvaluing an asset or a liability using quoted prices in an active market foridentical assets or liabilities). In other cases, multiple valuationtechniques will be appropriate (eg that might be the case when valuing acash-generating unit). If multiple valuation techniques are used tomeasure fair value, the results (ie respective indications of fair value)shall be evaluated considering the reasonableness of the range of valuesindicated by those results. A fair value measurement is the point withinthat range that is most representative of fair value in the circumstances.

64 If the transaction price is fair value at initial recognition and a valuationtechnique that uses unobservable inputs will be used to measure fair valuein subsequent periods, the valuation technique shall be calibrated so that atinitial recognition the result of the valuation technique equals the



transaction price. Calibration ensures that the valuation technique reflectscurrent market conditions, and it helps an entity to determine whether anadjustment to the valuation technique is necessary (eg there might be acharacteristic of the asset or liability that is not captured by the valuationtechnique). After initial recognition, when measuring fair value using avaluation technique or techniques that use unobservable inputs, an entityshall ensure that those valuation techniques reflect observable market data(eg the price for a similar asset or liability) at the measurement date.

65 Valuation techniques used to measure fair value shall be appliedconsistently. However, a change in a valuation technique or its application(eg a change in its weighting when multiple valuation techniques are usedor a change in an adjustment applied to a valuation technique) isappropriate if the change results in a measurement that is equally or morerepresentative of fair value in the circumstances. That might be the case if,for example, any of the following events take place:

(a) new markets develop;

(b) new information becomes available;

(c) information previously used is no longer available;

(d) valuation techniques improve; or

(e) market conditions change.

66 Revisions resulting from a change in the valuation technique or itsapplication shall be accounted for as a change in accounting estimate inaccordance with IAS 8. However, the disclosures in IAS 8 for a change inaccounting estimate are not required for revisions resulting from achange in a valuation technique or its application.

Inputs to valuation techniques

General principles

67 Valuation techniques used to measure fair value shall maximise the use ofrelevant observable inputs and minimise the use of unobservable inputs.

68 Examples of markets in which inputs might be observable for some assetsand liabilities (eg financial instruments) include exchange markets,dealer markets, brokered markets and principal-to-principal markets(see paragraph B34).



69 An entity shall select inputs that are consistent with the characteristics ofthe asset or liability that market participants would take into account ina transaction for the asset or liability (see paragraphs 11 and 12). In somecases those characteristics result in the application of an adjustment,such as a premium or discount (eg a control premium or non-controllinginterest discount). However, a fair value measurement shall notincorporate a premium or discount that is inconsistent with the unit ofaccount in the IFRS that requires or permits the fair value measurement(see paragraphs 13 and 14). Premiums or discounts that reflect size as acharacteristic of the entity’s holding (specifically, a blockage factor thatadjusts the quoted price of an asset or a liability because the market’snormal daily trading volume is not sufficient to absorb the quantity heldby the entity, as described in paragraph 80) rather than as a characteristicof the asset or liability (eg a control premium when measuring the fairvalue of a controlling interest) are not permitted in a fair valuemeasurement. In all cases, if there is a quoted price in an active market(ie a Level 1 input) for an asset or a liability, an entity shall use that pricewithout adjustment when measuring fair value, except as specified inparagraph 79.

Inputs based on bid and ask prices

70 If an asset or a liability measured at fair value has a bid price and an askprice (eg an input from a dealer market), the price within the bid-askspread that is most representative of fair value in the circumstances shallbe used to measure fair value regardless of where the input is categorisedwithin the fair value hierarchy (ie Level 1, 2 or 3; see paragraphs 72–90).The use of bid prices for asset positions and ask prices for liabilitypositions is permitted, but is not required.

71 This IFRS does not preclude the use of mid-market pricing or other pricingconventions that are used by market participants as a practical expedientfor fair value measurements within a bid-ask spread.

Fair value hierarchy

72 To increase consistency and comparability in fair value measurementsand related disclosures, this IFRS establishes a fair value hierarchy thatcategorises into three levels (see paragraphs 76–90) the inputs tovaluation techniques used to measure fair value. The fair value hierarchygives the highest priority to quoted prices (unadjusted) in active marketsfor identical assets or liabilities (Level 1 inputs) and the lowest priority tounobservable inputs (Level 3 inputs).



73 In some cases, the inputs used to measure the fair value of an asset or aliability might be categorised within different levels of the fair valuehierarchy. In those cases, the fair value measurement is categorised in itsentirety in the same level of the fair value hierarchy as the lowest levelinput that is significant to the entire measurement. Assessing thesignificance of a particular input to the entire measurement requiresjudgement, taking into account factors specific to the asset or liability.Adjustments to arrive at measurements based on fair value, such as coststo sell when measuring fair value less costs to sell, shall not be taken intoaccount when determining the level of the fair value hierarchy withinwhich a fair value measurement is categorised.

74 The availability of relevant inputs and their relative subjectivity mightaffect the selection of appropriate valuation techniques (see paragraph 61).However, the fair value hierarchy prioritises the inputs to valuationtechniques, not the valuation techniques used to measure fair value.For example, a fair value measurement developed using a present valuetechnique might be categorised within Level 2 or Level 3, depending onthe inputs that are significant to the entire measurement and the level ofthe fair value hierarchy within which those inputs are categorised.

75 If an observable input requires an adjustment using an unobservableinput and that adjustment results in a significantly higher or lower fairvalue measurement, the resulting measurement would be categorisedwithin Level 3 of the fair value hierarchy. For example, if a marketparticipant would take into account the effect of a restriction on the saleof an asset when estimating the price for the asset, an entity would adjustthe quoted price to reflect the effect of that restriction. If that quotedprice is a Level 2 input and the adjustment is an unobservable input that issignificant to the entire measurement, the measurement would becategorised within Level 3 of the fair value hierarchy.

Level 1 inputs

76 Level 1 inputs are quoted prices (unadjusted) in active markets foridentical assets or liabilities that the entity can access at themeasurement date.

77 A quoted price in an active market provides the most reliable evidence offair value and shall be used without adjustment to measure fair valuewhenever available, except as specified in paragraph 79.



78 A Level 1 input will be available for many financial assets and financialliabilities, some of which might be exchanged in multiple active markets(eg on different exchanges). Therefore, the emphasis within Level 1 is ondetermining both of the following:

(a) the principal market for the asset or liability or, in the absence of aprincipal market, the most advantageous market for the asset orliability; and

(b) whether the entity can enter into a transaction for the asset orliability at the price in that market at the measurement date.

79 An entity shall not make an adjustment to a Level 1 input except in thefollowing circumstances:

(a) when an entity holds a large number of similar (but not identical)assets or liabilities (eg debt securities) that are measured at fairvalue and a quoted price in an active market is available but notreadily accessible for each of those assets or liabilities individually(ie given the large number of similar assets or liabilities held by theentity, it would be difficult to obtain pricing information for eachindividual asset or liability at the measurement date). In that case,as a practical expedient, an entity may measure fair value using analternative pricing method that does not rely exclusively on quotedprices (eg matrix pricing). However, the use of an alternativepricing method results in a fair value measurement categorisedwithin a lower level of the fair value hierarchy.

(b) when a quoted price in an active market does not represent fairvalue at the measurement date. That might be the case if, forexample, significant events (such as transactions in aprincipal-to-principal market, trades in a brokered market orannouncements) take place after the close of a market but beforethe measurement date. An entity shall establish and consistentlyapply a policy for identifying those events that might affect fairvalue measurements. However, if the quoted price is adjusted fornew information, the adjustment results in a fair valuemeasurement categorised within a lower level of the fair valuehierarchy.

(c) when measuring the fair value of a liability or an entity’s ownequity instrument using the quoted price for the identical itemtraded as an asset in an active market and that price needs to beadjusted for factors specific to the item or the asset(see paragraph 39). If no adjustment to the quoted price of the asset



is required, the result is a fair value measurement categorisedwithin Level 1 of the fair value hierarchy. However, any adjustmentto the quoted price of the asset results in a fair value measurementcategorised within a lower level of the fair value hierarchy.

80 If an entity holds a position in a single asset or liability (including aposition comprising a large number of identical assets or liabilities, suchas a holding of financial instruments) and the asset or liability is tradedin an active market, the fair value of the asset or liability shall bemeasured within Level 1 as the product of the quoted price for theindividual asset or liability and the quantity held by the entity. That isthe case even if a market’s normal daily trading volume is not sufficientto absorb the quantity held and placing orders to sell the position in asingle transaction might affect the quoted price.

Level 2 inputs

81 Level 2 inputs are inputs other than quoted prices included within Level 1that are observable for the asset or liability, either directly or indirectly.

82 If the asset or liability has a specified (contractual) term, a Level 2 inputmust be observable for substantially the full term of the asset or liability.Level 2 inputs include the following:

(a) quoted prices for similar assets or liabilities in active markets.

(b) quoted prices for identical or similar assets or liabilities in marketsthat are not active.

(c) inputs other than quoted prices that are observable for the asset orliability, for example:

(i) interest rates and yield curves observable at commonly quotedintervals;

(ii) implied volatilities; and

(iii) credit spreads.

(d) market-corroborated inputs.

83 Adjustments to Level 2 inputs will vary depending on factors specific tothe asset or liability. Those factors include the following:

(a) the condition or location of the asset;

(b) the extent to which inputs relate to items that are comparable tothe asset or liability (including those factors described inparagraph 39); and



(c) the volume or level of activity in the markets within which theinputs are observed.

84 An adjustment to a Level 2 input that is significant to the entiremeasurement might result in a fair value measurement categorisedwithin Level 3 of the fair value hierarchy if the adjustment usessignificant unobservable inputs.

85 Paragraph B35 describes the use of Level 2 inputs for particular assets andliabilities.

Level 3 inputs

86 Level 3 inputs are unobservable inputs for the asset or liability.

87 Unobservable inputs shall be used to measure fair value to the extent thatrelevant observable inputs are not available, thereby allowing forsituations in which there is little, if any, market activity for the asset orliability at the measurement date. However, the fair value measurementobjective remains the same, ie an exit price at the measurement datefrom the perspective of a market participant that holds the asset or owesthe liability. Therefore, unobservable inputs shall reflect theassumptions that market participants would use when pricing the assetor liability, including assumptions about risk.

88 Assumptions about risk include the risk inherent in a particularvaluation technique used to measure fair value (such as a pricing model)and the risk inherent in the inputs to the valuation technique.A measurement that does not include an adjustment for risk would notrepresent a fair value measurement if market participants would includeone when pricing the asset or liability. For example, it might be necessaryto include a risk adjustment when there is significant measurementuncertainty (eg when there has been a significant decrease in the volumeor level of activity when compared with normal market activity for theasset or liability, or similar assets or liabilities, and the entity hasdetermined that the transaction price or quoted price does not representfair value, as described in paragraphs B37–B47).

89 An entity shall develop unobservable inputs using the best informationavailable in the circumstances, which might include the entity’s owndata. In developing unobservable inputs, an entity may begin with itsown data, but it shall adjust those data if reasonably availableinformation indicates that other market participants would use differentdata or there is something particular to the entity that is not available toother market participants (eg an entity-specific synergy). An entity need



not undertake exhaustive efforts to obtain information about marketparticipant assumptions. However, an entity shall take into account allinformation about market participant assumptions that is reasonablyavailable. Unobservable inputs developed in the manner described aboveare considered market participant assumptions and meet the objective ofa fair value measurement.

90 Paragraph B36 describes the use of Level 3 inputs for particular assets andliabilities.

Disclosure

91 An entity shall disclose information that helps users of its financialstatements assess both of the following:

(a) for assets and liabilities that are measured at fair value on arecurring or non-recurring basis in the statement of financialposition after initial recognition, the valuation techniques andinputs used to develop those measurements.

(b) for recurring fair value measurements using significantunobservable inputs (Level 3), the effect of the measurements onprofit or loss or other comprehensive income for the period.

92 To meet the objectives in paragraph 91, an entity shall consider all thefollowing:

(a) the level of detail necessary to satisfy the disclosure requirements;

(b) how much emphasis to place on each of the various requirements;

(c) how much aggregation or disaggregation to undertake; and

(d) whether users of financial statements need additional informationto evaluate the quantitative information disclosed.

If the disclosures provided in accordance with this IFRS and other IFRSs areinsufficient to meet the objectives in paragraph 91, an entity shall discloseadditional information necessary to meet those objectives.

93 To meet the objectives in paragraph 91, an entity shall disclose, at aminimum, the following information for each class of assets andliabilities (see paragraph 94 for information on determining appropriateclasses of assets and liabilities) measured at fair value (includingmeasurements based on fair value within the scope of this IFRS) in thestatement of financial position after initial recognition:



(a) for recurring and non-recurring fair value measurements, the fairvalue measurement at the end of the reporting period, and fornon-recurring fair value measurements, the reasons for themeasurement. Recurring fair value measurements of assets orliabilities are those that other IFRSs require or permit in thestatement of financial position at the end of each reporting period.Non-recurring fair value measurements of assets or liabilities arethose that other IFRSs require or permit in the statement offinancial position in particular circumstances (eg when an entitymeasures an asset held for sale at fair value less costs to sell inaccordance with IFRS 5 Non-current Assets Held for Sale and DiscontinuedOperations because the asset’s fair value less costs to sell is lowerthan its carrying amount).

(b) for recurring and non-recurring fair value measurements, the levelof the fair value hierarchy within which the fair valuemeasurements are categorised in their entirety (Level 1, 2 or 3).

(c) for assets and liabilities held at the end of the reporting period thatare measured at fair value on a recurring basis, the amounts of anytransfers between Level 1 and Level 2 of the fair value hierarchy, thereasons for those transfers and the entity’s policy for determiningwhen transfers between levels are deemed to have occurred(see paragraph 95). Transfers into each level shall be disclosed anddiscussed separately from transfers out of each level.

(d) for recurring and non-recurring fair value measurementscategorised within Level 2 and Level 3 of the fair value hierarchy, adescription of the valuation technique(s) and the inputs used in thefair value measurement. If there has been a change in valuationtechnique (eg changing from a market approach to an incomeapproach or the use of an additional valuation technique), theentity shall disclose that change and the reason(s) for making it.For fair value measurements categorised within Level 3 of the fairvalue hierarchy, an entity shall provide quantitative informationabout the significant unobservable inputs used in the fair valuemeasurement. An entity is not required to create quantitativeinformation to comply with this disclosure requirement ifquantitative unobservable inputs are not developed by the entitywhen measuring fair value (eg when an entity uses prices fromprior transactions or third-party pricing information withoutadjustment). However, when providing this disclosure an entitycannot ignore quantitative unobservable inputs that are



significant to the fair value measurement and are reasonablyavailable to the entity.

(e) for recurring fair value measurements categorised within Level 3 ofthe fair value hierarchy, a reconciliation from the opening balancesto the closing balances, disclosing separately changes during theperiod attributable to the following:

(i) total gains or losses for the period recognised in profit or loss,and the line item(s) in profit or loss in which those gains orlosses are recognised.

(ii) total gains or losses for the period recognised in othercomprehensive income, and the line item(s) in othercomprehensive income in which those gains or losses arerecognised.

(iii) purchases, sales, issues and settlements (each of those typesof changes disclosed separately).

(iv) the amounts of any transfers into or out of Level 3 of the fairvalue hierarchy, the reasons for those transfers and theentity’s policy for determining when transfers between levelsare deemed to have occurred (see paragraph 95). Transfersinto Level 3 shall be disclosed and discussed separately fromtransfers out of Level 3.

(f) for recurring fair value measurements categorised within Level 3 ofthe fair value hierarchy, the amount of the total gains or losses forthe period in (e)(i) included in profit or loss that is attributable tothe change in unrealised gains or losses relating to those assets andliabilities held at the end of the reporting period, and the lineitem(s) in profit or loss in which those unrealised gains or losses arerecognised.

(g) for recurring and non-recurring fair value measurementscategorised within Level 3 of the fair value hierarchy, a descriptionof the valuation processes used by the entity (including, forexample, how an entity decides its valuation policies andprocedures and analyses changes in fair value measurements fromperiod to period).

(h) for recurring fair value measurements categorised within Level 3 ofthe fair value hierarchy:

(i) for all such measurements, a narrative description of thesensitivity of the fair value measurement to changes in



unobservable inputs if a change in those inputs to a differentamount might result in a significantly higher or lower fairvalue measurement. If there are interrelationships betweenthose inputs and other unobservable inputs used in the fairvalue measurement, an entity shall also provide a descriptionof those interrelationships and of how they might magnify ormitigate the effect of changes in the unobservable inputs onthe fair value measurement. To comply with that disclosurerequirement, the narrative description of the sensitivity tochanges in unobservable inputs shall include, at a minimum,the unobservable inputs disclosed when complying with (d).

(ii) for financial assets and financial liabilities, if changing oneor more of the unobservable inputs to reflect reasonablypossible alternative assumptions would change fair valuesignificantly, an entity shall state that fact and disclose theeffect of those changes. The entity shall disclose how theeffect of a change to reflect a reasonably possible alternativeassumption was calculated. For that purpose, significanceshall be judged with respect to profit or loss, and total assetsor total liabilities, or, when changes in fair value arerecognised in other comprehensive income, total equity.

(i) for recurring and non-recurring fair value measurements, if thehighest and best use of a non-financial asset differs from its currentuse, an entity shall disclose that fact and why the non-financialasset is being used in a manner that differs from its highest andbest use.

94 An entity shall determine appropriate classes of assets and liabilities onthe basis of the following:

(a) the nature, characteristics and risks of the asset or liability; and

(b) the level of the fair value hierarchy within which the fair valuemeasurement is categorised.

The number of classes may need to be greater for fair value measurementscategorised within Level 3 of the fair value hierarchy because thosemeasurements have a greater degree of uncertainty and subjectivity.Determining appropriate classes of assets and liabilities for whichdisclosures about fair value measurements should be provided requiresjudgement. A class of assets and liabilities will often require greaterdisaggregation than the line items presented in the statement of financialposition. However, an entity shall provide information sufficient to permit



reconciliation to the line items presented in the statement of financialposition. If another IFRS specifies the class for an asset or a liability, anentity may use that class in providing the disclosures required in this IFRSif that class meets the requirements in this paragraph.

95 An entity shall disclose and consistently follow its policy for determiningwhen transfers between levels of the fair value hierarchy are deemed tohave occurred in accordance with paragraph 93(c) and (e)(iv). The policyabout the timing of recognising transfers shall be the same for transfersinto the levels as for transfers out of the levels. Examples of policies fordetermining the timing of transfers include the following:

(a) the date of the event or change in circumstances that caused thetransfer.

(b) the beginning of the reporting period.

(c) the end of the reporting period.

96 If an entity makes an accounting policy decision to use the exception inparagraph 48, it shall disclose that fact.

97 For each class of assets and liabilities not measured at fair value in thestatement of financial position but for which the fair value is disclosed,an entity shall disclose the information required by paragraph 93(b), (d)and (i). However, an entity is not required to provide the quantitativedisclosures about significant unobservable inputs used in fair valuemeasurements categorised within Level 3 of the fair value hierarchyrequired by paragraph 93(d). For such assets and liabilities, an entity doesnot need to provide the other disclosures required by this IFRS.

98 For a liability measured at fair value and issued with an inseparablethird-party credit enhancement, an issuer shall disclose the existence ofthat credit enhancement and whether it is reflected in the fair valuemeasurement of the liability.

99 An entity shall present the quantitative disclosures required by this IFRSin a tabular format unless another format is more appropriate.



Appendix ADefined terms

This appendix is an integral part of the IFRS.

active market A market in which transactions for the asset or liability takeplace with sufficient frequency and volume to provide pricinginformation on an ongoing basis.

cost approach A valuation technique that reflects the amount that would berequired currently to replace the service capacity of an asset(often referred to as current replacement cost).

entry price The price paid to acquire an asset or received to assume aliability in an exchange transaction.

exit price The price that would be received to sell an asset or paid totransfer a liability.

expected cash flow The probability-weighted average (ie mean of the distribution)of possible future cash flows.

fair value The price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between marketparticipants at the measurement date.

highest and best use

The use of a non-financial asset by market participants thatwould maximise the value of the asset or the group of assetsand liabilities (eg a business) within which the asset would beused.

income approach Valuation techniques that convert future amounts (eg cashflows or income and expenses) to a single current(ie discounted) amount. The fair value measurement isdetermined on the basis of the value indicated by currentmarket expectations about those future amounts.



inputs The assumptions that market participants would use whenpricing the asset or liability, including assumptions aboutrisk, such as the following:

(a) the risk inherent in a particular valuation techniqueused to measure fair value (such as a pricing model);and

(b) the risk inherent in the inputs to the valuationtechnique.

Inputs may be observable or unobservable.

Level 1 inputs Quoted prices (unadjusted) in active markets for identicalassets or liabilities that the entity can access at themeasurement date.

Level 2 inputs Inputs other than quoted prices included within Level 1 thatare observable for the asset or liability, either directly orindirectly.

Level 3 inputs Unobservable inputs for the asset or liability.

market approach A valuation technique that uses prices and other relevantinformation generated by market transactions involvingidentical or comparable (ie similar) assets, liabilities or agroup of assets and liabilities, such as a business.

market-corroborated inputs

Inputs that are derived principally from or corroborated byobservable market data by correlation or other means.



market participants

Buyers and sellers in the principal (or most advantageous)market for the asset or liability that have all of the followingcharacteristics:

(a) They are independent of each other, ie they are notrelated parties as defined in IAS 24, although the pricein a related party transaction may be used as an inputto a fair value measurement if the entity has evidencethat the transaction was entered into at market terms.

(b) They are knowledgeable, having a reasonableunderstanding about the asset or liability and thetransaction using all available information, includinginformation that might be obtained through duediligence efforts that are usual and customary.

(c) They are able to enter into a transaction for the asset orliability.

(d) They are willing to enter into a transaction for the assetor liability, ie they are motivated but not forced orotherwise compelled to do so.

most advantageous market

The market that maximises the amount that would bereceived to sell the asset or minimises the amount that wouldbe paid to transfer the liability, after taking into accounttransaction costs and transport costs.

non-performance risk

The risk that an entity will not fulfil an obligation.Non-performance risk includes, but may not be limited to, theentity’s own credit risk.

observable inputs Inputs that are developed using market data, such as publiclyavailable information about actual events or transactions,and that reflect the assumptions that market participantswould use when pricing the asset or liability.

orderly transactionA transaction that assumes exposure to the market for aperiod before the measurement date to allow for marketingactivities that are usual and customary for transactionsinvolving such assets or liabilities; it is not a forcedtransaction (eg a forced liquidation or distress sale).

principal market The market with the greatest volume and level of activity forthe asset or liability.



risk premium Compensation sought by risk-averse market participants forbearing the uncertainty inherent in the cash flows of an assetor a liability. Also referred to as a ‘risk adjustment’.

transaction costs The costs to sell an asset or transfer a liability in the principal(or most advantageous) market for the asset or liability thatare directly attributable to the disposal of the asset or thetransfer of the liability and meet both of the followingcriteria:

(a) They result directly from and are essential to thattransaction.

(b) They would not have been incurred by the entity hadthe decision to sell the asset or transfer the liability notbeen made (similar to costs to sell, as defined in IFRS 5).

transport costs The costs that would be incurred to transport an asset from itscurrent location to its principal (or most advantageous)market.

unit of account The level at which an asset or a liability is aggregated ordisaggregated in an IFRS for recognition purposes.

unobservable inputs

Inputs for which market data are not available and that aredeveloped using the best information available about theassumptions that market participants would use whenpricing the asset or liability.



Appendix B Application guidance

This appendix is an integral part of the IFRS. It describes the application of paragraphs 1–99and has the same authority as the other parts of the IFRS.

B1 The judgements applied in different valuation situations may bedifferent. This appendix describes the judgements that might applywhen an entity measures fair value in different valuation situations.

The fair value measurement approach

B2 The objective of a fair value measurement is to estimate the price atwhich an orderly transaction to sell the asset or to transfer the liabilitywould take place between market participants at the measurement dateunder current market conditions. A fair value measurement requires anentity to determine all the following:

(a) the particular asset or liability that is the subject of themeasurement (consistently with its unit of account).

(b) for a non-financial asset, the valuation premise that is appropriatefor the measurement (consistently with its highest and best use).

(c) the principal (or most advantageous) market for the asset orliability.

(d) the valuation technique(s) appropriate for the measurement,considering the availability of data with which to develop inputsthat represent the assumptions that market participants would usewhen pricing the asset or liability and the level of the fair valuehierarchy within which the inputs are categorised.

Valuation premise for non-financial assets (paragraphs 31–33)

B3 When measuring the fair value of a non-financial asset used incombination with other assets as a group (as installed or otherwiseconfigured for use) or in combination with other assets and liabilities(eg a business), the effect of the valuation premise depends on thecircumstances. For example:

(a) the fair value of the asset might be the same whether the asset isused on a stand-alone basis or in combination with other assets or



with other assets and liabilities. That might be the case if the assetis a business that market participants would continue to operate.In that case, the transaction would involve valuing the business inits entirety. The use of the assets as a group in an ongoing businesswould generate synergies that would be available to marketparticipants (ie market participant synergies that, therefore,should affect the fair value of the asset on either a stand-alonebasis or in combination with other assets or with other assets andliabilities).

(b) an asset’s use in combination with other assets or with other assetsand liabilities might be incorporated into the fair valuemeasurement through adjustments to the value of the asset usedon a stand-alone basis. That might be the case if the asset is amachine and the fair value measurement is determined using anobserved price for a similar machine (not installed or otherwiseconfigured for use), adjusted for transport and installation costs sothat the fair value measurement reflects the current condition andlocation of the machine (installed and configured for use).

(c) an asset’s use in combination with other assets or with other assetsand liabilities might be incorporated into the fair valuemeasurement through the market participant assumptions used tomeasure the fair value of the asset. For example, if the asset iswork in progress inventory that is unique and market participantswould convert the inventory into finished goods, the fair value ofthe inventory would assume that market participants haveacquired or would acquire any specialised machinery necessary toconvert the inventory into finished goods.

(d) an asset’s use in combination with other assets or with other assetsand liabilities might be incorporated into the valuation techniqueused to measure the fair value of the asset. That might be the casewhen using the multi-period excess earnings method to measurethe fair value of an intangible asset because that valuationtechnique specifically takes into account the contribution of anycomplementary assets and the associated liabilities in the group inwhich such an intangible asset would be used.

(e) in more limited situations, when an entity uses an asset within agroup of assets, the entity might measure the asset at an amountthat approximates its fair value when allocating the fair value ofthe asset group to the individual assets of the group. That might bethe case if the valuation involves real property and the fair value of



improved property (ie an asset group) is allocated to its componentassets (such as land and improvements).

Fair value at initial recognition (paragraphs 57–60)

B4 When determining whether fair value at initial recognition equals thetransaction price, an entity shall take into account factors specific to thetransaction and to the asset or liability. For example, the transactionprice might not represent the fair value of an asset or a liability at initialrecognition if any of the following conditions exist:

(a) The transaction is between related parties, although the price in arelated party transaction may be used as an input into a fair valuemeasurement if the entity has evidence that the transaction wasentered into at market terms.

(b) The transaction takes place under duress or the seller is forced toaccept the price in the transaction. For example, that might be thecase if the seller is experiencing financial difficulty.

(c) The unit of account represented by the transaction price isdifferent from the unit of account for the asset or liabilitymeasured at fair value. For example, that might be the case if theasset or liability measured at fair value is only one of the elementsin the transaction (eg in a business combination), the transactionincludes unstated rights and privileges that are measuredseparately in accordance with another IFRS, or the transactionprice includes transaction costs.

(d) The market in which the transaction takes place is different fromthe principal market (or most advantageous market). For example,those markets might be different if the entity is a dealer that entersinto transactions with customers in the retail market, but theprincipal (or most advantageous) market for the exit transaction iswith other dealers in the dealer market.



Valuation techniques (paragraphs 61–66)

Market approach

B5 The market approach uses prices and other relevant informationgenerated by market transactions involving identical or comparable(ie similar) assets, liabilities or a group of assets and liabilities, such as abusiness.

B6 For example, valuation techniques consistent with the market approachoften use market multiples derived from a set of comparables. Multiplesmight be in ranges with a different multiple for each comparable.The selection of the appropriate multiple within the range requiresjudgement, considering qualitative and quantitative factors specific tothe measurement.

B7 Valuation techniques consistent with the market approach includematrix pricing. Matrix pricing is a mathematical technique usedprincipally to value some types of financial instruments, such as debtsecurities, without relying exclusively on quoted prices for the specificsecurities, but rather relying on the securities’ relationship to otherbenchmark quoted securities.

Cost approach

B8 The cost approach reflects the amount that would be required currentlyto replace the service capacity of an asset (often referred to as currentreplacement cost).

B9 From the perspective of a market participant seller, the price that wouldbe received for the asset is based on the cost to a market participant buyerto acquire or construct a substitute asset of comparable utility, adjustedfor obsolescence. That is because a market participant buyer would notpay more for an asset than the amount for which it could replace theservice capacity of that asset. Obsolescence encompasses physicaldeterioration, functional (technological) obsolescence and economic(external) obsolescence and is broader than depreciation for financialreporting purposes (an allocation of historical cost) or tax purposes(using specified service lives). In many cases the current replacementcost method is used to measure the fair value of tangible assets that areused in combination with other assets or with other assets and liabilities.



Income approach

B10 The income approach converts future amounts (eg cash flows or incomeand expenses) to a single current (ie discounted) amount. When theincome approach is used, the fair value measurement reflects currentmarket expectations about those future amounts.

B11 Those valuation techniques include, for example, the following:

(a) present value techniques (see paragraphs B12–B30);

(b) option pricing models, such as the Black-Scholes-Merton formula ora binomial model (ie a lattice model), that incorporate presentvalue techniques and reflect both the time value and the intrinsicvalue of an option; and

(c) the multi-period excess earnings method, which is used to measurethe fair value of some intangible assets.

Present value techniques

B12 Paragraphs B13–B30 describe the use of present value techniques tomeasure fair value. Those paragraphs focus on a discount rateadjustment technique and an expected cash flow (expected present value)technique. Those paragraphs neither prescribe the use of a single specificpresent value technique nor limit the use of present value techniques tomeasure fair value to the techniques discussed. The present valuetechnique used to measure fair value will depend on facts andcircumstances specific to the asset or liability being measured(eg whether prices for comparable assets or liabilities can be observed inthe market) and the availability of sufficient data.

The components of a present value measurement

B13 Present value (ie an application of the income approach) is a tool used tolink future amounts (eg cash flows or values) to a present amount usinga discount rate. A fair value measurement of an asset or a liability usinga present value technique captures all the following elements from theperspective of market participants at the measurement date:

(a) an estimate of future cash flows for the asset or liability beingmeasured.

(b) expectations about possible variations in the amount and timing ofthe cash flows representing the uncertainty inherent in the cashflows.



(c) the time value of money, represented by the rate on risk-freemonetary assets that have maturity dates or durations thatcoincide with the period covered by the cash flows and poseneither uncertainty in timing nor risk of default to the holder(ie a risk-free interest rate).

(d) the price for bearing the uncertainty inherent in the cash flows(ie a risk premium).

(e) other factors that market participants would take into account inthe circumstances.

(f) for a liability, the non-performance risk relating to that liability,including the entity’s (ie the obligor’s) own credit risk.

General principles

B14 Present value techniques differ in how they capture the elements inparagraph B13. However, all the following general principles govern theapplication of any present value technique used to measure fair value:

(a) Cash flows and discount rates should reflect assumptions thatmarket participants would use when pricing the asset or liability.

(b) Cash flows and discount rates should take into account only thefactors attributable to the asset or liability being measured.

(c) To avoid double-counting or omitting the effects of risk factors,discount rates should reflect assumptions that are consistent withthose inherent in the cash flows. For example, a discount rate thatreflects the uncertainty in expectations about future defaults isappropriate if using contractual cash flows of a loan (ie a discountrate adjustment technique). That same rate should not be used ifusing expected (ie probability-weighted) cash flows (ie an expectedpresent value technique) because the expected cash flows alreadyreflect assumptions about the uncertainty in future defaults;instead, a discount rate that is commensurate with the riskinherent in the expected cash flows should be used.

(d) Assumptions about cash flows and discount rates should beinternally consistent. For example, nominal cash flows, whichinclude the effect of inflation, should be discounted at a ratethat includes the effect of inflation. The nominal risk-free interestrate includes the effect of inflation. Real cash flows, which excludethe effect of inflation, should be discounted at a rate that excludesthe effect of inflation. Similarly, after-tax cash flows should be



discounted using an after-tax discount rate. Pre-tax cash flowsshould be discounted at a rate consistent with those cash flows.

(e) Discount rates should be consistent with the underlying economicfactors of the currency in which the cash flows are denominated.

Risk and uncertainty

B15 A fair value measurement using present value techniques is made underconditions of uncertainty because the cash flows used are estimatesrather than known amounts. In many cases both the amount and timingof the cash flows are uncertain. Even contractually fixed amounts, suchas the payments on a loan, are uncertain if there is risk of default.

B16 Market participants generally seek compensation (ie a risk premium) forbearing the uncertainty inherent in the cash flows of an asset or aliability. A fair value measurement should include a risk premiumreflecting the amount that market participants would demand ascompensation for the uncertainty inherent in the cash flows. Otherwise,the measurement would not faithfully represent fair value. In some casesdetermining the appropriate risk premium might be difficult. However,the degree of difficulty alone is not a sufficient reason to exclude a riskpremium.

B17 Present value techniques differ in how they adjust for risk and in the typeof cash flows they use. For example:

(a) The discount rate adjustment technique (see paragraphs B18–B22)uses a risk-adjusted discount rate and contractual, promised ormost likely cash flows.

(b) Method 1 of the expected present value technique (see paragraph B25)uses risk-adjusted expected cash flows and a risk-free rate.

(c) Method 2 of the expected present value technique (see paragraph B26)uses expected cash flows that are not risk-adjusted and a discount rateadjusted to include the risk premium that market participantsrequire. That rate is different from the rate used in the discount rateadjustment technique.

Discount rate adjustment technique

B18 The discount rate adjustment technique uses a single set of cash flowsfrom the range of possible estimated amounts, whether contractual orpromised (as is the case for a bond) or most likely cash flows. In all cases,those cash flows are conditional upon the occurrence of specified events



(eg contractual or promised cash flows for a bond are conditional on theevent of no default by the debtor). The discount rate used in the discountrate adjustment technique is derived from observed rates of return forcomparable assets or liabilities that are traded in the market.Accordingly, the contractual, promised or most likely cash flows arediscounted at an observed or estimated market rate for such conditionalcash flows (ie a market rate of return).

B19 The discount rate adjustment technique requires an analysis of marketdata for comparable assets or liabilities. Comparability is established byconsidering the nature of the cash flows (eg whether the cash flows arecontractual or non-contractual and are likely to respond similarly tochanges in economic conditions), as well as other factors (eg creditstanding, collateral, duration, restrictive covenants and liquidity).Alternatively, if a single comparable asset or liability does not fairlyreflect the risk inherent in the cash flows of the asset or liability beingmeasured, it may be possible to derive a discount rate using data forseveral comparable assets or liabilities in conjunction with the risk-freeyield curve (ie using a ‘build-up’ approach).

B20 To illustrate a build-up approach, assume that Asset A is a contractualright to receive CU800* in one year (ie there is no timing uncertainty).There is an established market for comparable assets, and informationabout those assets, including price information, is available. Of thosecomparable assets:

(a) Asset B is a contractual right to receive CU1,200 in one year and has amarket price of CU1,083. Thus, the implied annual rate of return (ie aone-year market rate of return) is 10.8 per cent [(CU1,200/CU1,083) – 1].

(b) Asset C is a contractual right to receive CU700 in two years and has amarket price of CU566. Thus, the implied annual rate of return (ie atwo-year market rate of return) is 11.2 per cent [(CU700/CU566)^0.5 – 1].

(c) All three assets are comparable with respect to risk (ie dispersion ofpossible pay-offs and credit).

B21 On the basis of the timing of the contractual payments to be received forAsset A relative to the timing for Asset B and Asset C (ie one year forAsset B versus two years for Asset C), Asset B is deemed more comparableto Asset A. Using the contractual payment to be received for Asset A(CU800) and the one-year market rate derived from Asset B (10.8 per cent),the fair value of Asset A is CU722 (CU800/1.108). Alternatively, in theabsence of available market information for Asset B, the one-year market

* In this IFRS monetary amounts are denominated in ‘currency units (CU)’.



rate could be derived from Asset C using the build-up approach. In thatcase the two-year market rate indicated by Asset C (11.2 per cent) wouldbe adjusted to a one-year market rate using the term structure of therisk-free yield curve. Additional information and analysis might berequired to determine whether the risk premiums for one-year andtwo-year assets are the same. If it is determined that the risk premiumsfor one-year and two-year assets are not the same, the two-year marketrate of return would be further adjusted for that effect.

B22 When the discount rate adjustment technique is applied to fixed receiptsor payments, the adjustment for risk inherent in the cash flows of theasset or liability being measured is included in the discount rate. In someapplications of the discount rate adjustment technique to cash flows thatare not fixed receipts or payments, an adjustment to the cash flows maybe necessary to achieve comparability with the observed asset or liabilityfrom which the discount rate is derived.

Expected present value technique

B23 The expected present value technique uses as a starting point a set of cashflows that represents the probability-weighted average of all possiblefuture cash flows (ie the expected cash flows). The resulting estimate isidentical to expected value, which, in statistical terms, is the weightedaverage of a discrete random variable’s possible values with the respectiveprobabilities as the weights. Because all possible cash flows areprobability-weighted, the resulting expected cash flow is not conditionalupon the occurrence of any specified event (unlike the cash flows used inthe discount rate adjustment technique).

B24 In making an investment decision, risk-averse market participants wouldtake into account the risk that the actual cash flows may differ from theexpected cash flows. Portfolio theory distinguishes between two types ofrisk:

(a) unsystematic (diversifiable) risk, which is the risk specific to aparticular asset or liability.

(b) systematic (non-diversifiable) risk, which is the common risk shared byan asset or a liability with the other items in a diversified portfolio.

Portfolio theory holds that in a market in equilibrium, marketparticipants will be compensated only for bearing the systematic riskinherent in the cash flows. (In markets that are inefficient or out ofequilibrium, other forms of return or compensation might be available.)



B25 Method 1 of the expected present value technique adjusts the expectedcash flows of an asset for systematic (ie market) risk by subtracting a cashrisk premium (ie risk-adjusted expected cash flows). Those risk-adjustedexpected cash flows represent a certainty-equivalent cash flow, which isdiscounted at a risk-free interest rate. A certainty-equivalent cash flowrefers to an expected cash flow (as defined), adjusted for risk so that amarket participant is indifferent to trading a certain cash flow for anexpected cash flow. For example, if a market participant was willing totrade an expected cash flow of CU1,200 for a certain cash flow of CU1,000,the CU1,000 is the certainty equivalent of the CU1,200 (ie the CU200would represent the cash risk premium). In that case the marketparticipant would be indifferent as to the asset held.

B26 In contrast, Method 2 of the expected present value technique adjusts forsystematic (ie market) risk by applying a risk premium to the risk-freeinterest rate. Accordingly, the expected cash flows are discounted at arate that corresponds to an expected rate associated withprobability-weighted cash flows (ie an expected rate of return). Modelsused for pricing risky assets, such as the capital asset pricing model, canbe used to estimate the expected rate of return. Because the discount rateused in the discount rate adjustment technique is a rate of returnrelating to conditional cash flows, it is likely to be higher than thediscount rate used in Method 2 of the expected present value technique,which is an expected rate of return relating to expected orprobability-weighted cash flows.

B27 To illustrate Methods 1 and 2, assume that an asset has expected cash flowsof CU780 in one year determined on the basis of the possible cash flows andprobabilities shown below. The applicable risk-free interest rate for cashflows with a one-year horizon is 5 per cent, and the systematic riskpremium for an asset with the same risk profile is 3 per cent.

Possible cash flows Probability Probability-weighted cash flows

CU500 15% XCU75

CU800 60% CU480

CU900 25% CU225

Expected cash flows CU780



B28 In this simple illustration, the expected cash flows (CU780) represent theprobability-weighted average of the three possible outcomes. In morerealistic situations, there could be many possible outcomes. However, toapply the expected present value technique, it is not always necessary totake into account distributions of all possible cash flows using complexmodels and techniques. Rather, it might be possible to develop a limitednumber of discrete scenarios and probabilities that capture the array ofpossible cash flows. For example, an entity might use realised cash flowsfor some relevant past period, adjusted for changes in circumstancesoccurring subsequently (eg changes in external factors, includingeconomic or market conditions, industry trends and competition as wellas changes in internal factors affecting the entity more specifically),taking into account the assumptions of market participants.

B29 In theory, the present value (ie the fair value) of the asset’s cash flows isthe same whether determined using Method 1 or Method 2, as follows:

(a) Using Method 1, the expected cash flows are adjusted for systematic(ie market) risk. In the absence of market data directly indicatingthe amount of the risk adjustment, such adjustment could bederived from an asset pricing model using the concept of certaintyequivalents. For example, the risk adjustment (ie the cash riskpremium of CU22) could be determined using the systematic riskpremium of 3 per cent (CU780 – [CU780 × (1.05/1.08)]), which resultsin risk-adjusted expected cash flows of CU758 (CU780 – CU22).The CU758 is the certainty equivalent of CU780 and is discounted atthe risk-free interest rate (5 per cent). The present value (ie the fairvalue) of the asset is CU722 (CU758/1.05).

(b) Using Method 2, the expected cash flows are not adjusted forsystematic (ie market) risk. Rather, the adjustment for that risk isincluded in the discount rate. Thus, the expected cash flows arediscounted at an expected rate of return of 8 per cent (ie the5 per cent risk-free interest rate plus the 3 per cent systematic riskpremium). The present value (ie the fair value) of the asset isCU722 (CU780/1.08).

B30 When using an expected present value technique to measure fair value,either Method 1 or Method 2 could be used. The selection of Method 1 orMethod 2 will depend on facts and circumstances specific to the asset orliability being measured, the extent to which sufficient data are availableand the judgements applied.



Applying present value techniques to liabilities and an entity’s own equity instruments not held by other parties as assets (paragraphs 40 and 41)

B31 When using a present value technique to measure the fair value of aliability that is not held by another party as an asset (eg a decommissioningliability), an entity shall, among other things, estimate the future cashoutflows that market participants would expect to incur in fulfilling theobligation. Those future cash outflows shall include market participants’expectations about the costs of fulfilling the obligation and thecompensation that a market participant would require for taking on theobligation. Such compensation includes the return that a marketparticipant would require for the following:

(a) undertaking the activity (ie the value of fulfilling the obligation;eg by using resources that could be used for other activities); and

(b) assuming the risk associated with the obligation (ie a risk premiumthat reflects the risk that the actual cash outflows might differfrom the expected cash outflows; see paragraph B33).

B32 For example, a non-financial liability does not contain a contractual rateof return and there is no observable market yield for that liability.In some cases the components of the return that market participantswould require will be indistinguishable from one another (eg when usingthe price a third party contractor would charge on a fixed fee basis).In other cases an entity needs to estimate those components separately(eg when using the price a third party contractor would charge on a costplus basis because the contractor in that case would not bear the risk offuture changes in costs).

B33 An entity can include a risk premium in the fair value measurement of aliability or an entity’s own equity instrument that is not held by anotherparty as an asset in one of the following ways:

(a) by adjusting the cash flows (ie as an increase in the amount of cashoutflows); or

(b) by adjusting the rate used to discount the future cash flows to theirpresent values (ie as a reduction in the discount rate).

An entity shall ensure that it does not double-count or omit adjustmentsfor risk. For example, if the estimated cash flows are increased to takeinto account the compensation for assuming the risk associated with theobligation, the discount rate should not be adjusted to reflect that risk.



Inputs to valuation techniques (paragraphs 67–71)

B34 Examples of markets in which inputs might be observable for some assetsand liabilities (eg financial instruments) include the following:

(a) Exchange markets. In an exchange market, closing prices are bothreadily available and generally representative of fair value.An example of such a market is the London Stock Exchange.

(b) Dealer markets. In a dealer market, dealers stand ready to trade(either buy or sell for their own account), thereby providingliquidity by using their capital to hold an inventory of the items forwhich they make a market. Typically bid and ask prices(representing the price at which the dealer is willing to buy and theprice at which the dealer is willing to sell, respectively) are morereadily available than closing prices. Over-the-counter markets(for which prices are publicly reported) are dealer markets. Dealermarkets also exist for some other assets and liabilities, includingsome financial instruments, commodities and physical assets(eg used equipment).

(c) Brokered markets. In a brokered market, brokers attempt to matchbuyers with sellers but do not stand ready to trade for their ownaccount. In other words, brokers do not use their own capital tohold an inventory of the items for which they make a market.The broker knows the prices bid and asked by the respectiveparties, but each party is typically unaware of another party’s pricerequirements. Prices of completed transactions are sometimesavailable. Brokered markets include electronic communicationnetworks, in which buy and sell orders are matched, andcommercial and residential real estate markets.

(d) Principal-to-principal markets. In a principal-to-principal market,transactions, both originations and resales, are negotiatedindependently with no intermediary. Little information aboutthose transactions may be made available publicly.



Fair value hierarchy (paragraphs 72–90)

Level 2 inputs (paragraphs 81–85)

B35 Examples of Level 2 inputs for particular assets and liabilities include thefollowing:

(a) Receive-fixed, pay-variable interest rate swap based on the London InterbankOffered Rate (LIBOR) swap rate. A Level 2 input would be the LIBORswap rate if that rate is observable at commonly quoted intervalsfor substantially the full term of the swap.

(b) Receive-fixed, pay-variable interest rate swap based on a yield curvedenominated in a foreign currency. A Level 2 input would be the swaprate based on a yield curve denominated in a foreign currency thatis observable at commonly quoted intervals for substantially thefull term of the swap. That would be the case if the term of theswap is 10 years and that rate is observable at commonly quotedintervals for 9 years, provided that any reasonable extrapolation ofthe yield curve for year 10 would not be significant to the fair valuemeasurement of the swap in its entirety.

(c) Receive-fixed, pay-variable interest rate swap based on a specific bank’s primerate. A Level 2 input would be the bank’s prime rate derivedthrough extrapolation if the extrapolated values are corroboratedby observable market data, for example, by correlation with aninterest rate that is observable over substantially the full term ofthe swap.

(d) Three-year option on exchange-traded shares. A Level 2 input would bethe implied volatility for the shares derived through extrapolationto year 3 if both of the following conditions exist:

(i) Prices for one-year and two-year options on the shares areobservable.

(ii) The extrapolated implied volatility of a three-year option iscorroborated by observable market data for substantially thefull term of the option.

In that case the implied volatility could be derived by extrapolatingfrom the implied volatility of the one-year and two-year options onthe shares and corroborated by the implied volatility for three-yearoptions on comparable entities’ shares, provided that correlationwith the one-year and two-year implied volatilities is established.



(e) Licensing arrangement. For a licensing arrangement that is acquiredin a business combination and was recently negotiated with anunrelated party by the acquired entity (the party to the licensingarrangement), a Level 2 input would be the royalty rate in thecontract with the unrelated party at inception of the arrangement.

(f) Finished goods inventory at a retail outlet. For finished goods inventorythat is acquired in a business combination, a Level 2 input would beeither a price to customers in a retail market or a price to retailersin a wholesale market, adjusted for differences between thecondition and location of the inventory item and the comparable(ie similar) inventory items so that the fair value measurementreflects the price that would be received in a transaction to sell theinventory to another retailer that would complete the requisiteselling efforts. Conceptually, the fair value measurement will bethe same, whether adjustments are made to a retail price(downward) or to a wholesale price (upward). Generally, the pricethat requires the least amount of subjective adjustments should beused for the fair value measurement.

(g) Building held and used. A Level 2 input would be the price per squaremetre for the building (a valuation multiple) derived fromobservable market data, eg multiples derived from prices inobserved transactions involving comparable (ie similar) buildingsin similar locations.

(h) Cash-generating unit. A Level 2 input would be a valuation multiple(eg a multiple of earnings or revenue or a similar performancemeasure) derived from observable market data, eg multiplesderived from prices in observed transactions involving comparable(ie similar) businesses, taking into account operational, market,financial and non-financial factors.

Level 3 inputs (paragraphs 86–90)

B36 Examples of Level 3 inputs for particular assets and liabilities include thefollowing:

(a) Long-dated currency swap. A Level 3 input would be an interest rate ina specified currency that is not observable and cannot becorroborated by observable market data at commonly quotedintervals or otherwise for substantially the full term of thecurrency swap. The interest rates in a currency swap are the swaprates calculated from the respective countries’ yield curves.



(b) Three-year option on exchange-traded shares. A Level 3 input would behistorical volatility, ie the volatility for the shares derived from theshares’ historical prices. Historical volatility typically does notrepresent current market participants’ expectations about futurevolatility, even if it is the only information available to price anoption.

(c) Interest rate swap. A Level 3 input would be an adjustment to amid-market consensus (non-binding) price for the swap developedusing data that are not directly observable and cannot otherwisebe corroborated by observable market data.

(d) Decommissioning liability assumed in a business combination. A Level 3input would be a current estimate using the entity’s own dataabout the future cash outflows to be paid to fulfil the obligation(including market participants’ expectations about the costs offulfilling the obligation and the compensation that a marketparticipant would require for taking on the obligation to dismantlethe asset) if there is no reasonably available information thatindicates that market participants would use differentassumptions. That Level 3 input would be used in a present valuetechnique together with other inputs, eg a current risk-free interestrate or a credit-adjusted risk-free rate if the effect of the entity’scredit standing on the fair value of the liability is reflected in thediscount rate rather than in the estimate of future cash outflows.

(e) Cash-generating unit. A Level 3 input would be a financial forecast(eg of cash flows or profit or loss) developed using the entity’s owndata if there is no reasonably available information that indicatesthat market participants would use different assumptions.

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

B37 The fair value of an asset or a liability might be affected when there hasbeen a significant decrease in the volume or level of activity for that assetor liability in relation to normal market activity for the asset or liability(or similar assets or liabilities). To determine whether, on the basis of theevidence available, there has been a significant decrease in the volume orlevel of activity for the asset or liability, an entity shall evaluate thesignificance and relevance of factors such as the following:

(a) There are few recent transactions.



(b) Price quotations are not developed using current information.

(c) Price quotations vary substantially either over time or amongmarket-makers (eg some brokered markets).

(d) Indices that previously were highly correlated with the fair valuesof the asset or liability are demonstrably uncorrelated with recentindications of fair value for that asset or liability.

(e) There is a significant increase in implied liquidity risk premiums,yields or performance indicators (such as delinquency rates or lossseverities) for observed transactions or quoted prices whencompared with the entity’s estimate of expected cash flows, takinginto account all available market data about credit and othernon-performance risk for the asset or liability.

(f) There is a wide bid-ask spread or significant increase in the bid-askspread.

(g) There is a significant decline in the activity of, or there is anabsence of, a market for new issues (ie a primary market) for theasset or liability or similar assets or liabilities.

(h) Little information is publicly available (eg for transactions thattake place in a principal-to-principal market).

B38 If an entity concludes that there has been a significant decrease in thevolume or level of activity for the asset or liability in relation to normalmarket activity for the asset or liability (or similar assets or liabilities),further analysis of the transactions or quoted prices is needed. A decreasein the volume or level of activity on its own may not indicate that atransaction price or quoted price does not represent fair value or thata transaction in that market is not orderly. However, if an entitydetermines that a transaction or quoted price does not represent fairvalue (eg there may be transactions that are not orderly), an adjustmentto the transactions or quoted prices will be necessary if the entity usesthose prices as a basis for measuring fair value and that adjustment maybe significant to the fair value measurement in its entirety. Adjustmentsalso may be necessary in other circumstances (eg when a price for asimilar asset requires significant adjustment to make it comparable tothe asset being measured or when the price is stale).

B39 This IFRS does not prescribe a methodology for making significantadjustments to transactions or quoted prices. See paragraphs 61–66 andB5–B11 for a discussion of the use of valuation techniques whenmeasuring fair value. Regardless of the valuation technique used, an



entity shall include appropriate risk adjustments, including a riskpremium reflecting the amount that market participants would demandas compensation for the uncertainty inherent in the cash flows of anasset or a liability (see paragraph B17). Otherwise, the measurement doesnot faithfully represent fair value. In some cases determining theappropriate risk adjustment might be difficult. However, the degree ofdifficulty alone is not a sufficient basis on which to exclude a riskadjustment. The risk adjustment shall be reflective of an orderlytransaction between market participants at the measurement date undercurrent market conditions.

B40 If there has been a significant decrease in the volume or level of activityfor the asset or liability, a change in valuation technique or the use ofmultiple valuation techniques may be appropriate (eg the use of a marketapproach and a present value technique). When weighting indications offair value resulting from the use of multiple valuation techniques, anentity shall consider the reasonableness of the range of fair valuemeasurements. The objective is to determine the point within the rangethat is most representative of fair value under current market conditions.A wide range of fair value measurements may be an indication thatfurther analysis is needed.

B41 Even when there has been a significant decrease in the volume or level ofactivity for the asset or liability, the objective of a fair value measurementremains the same. Fair value is the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction (ie not aforced liquidation or distress sale) between market participants at themeasurement date under current market conditions.

B42 Estimating the price at which market participants would be willing toenter into a transaction at the measurement date under current marketconditions if there has been a significant decrease in the volume or levelof activity for the asset or liability depends on the facts and circumstancesat the measurement date and requires judgement. An entity’s intentionto hold the asset or to settle or otherwise fulfil the liability is not relevantwhen measuring fair value because fair value is a market-basedmeasurement, not an entity-specific measurement.

Identifying transactions that are not orderly

B43 The determination of whether a transaction is orderly (or is not orderly)is more difficult if there has been a significant decrease in the volume orlevel of activity for the asset or liability in relation to normal marketactivity for the asset or liability (or similar assets or liabilities). In such



circumstances it is not appropriate to conclude that all transactions inthat market are not orderly (ie forced liquidations or distress sales).Circumstances that may indicate that a transaction is not orderly includethe following:

(a) There was not adequate exposure to the market for a period beforethe measurement date to allow for marketing activities that areusual and customary for transactions involving such assets orliabilities under current market conditions.

(b) There was a usual and customary marketing period, but the sellermarketed the asset or liability to a single market participant.

(c) The seller is in or near bankruptcy or receivership (ie the seller isdistressed).

(d) The seller was required to sell to meet regulatory or legalrequirements (ie the seller was forced).

(e) The transaction price is an outlier when compared with otherrecent transactions for the same or a similar asset or liability.

An entity shall evaluate the circumstances to determine whether, on theweight of the evidence available, the transaction is orderly.

B44 An entity shall consider all the following when measuring fair value orestimating market risk premiums:

(a) If the evidence indicates that a transaction is not orderly, an entityshall place little, if any, weight (compared with other indications offair value) on that transaction price.

(b) If the evidence indicates that a transaction is orderly, an entityshall take into account that transaction price. The amount ofweight placed on that transaction price when compared with otherindications of fair value will depend on the facts andcircumstances, such as the following:

(i) the volume of the transaction.

(ii) the comparability of the transaction to the asset or liabilitybeing measured.

(iii) the proximity of the transaction to the measurement date.

(c) If an entity does not have sufficient information to concludewhether a transaction is orderly, it shall take into account thetransaction price. However, that transaction price may notrepresent fair value (ie the transaction price is not necessarily the



sole or primary basis for measuring fair value or estimating marketrisk premiums). When an entity does not have sufficientinformation to conclude whether particular transactions areorderly, the entity shall place less weight on those transactionswhen compared with other transactions that are known to beorderly.

An entity need not undertake exhaustive efforts to determine whether atransaction is orderly, but it shall not ignore information that isreasonably available. When an entity is a party to a transaction, it ispresumed to have sufficient information to conclude whether thetransaction is orderly.

Using quoted prices provided by third parties

B45 This IFRS does not preclude the use of quoted prices provided by thirdparties, such as pricing services or brokers, if an entity has determinedthat the quoted prices provided by those parties are developed inaccordance with this IFRS.

B46 If there has been a significant decrease in the volume or level of activityfor the asset or liability, an entity shall evaluate whether the quotedprices provided by third parties are developed using current informationthat reflects orderly transactions or a valuation technique that reflectsmarket participant assumptions (including assumptions about risk).In weighting a quoted price as an input to a fair value measurement, anentity places less weight (when compared with other indications of fairvalue that reflect the results of transactions) on quotes that do not reflectthe result of transactions.

B47 Furthermore, the nature of a quote (eg whether the quote is an indicativeprice or a binding offer) shall be taken into account when weighting theavailable evidence, with more weight given to quotes provided by thirdparties that represent binding offers.



Appendix CEffective date and transition

This appendix is an integral part of the IFRS and has the same authority as the other parts ofthe IFRS.

C1 An entity shall apply this IFRS for annual periods beginning on or after1 January 2013. Earlier application is permitted. If an entity applies thisIFRS for an earlier period, it shall disclose that fact.

C2 This IFRS shall be applied prospectively as of the beginning of the annualperiod in which it is initially applied.

C3 The disclosure requirements of this IFRS need not be applied incomparative information provided for periods before initial applicationof this IFRS.



Appendix DAmendments to other IFRSs

This appendix sets out amendments to other IFRSs that are a consequence of the Board issuingIFRS 13. An entity shall apply the amendments for annual periods beginning on or after1 January 2013. If an entity applies IFRS 13 for an earlier period, it shall apply theamendments for that earlier period. Amended paragraphs are shown with new textunderlined and deleted text struck through.

Change in definition

D1 In IFRSs 1, 3–5 and 9 (issued in October 2010) the definition of fair valueis replaced with:

Fair value is the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. (See IFRS 13.)

In IASs 2, 16, 18–21, 32 and 40 the definition of fair value is replaced with:

Fair value is the price that would be received to sell an asset orpaid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date. (See IFRS 13 FairValue Measurement.)

IFRS 1 First-time Adoption of International Financial Reporting Standards (as amended at September 2010)

D2 Paragraph 19 is deleted.

D3 Paragraph 39J is added as follows:

39J IFRS 13 Fair Value Measurement, issued in May 2011, deletedparagraph 19, amended the definition of fair value inAppendix A and amended paragraphs D15 and D20. An entityshall apply those amendments when it applies IFRS 13.

D4 Paragraphs D15 and D20 are amended as follows:

D15 If a first-time adopter measures such an investment at cost inaccordance with IAS 27, it shall measure that investment at oneof the following amounts in its separate opening IFRSstatement of financial position:

…



(b) deemed cost. The deemed cost of such an investment shallbe its:

(i) fair value (determined in accordance with IAS 39)at the entity’s date of transition to IFRSs in itsseparate financial statements; or

…

D20 Notwithstanding the requirements of paragraphs 7 and 9, anentity may apply the requirements in the last sentenceparagraph AG76(a) of IAS 39 paragraph AG76 and inparagraph AG76A, in either of the following ways:

…

IFRS 2 Share-based Payment

D5 Paragraph 6A is added as follows:

6A This IFRS uses the term ‘fair value’ in a way that differs in somerespects from the definition of fair value in IFRS 13 Fair ValueMeasurement. Therefore, when applying IFRS 2 an entitymeasures fair value in accordance with this IFRS, not IFRS 13.

IFRS 3 Business Combinations

D6 Paragraphs 20, 29, 33 and 47 are amended as follows:

20 Paragraphs B41–B45 provide guidance on measuring the fairvalue of particular identifiable assets and a non-controllinginterest in an acquiree. Paragraphs 24–31 specify the types ofidentifiable assets and liabilities that include items for whichthis IFRS provides limited exceptions to the measurementprinciple.

29 The acquirer shall measure the value of a reacquired rightrecognised as an intangible asset on the basis of the remainingcontractual term of the related contract regardless of whethermarket participants would consider potential contractualrenewals in determining when measuring its fair value.Paragraphs B35 and B36 provide related application guidance.

33 … To determine the amount of goodwill in a businesscombination in which no consideration is transferred, the



acquirer shall use the acquisition-date fair value of theacquirer’s interest in the acquiree determined using avaluation technique in place of the acquisition-date fair valueof the consideration transferred (paragraph 32(a)(i)). …

47 … For example, unless an intervening event that changed its fairvalue can be identified, the sale of an asset to a third partyshortly after the acquisition date for an amount that differssignificantly from its provisional fair value determinedmeasured at that date is likely to indicate an error in theprovisional amount.

D7 Paragraph 64F is added as follows:

64F IFRS 13 Fair Value Measurement, issued in May 2011, amendedparagraphs 20, 29, 33, 47, amended the definition of fair valuein Appendix A and amended paragraphs B22, B40, B43–B46, B49and B64. An entity shall apply those amendments when itapplies IFRS 13.

D8 In Appendix B paragraphs B22 and B40, B43–B46, B49 and B64 areamended as follows:

B22 Because the consolidated financial statements represent thecontinuation of the financial statements of the legal subsidiaryexcept for its capital structure, the consolidated financialstatements reflect:

…

(d) the amount recognised as issued equity interests in theconsolidated financial statements determined by addingthe issued equity interest of the legal subsidiary(the accounting acquirer) outstanding immediately beforethe business combination to the fair value of the legalparent (accounting acquiree) determined in accordancewith this IFRS. However, …

…

B40 The identifiability criteria determine whether an intangibleasset is recognised separately from goodwill. However, thecriteria neither provide guidance for measuring the fair valueof an intangible asset nor restrict the assumptions used inestimating measuring the fair value of an intangible asset.For example, the acquirer would take into account theassumptions that market participants would consider use when



pricing the intangible asset, such as expectations of futurecontract renewals, in measuring fair value. …

B43 For To protect its competitive position, or for other reasons, theacquirer may intend not to use an acquired non-financial assetactively, for example, a research and development intangibleasset, or it may not intend to use the asset in a way that isdifferent from the way in which other market participantswould use it according to its highest and best use. For example,that might be the case for an acquired research anddevelopment intangible asset that the acquirer plans to usedefensively by preventing others from using it. Nevertheless,the acquirer shall measure the fair value of the non-financialasset at fair value determined in accordance with assuming itshighest and best use by other market participants inaccordance with the appropriate valuation premise, bothinitially and when measuring fair value less costs of disposal forsubsequent impairment testing.

B44 This IFRS allows the acquirer to measure a non-controllinginterest in the acquiree at its fair value at the acquisition date.Sometimes an acquirer will be able to measure theacquisition-date fair value of a non-controlling interest on thebasis of a quoted price in an active market prices for the equityshares (ie those not held by the acquirer). In other situations,however, a quoted price in an active market price for the equityshares will not be available. In those situations, the acquirerwould measure the fair value of the non-controlling interestusing another valuation techniques.

B45 The fair values of the acquirer’s interest in the acquiree and thenon-controlling interest on a per-share basis might differ.The main difference is likely to be the inclusion of a controlpremium in the per-share fair value of the acquirer’s interest inthe acquiree or, conversely, the inclusion of a discount for lackof control (also referred to as a minority non-controllinginterest discount) in the per-share fair value of thenon-controlling interest if market participants would take intoaccount such a premium or discount when pricing thenon-controlling interest.

B46 In a business combination achieved without the transfer ofconsideration, the acquirer must substitute theacquisition-date fair value of its interest in the acquiree for the



acquisition-date fair value of the consideration transferred tomeasure goodwill or a gain on a bargain purchase(see paragraphs 32–34). The acquirer should measure theacquisition-date fair value of its interest in the acquiree usingone or more valuation techniques that are appropriate in thecircumstances and for which sufficient data are available.If more than one valuation technique is used, the acquirershould evaluate the results of the techniques, considering therelevance and reliability of the inputs used and the extent ofthe available data.

B49 A fair value measurement of a mutual entity should include theassumptions that market participants would make about futuremember benefits as well as any other relevant assumptionsmarket participants would make about the mutual entity.For example, an estimated cash flow model a present valuetechnique may be used to determine measure the fair value of amutual entity. The cash flows used as inputs to the modelshould be based on the expected cash flows of the mutualentity, which are likely to reflect reductions for memberbenefits, such as reduced fees charged for goods and services.

B64 To meet the objective in paragraph 59, the acquirer shalldisclose the following information for each businesscombination that occurs during the reporting period:

…

(f) the acquisition-date fair value of the total considerationtransferred and the acquisition-date fair value of eachmajor class of consideration, such as:

…

(iv) equity interests of the acquirer, including thenumber of instruments or interests issued orissuable and the method of determiningmeasuring the fair value of those instruments orinterests.

…

(o) for each business combination in which the acquirerholds less than 100 per cent of the equity interests in theacquiree at the acquisition date:

…



(ii) for each non-controlling interest in an acquireemeasured at fair value, the valuation technique(s)and key model significant inputs used fordetermining to measure that value.

…

IFRS 4 Insurance Contracts

D9 Paragraph 41E is added as follows:

41E IFRS 13 Fair Value Measurement, issued in May 2011, amended thedefinition of fair value in Appendix A. An entity shall applythat amendment when it applies IFRS 13.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

D10 Paragraph 44H is added as follows:

44H IFRS 13 Fair Value Measurement, issued in May 2011, amended thedefinition of fair value in Appendix A. An entity shall applythat amendment when it applies IFRS 13.

IFRS 7 Financial Instruments: Disclosures (as amended at October 2009)

D11 Paragraph IN5C is added as follows:

IN5C In May 2011 the Board relocated the disclosures about fair valuemeasurements to IFRS 13 Fair Value Measurement.

D12 Paragraph 3 is amended as follows:

3 This IFRS shall be applied by all entities to all types of financialinstruments, except:

(a) ... in those cases, entities shall apply the requirements ofthis IFRS and, for those interests measured at fair value,the requirements of IFRS 13 Fair Value Measurement. ...

…

D13 Paragraphs 27–27B are deleted.




28 If the market for a financial instrument is not active, an entityestablishes its fair value using a valuation technique(see paragraphs AG74–AG79 of IAS 39). Nevertheless, the bestevidence of fair value at initial recognition is the transactionprice (ie the fair value of the consideration given or received),unless conditions described in paragraph AG76 of IAS 39 aremet. It follows that there could be a difference between the fairvalue at initial recognition and the amount that would bedetermined at that date using the valuation technique. If sucha difference exists, an entity shall disclose, by class of financialinstrument: In some cases, an entity does not recognise a gainor loss on initial recognition of a financial asset or financialliability because the fair value is neither evidenced by a quotedprice in an active market for an identical asset or liability(ie a Level 1 input) nor based on a valuation technique that usesonly data from observable markets (see paragraph AG76 ofIAS 39). In such cases, the entity shall disclose by class offinancial asset or financial liability:

(a) its accounting policy for recognising in profit or loss thethat difference between the fair value at initial recognitionand the transaction price in profit or loss to reflect achange in factors (including time) that market participantswould consider in setting a price take into account whenpricing the asset or liability (see paragraph AG76A AG76(b)of IAS 39). ; and

…

(c) why the entity concluded that the transaction price wasnot the best evidence of fair value, including a descriptionof the evidence that supports the fair value.


29 Disclosures of fair value are not required:

…

(b) for an investment in equity instruments that do not havea quoted market price in an active market for an identicalinstrument (ie a Level 1 input), or derivatives linked tosuch equity instruments, that is measured at cost in



accordance with IAS 39 because its fair value cannototherwise be measured reliably; or

…

D16 Paragraph 44P is added as follows:

44P IFRS 13, issued in May 2011, amended paragraphs 3, 28, 29, B4 andB26 and Appendix A and deleted paragraphs 27–27B. An entityshall apply those amendments when it applies IFRS 13.

D17 In Appendix A the definition of other price risk is amended as follows:

IFRS 9 Financial Instruments (issued November 2009)

D18 Paragraph 5.1.1 is amended as follows:

5.1.1 At initial recognition, an entity shall measure a financial assetat its fair value (see paragraphs 48, 48A and AG69–AG82 ofIAS 39) plus, in the case of a financial asset not at fair valuethrough profit or loss, transaction costs that are directlyattributable to the acquisition of the financial asset.

D19 Paragraph 5.1.1A is added as follows:

5.1.1A However, if the fair value of the financial asset at initialrecognition differs from the transaction price, an entity shallapply paragraph B5.1 and paragraph AG76 of IAS 39.

D20 Paragraphs 5.2.1, 5.3.2, 8.2.5 and 8.2.11 are amended as follows:

5.2.1 After initial recognition, an entity shall measure a financialasset in accordance with paragraphs 4.1–4.5 at fair value(see paragraphs 48, 48A and AG69–AG82 of IAS 39) or amortisedcost.

5.3.2 If, in accordance with paragraph 4.9, an entity reclassifies afinancial asset so that it is measured at fair value, its fair valueis determined measured at the reclassification date. Any gainor loss arising from a difference between the previous carryingamount and fair value is recognised in profit or loss.

other price risk

The risk that the fair value or future cash flows of afinancial instrument will fluctuate because of changesin market prices (other than those arising from interestrate risk or currency risk), whether those changes arecaused by factors specific to the individual financialinstrument or its issuer, or by factors affecting allsimilar financial instruments traded in the market.



8.2.5 If an entity measures a hybrid contract at fair value inaccordance with paragraph 4.4 or paragraph 4.5 but the fairvalue of the hybrid contract had not been determined measuredin comparative reporting periods, the fair value of the hybridcontract in the comparative reporting periods shall be the sumof the fair values of the components (ie the non-derivative hostand the embedded derivative) at the end of each comparativereporting period.

8.2.11 If an entity previously accounted for an investment in anunquoted equity instrument that does not have a quoted pricein an active market for an identical instrument (ie a Level 1input) (or a derivative that is linked to and must be settled bydelivery of such an unquoted equity instrument) at cost inaccordance with IAS 39, it shall measure that instrument at fairvalue at the date of initial application. ...

D21 Paragraph 8.1.3 is added as follows:

8.1.3 IFRS 13 Fair Value Measurement, issued in May 2011, amendedparagraphs 5.1.1, 5.2.1, 5.3.2, 8.2.5, 8.2.11, B5.1, B5.4, B5.5, B5.7,C8, C20, C22, C27 and C28 and added paragraph 5.1.1A.An entity shall apply those amendments when it applies IFRS 13.

D22 In Appendix A the introductory text is amended as follows:

The following terms are defined in paragraph 11 of IAS 32Financial Instruments: Presentation, or paragraph 9 of IAS 39 orAppendix A of IFRS 13 and are used in this IFRS with themeanings specified in IAS 32, or IAS 39 or IFRS 13: ...

D23 In Appendix B paragraph B5.1, the heading above paragraph B5.5 andparagraphs B5.5 and B5.7 are amended as follows:

B5.1 The fair value of a financial asset at initial recognition isnormally the transaction price (ie the fair value of theconsideration given, see also IFRS 13 and paragraph AG76 ofIAS 39). However, if part of the consideration given is forsomething other than the financial instrument, an entity shallmeasure the fair value of the financial instrument is estimatedusing a valuation technique (see paragraphs AG74–AG79 ofIAS 39). For example, the fair value of a long-term loan orreceivable that carries no interest can be estimated measuredas the present value of all future cash receipts discounted usingthe prevailing market rate(s) of interest for a similarinstrument (similar as to currency, term, type of interest rate



and other factors) with a similar credit rating. Any additionalamount lent is an expense or a reduction of income unless itqualifies for recognition as some other type of asset.

Investments in unquoted equity instruments (and contracts on those investments that must be settled by delivery of the unquoted equity instruments)

B5.5 ... That may be the case if insufficient more recent informationis available to determine measure fair value, or if there is awide range of possible fair value measurements and costrepresents the best estimate of fair value within that range.

B5.7 ... In such cases, the entity must estimate measure fair value.

D24 In Appendix C, in paragraph C8 the amendments to paragraph 29 ofIFRS 7 Financial Instruments: Disclosures are amended as follows:

29 Disclosures of fair value are not required:

…

(b) for derivatives linked to investments in equityinstruments that do not have a quoted market price in anactive market for an identical instrument (ie a Level 1input) that are measured at cost in accordance with IAS 39because their fair value cannot otherwise be measuredreliably; or

…

D25 In paragraph C20 the amendments to paragraph 1 of IAS 28 Investments inAssociates are amended as follows:

1 This Standard shall be applied in accounting for investments inassociates. However, it does not apply to investments inassociates held by:

(a) venture capital organisations, or

(b) mutual funds, unit trusts and similar entities includinginvestment-linked insurance funds

that are measured at fair value through profit or loss inaccordance with IFRS 9 Financial Instruments and IAS 39 FinancialInstruments: Recognition and Measurement. An entity shallmeasure such investments at fair value through profit or loss inaccordance with IFRS 9. An entity holding such an investmentshall make the disclosures required by paragraph 37(f).



D26 In paragraph C22 the amendments to paragraph 1 of IAS 31 Interests in JointVentures are amended as follows:

1 This Standard shall be applied in accounting for interests injoint ventures and the reporting of joint venture assets,liabilities, income and expenses in the financial statements ofventurers and investors, regardless of the structures or formsunder which the joint venture activities take place. However, itdoes not apply to venturers’ interests in jointly controlledentities held by:



that are measured at fair value through profit or loss inaccordance with IFRS 9 Financial Instruments and IAS 39Financial Instruments: Recognition and Measurement. An entityshall measure such investments at fair value through profit orloss in accordance with IFRS 9. A venturer holding such aninterest shall make the disclosures required by paragraphs 55and 56.

D27 In paragraph C27 the amendments to paragraphs 9, 13 and 88 of IAS 39Financial Instruments: Recognition and Measurement are amended as follows:

9 ...

It should be noted that IFRS 13 Fair Value Measurementparagraphs 48, 48A, 49 and Appendix A paragraphs AG69–AG82,which sets out the requirements for determining a reliablemeasure of measuring the fair value of a financial liability,apply equally to all items that are measured at fair value,whether by designation or otherwise, or whose fair value isdisclosed.

...

13 If an entity is unable to determine measure reliably the fairvalue of an embedded derivative on the basis of its terms andconditions, the fair value of the embedded derivative is thedifference between the fair value of the hybrid (combined)contract and the fair value of the host if those can bedetermined under this Standard. If the entity is unable todetermine measure the fair value of the embedded derivativeusing this method, paragraph 12 applies and the hybrid(combined) contract is designated as at fair value throughprofit or loss.



88 A hedging relationship qualifies for hedge accounting underparagraphs 89–102 if, and only if, all of the following conditionsare met.

...

(d) The effectiveness of the hedge can be reliably measured,ie the fair value or cash flows of the hedged item that areattributable to the hedged risk and the fair value of thehedging instrument can be reliably measured(see paragraph 47(a) and Appendix A paragraphs AG80 andAG81 for guidance on determining fair value).

…

D28 In paragraph C28 the amendments to paragraphs AG64, AG80, AG81 andAG96 of IAS 39 are amended as follows:

AG64 The fair value of a financial liability on initial recognition isnormally the transaction price (ie the fair value of theconsideration received, see also paragraph AG76 and IFRS 13).However, if part of the consideration given or received is forsomething other than the financial liability, an entity shallmeasure the fair value of the financial liability is estimated,using a valuation technique (see paragraphs AG74–AG79).

AG80 The fair value of derivatives that are linked to and must besettled by delivery of unquoted equity instruments that do nothave a quoted price in an active market for an identicalinstrument (ie a Level 1 input) (see paragraph 47(a)) is reliablymeasurable if (a) the variability in the range of reasonable fairvalue estimates measurements is not significant for thatinstrument or (b) the probabilities of the various estimateswithin the range can be reasonably assessed and used inestimating when measuring fair value.

AG81 There are many situations in which the variability in the rangeof reasonable fair value estimates measurements of derivativesthat are linked to and must be settled by delivery of unquotedequity instruments that do not have a quoted price in an activemarket for an identical instrument (ie a Level 1 input)(see paragraph 47(a)) is likely not to be significant. Normally itis possible to estimate measure the fair value of suchderivatives that an entity has acquired from an outside party.However, if the range of reasonable fair value estimatesmeasurements is significant and the probabilities of the



various estimates cannot be reasonably assessed, an entity isprecluded from measuring the instrument at fair value.

AG96 A derivative that is linked to and must be settled by delivery ofunquoted equity instruments that do not have a quoted price inan active market for an identical instrument (ie a Level 1 input)and is not carried at fair value because its fair value cannototherwise be reliably measured (see paragraph 47(a)) cannot bedesignated as a hedging instrument.

IFRS 9 Financial Instruments (issued October 2010)

D29 Paragraph IN7 is amended as follows:

IN7 In October 2010 the Board added to IFRS 9 the requirements forclassification and measurement of financial liabilities:

…

(b) Consistently with the requirements in IFRS 9 forinvestments in unquoted equity instruments that do nothave a quoted price in an active market for an identicalinstrument (ie a Level 1 input) (and derivative assetslinked to those investments), the exception from fairvalue measurement was eliminated for derivativeliabilities that are linked to and must be settled bydelivery of such an unquoted equity instrument. UnderIAS 39, if those derivatives were not reliably measurable,they were required to be measured at cost. IFRS 9 requiresthem to be measured at fair value.

…

D30 Paragraphs 3.2.14, 4.3.7 and 5.1.1 are amended as follows:

3.2.14 When an entity allocates the previous carrying amount of alarger financial asset between the part that continues to berecognised and the part that is derecognised, the fair value ofthe part that continues to be recognised needs to bedetermined measured. When the entity has a history of sellingparts similar to the part that continues to be recognised orother market transactions exist for such parts, recent prices ofactual transactions provide the best estimate of its fair value. …

4.3.7 If an entity is unable to determine measure reliably the fairvalue of an embedded derivative on the basis of its terms and



conditions, the fair value of the embedded derivative is thedifference between the fair value of the hybrid contract and thefair value of the host, if those can be determined under thisIFRS. If the entity is unable to determine measure the fair valueof the embedded derivative using this method, paragraph 4.3.6applies and the hybrid contract is designated as at fair valuethrough profit or loss.

5.1.1 At initial recognition, an entity shall measure a financial assetor financial liability at its fair value (see paragraphs 5.4.1–5.4.3and B5.4.1–B5.4.17) plus or minus, in the case of a financial assetor financial liability not at fair value through profit or loss,transaction costs that are directly attributable to the acquisitionor issue of the financial asset or financial liability.

D31 Paragraph 5.1.1A is added as follows:

5.1.1A However, if the fair value of the financial asset or financialliability at initial recognition differs from the transaction price,an entity shall apply paragraph B5.1.2A.

D32 Paragraph 5.2.1 is amended as follows:

5.2.1 After initial recognition, an entity shall measure a financialasset in accordance with paragraphs 4.1.1–4.1.5 at fair value(see paragraphs 5.4.1, 5.4.2 and B5.4.1–B5.4.17) or amortised cost(see paragraphs 9 and AG5–AG8 of IAS 39).

D33 The heading above paragraph 5.4.1 and paragraphs 5.4.1–5.4.3 aredeleted.

D34 Paragraphs 5.6.2, 7.2.5, 7.2.11 and 7.2.12 are amended as follows:

5.6.2 If, in accordance with paragraph 4.4.1, an entity reclassifies afinancial asset so that it is measured at fair value, its fair valueis determined measured at the reclassification date. Any gainor loss arising from a difference between the previous carryingamount and fair value is recognised in profit or loss.

7.2.5 If an entity measures a hybrid contract at fair value inaccordance with paragraph 4.1.4 or paragraph 4.1.5 but the fairvalue of the hybrid contract had not been determined measuredin comparative reporting periods, the fair value of the hybridcontract in the comparative reporting periods shall be the sumof the fair values of the components (ie the non-derivative hostand the embedded derivative) at the end of each comparativereporting period.



7.2.11 If an entity previously accounted for an investment in anunquoted equity instrument that does not have a quoted pricein an active market for an identical instrument (ie a Level 1input) (or a derivative asset that is linked to and must be settledby delivery of such an unquoted equity instrument) at cost inaccordance with IAS 39, it shall measure that instrument at fairvalue at the date of initial application. ...

7.2.12 If an entity previously accounted for a derivative liability that islinked to and must be settled by delivery of an unquoted equityinstrument that does not have a quoted price in an activemarket for an identical instrument (ie a Level 1 input) at cost inaccordance with IAS 39, it shall measure that derivativeliability at fair value at the date of initial application. ...

D35 Paragraph 7.1.3 is added as follows:

7.1.3 IFRS 13 Fair Value Measurement, issued in May 2011, amendedparagraphs 3.2.14, 4.3.7, 5.1.1, 5.2.1, 5.4.1, 5.6.2, 7.2.5, 7.2.11, 7.2.12,amended the definition of fair value in Appendix A, amendedparagraphs B3.2.11, B3.2.17, B5.1.1, B5.2.2, B5.4.8, B5.4.14, B5.4.16,B5.7.20, C3, C11, C26, C28, C30, C49 and C53, deleted paragraphs5.4.2, B5.4.1–B5.4.13 and added paragraphs 5.1.1A, B5.1.2A andB5.2.2A. An entity shall apply those amendments when itapplies IFRS 13.

D36 In Appendix B paragraphs B3.2.11, B3.2.17, B5.1.1 and B5.2.2 are amendedas follows:

B3.2.11 In estimating When measuring the fair values of the part thatcontinues to be recognised and the part that is derecognised forthe purposes of applying paragraph 3.2.13, an entity applies thefair value measurement requirements in paragraphs 5.4.1–5.4.3and B5.4.1–B5.4.13 IFRS 13 in addition to paragraph 3.2.14.

B3.2.17 This paragraph illustrates the application of the continuinginvolvement approach when the entity’s continuing involvementis in a part of a financial asset.



B5.1.1 The fair value of a financial instrument at initial recognition isnormally the transaction price (ie the fair value of theconsideration given or received, see also paragraph B5.4.8B5.1.2A and IFRS 13). However, if part of the considerationgiven or received is for something other than the financialinstrument, an entity shall measure the fair value of thefinancial instrument is estimated using a valuation technique(see paragraphs B5.4.6–B5.4.12). For example, the fair value of along-term loan or receivable that carries no interest can beestimated measured as the present value of all future cashreceipts discounted using the prevailing market rate(s) ofinterest for a similar instrument (similar as to currency, term,type of interest rate and other factors) with a similar creditrating. Any additional amount lent is an expense or areduction of income unless it qualifies for recognition as someother type of asset.

D37 Paragraphs B5.1.2A and B5.2.2A are added as follows:

B5.1.2A The best evidence of the fair value of a financial instrument atinitial recognition is normally the transaction price (ie the fair

Assume an entity has a portfolio of prepayable loans … The fair value of the loans at the date of the transaction is CU10,100 and the estimated fair value of the excess spread of 0.5 per cent is CU40.

…

The entity calculates the gain or loss on the sale of the 90 per cent share of cash flows. Assuming that separate fair values of the 90 per cent part transferred and the 10 per cent part retained are not available at the date of the transfer, the entity allocates the carrying amount of the asset in accordance with paragraph 3.2.14 as follows:

Estimatedfair Fair

value

Percentage Allocatedcarryingamount

Portion transferred 9,090 90% 9,000

Portion retained 1,010 10% 1,000

Total 10,100 10,000

…



value of the consideration given or received, see also IFRS 13).If an entity determines that the fair value at initial recognitiondiffers from the transaction price as mentioned in paragraph5.1.1A, the entity shall account for that instrument at that dateas follows:

(a) at the measurement required by paragraph 5.1.1 if thatfair value is evidenced by a quoted price in an activemarket for an identical asset or liability (ie a Level 1 input)or based on a valuation technique that uses only datafrom observable markets. An entity shall recognise thedifference between the fair value at initial recognitionand the transaction price as a gain or loss.

(b) in all other cases, at the measurement required byparagraph 5.1.1, adjusted to defer the difference betweenthe fair value at initial recognition and the transactionprice. After initial recognition, the entity shall recognisethat deferred difference as a gain or loss only to the extentthat it arises from a change in a factor (including time)that market participants would take into account whenpricing the asset or liability.

B5.2.2A The subsequent measurement of a financial asset or financialliability and the subsequent recognition of gains and lossesdescribed in paragraph B5.1.2A shall be consistent with therequirements of this IFRS.

D38 Paragraphs B5.4.1–B5.4.13 and their related headings are deleted.

D39 The heading above paragraph B5.4.14 and paragraphs B5.4.14, B5.4.16 andB5.7.20 are amended as follows:

Investments in unquoted equity instruments (and contracts on those investments that must be settled by delivery of the unquoted equity instruments)

B5.4.14 ... That may be the case if insufficient more recent informationis available to determine measure fair value, or if there is awide range of possible fair value measurements and costrepresents the best estimate of fair value within that range.

B5.4.16 ... To the extent that any such relevant factors exist, they mayindicate that cost might not be representative of fair value.In such cases, the entity must estimate measure fair value.



B5.7.20 As with all estimates of fair value measurements, an entity’smeasurement method for determining the portion of thechange in the liability’s fair value that is attributable tochanges in its credit risk must make maximum use of marketrelevant observable inputs and minimum use of unobservableinputs.

D40 In Appendix C, in paragraph C3 the amendments to paragraphs D15 andD20 of IFRS 1 First-time Adoption of International Financial Reporting Standardsare amended as follows:

D15 If a first-time adopter measures such an investment at cost inaccordance with IAS 27, it shall measure that investment at oneof the following amounts in its separate opening IFRSstatement of financial position:

…

(b) deemed cost. The deemed cost of such an investmentshall be its:

(i) fair value (determined in accordance with IFRS 9)at the entity’s date of transition to IFRSs in itsseparate financial statements; or

…

D20 Despite the requirements of paragraphs 7 and 9, an entity mayapply the requirements in the last sentence of paragraph B5.4.8and in paragraph B5.4.9 B5.1.2A(b) of IFRS 9, in either of thefollowing ways:

…

D41 In paragraph C11 the amendments to paragraph 28 of IFRS 7 FinancialInstruments: Disclosures are amended as follows:

28 If the market for a financial instrument is not active, an entityestablishes its fair value using a valuation technique(see paragraphs B5.4.6–B5.4.12 of IFRS 9). Nevertheless, the bestevidence of fair value at initial recognition is the transactionprice (ie the fair value of the consideration given or received),unless the conditions described in paragraph B5.4.8 of IFRS 9are met. It follows that there could be a difference between thefair value at initial recognition and the amount that would bedetermined at that date using the valuation technique. If sucha difference exists, an entity shall disclose, by class of financialinstrument: In some cases, an entity does not recognise a gain



or loss on initial recognition of a financial asset or financialliability because the fair value is neither evidenced by a quotedprice in an active market for an identical asset or liability(ie a Level 1 input) nor based on a valuation technique that usesonly data from observable markets (see paragraph B5.1.2A ofIFRS 9). In such cases, the entity shall disclose by class offinancial asset or financial liability:

(a) its accounting policy for recognising in profit or loss thethat difference between the fair value at initial recognitionand the transaction price in profit or loss to reflect achange in factors (including time) that market participantswould consider in setting a price take into account whenpricing the asset or liability (see paragraph B5.4.9 B5.1.2A(b)of IFRS 9). ; and

…

(c) why the entity concluded that the transaction price wasnot the best evidence of fair value, including a descriptionof the evidence that supports the fair value.

D42 In paragraph C26 the amendments to paragraph 1 of IAS 28 Investments inAssociates are amended as follows:

1 This Standard shall be applied in accounting for investmentsin associates. However, it does not apply to investments inassociates held by:



that are measured at fair value through profit or loss inaccordance with IFRS 9 Financial Instruments. An entity shallmeasure such investments at fair value through profit or loss inaccordance with IFRS 9. An entity holding such an investmentshall make the disclosures required by paragraph 37(f).

D43 In paragraph C28 the amendments to paragraph 1 of IAS 31 Interests in JointVentures are amended as follows:

1 This Standard shall be applied in accounting for interests injoint ventures and the reporting of joint venture assets,liabilities, income and expenses in the financial statements ofventurers and investors, regardless of the structures or formsunder which the joint venture activities take place. However, it



does not apply to venturers’ interests in jointly controlledentities held by:



that are measured at fair value through profit or loss inaccordance with IFRS 9 Financial Instruments. An entity shallmeasure such investments at fair value through profit or loss inaccordance with IFRS 9. A venturer holding such an interestshall make the disclosures required by paragraphs 55 and 56.

D44 In paragraph C30 the amendments to paragraph 23 of IAS 32 FinancialInstruments: Presentation are amended as follows:

23 … One example is an entity’s obligation under a forwardcontract to purchase its own equity instruments for cash.When the The financial liability is recognised initially at underIFRS 9, its fair value (the present value of the redemptionamount), and is reclassified from equity. …

D45 In paragraph C49 the amendments to paragraph A8 of IFRIC 2 Members’Shares in Co-operative Entities and Similar Instruments are amended as follows:

A8 Members’ shares in excess of the prohibition againstredemption are financial liabilities. The co-operative entitymeasures this financial liability at fair value at initialrecognition. Because these shares are redeemable on demand,the co-operative entity determines measures the fair value ofsuch financial liabilities in accordance with paragraph 47 ofIFRS 13 as required by paragraph 5.4.3 of IFRS 9, which states:‘The fair value of a financial liability with a demand feature(eg a demand deposit) is not less than the amount payable ondemand …’ Accordingly, the co-operative entity classifies asfinancial liabilities the maximum amount payable on demandunder the redemption provisions.

D46 In paragraph C53 the amendments to paragraph 7 of IFRIC 19Extinguishing Financial Liabilities with Equity Instruments are amended asfollows:

7 If the fair value of the equity instruments issued cannot bereliably measured then the equity instruments shall bemeasured to reflect the fair value of the financial liabilityextinguished. In measuring the fair value of a financialliability extinguished that includes a demand feature



(eg a demand deposit), paragraph 5.4.3 47 of IFRS 9 IFRS 13 isnot applied.

IAS 1 Presentation of Financial Statements

D47 Paragraphs 128 and 133 are amended as follows:

128 The disclosures in paragraph 125 are not required for assets andliabilities with a significant risk that their carrying amountsmight change materially within the next financial year if, atthe end of the reporting period, they are measured at fair valuebased on recently observed market prices a quoted price in anactive market for an identical asset or liability. Such fair valuesmight change materially within the next financial year butthese changes would not arise from assumptions or othersources of estimation uncertainty at the end of the reportingperiod.

133 Other IFRSs require the disclosure of some of the assumptionsthat would otherwise be required in accordance withparagraph 125. For example, IAS 37 requires disclosure, inspecified circumstances, of major assumptions concerningfuture events affecting classes of provisions. IFRS 7 IFRS 13 FairValue Measurement requires disclosure of significant assumptions(including the valuation technique(s) and inputs) the entityuses when measuring in estimating the fair values of financialassets and financial liabilities that are carried at fair value.IAS 16 requires disclosure of significant assumptions that theentity uses in estimating the fair values of revalued items ofproperty, plant and equipment.

D48 Paragraph 139I is added as follows:

139I IFRS 13, issued in May 2011, amended paragraphs 128 and 133.An entity shall apply those amendments when it applies IFRS 13.

IAS 2 Inventories


7 Net realisable value refers to the net amount that an entityexpects to realise from the sale of inventory in the ordinarycourse of business. Fair value reflects the amount for which thesame inventory could be exchanged between knowledgeable



and willing buyers and sellers in the marketplace. Fair valuereflects the price at which an orderly transaction to sell thesame inventory in the principal (or most advantageous) marketfor that inventory would take place between marketparticipants at the measurement date. The former is anentity-specific value; the latter is not. Net realisable value forinventories may not equal fair value less costs to sell.

D50 Paragraph 40C is added as follows:

40C IFRS 13, issued in May 2011, amended the definition of fairvalue in paragraph 6 and amended paragraph 7. An entity shallapply those amendments when it applies IFRS 13.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors


52 Therefore, retrospectively applying a new accounting policy orcorrecting a prior period error requires distinguishinginformation that

(a) provides evidence of circumstances that existed on thedate(s) as at which the transaction, other event orcondition occurred, and

(b) would have been available when the financial statementsfor that prior period were authorised for issue

from other information. For some types of estimates (eg anestimate of a fair value measurement that uses significantunobservable not based on an observable price or observableinputs), it is impracticable to distinguish these types ofinformation. When retrospective application or retrospectiverestatement would require making a significant estimate forwhich it is impossible to distinguish these two types ofinformation, it is impracticable to apply the new accountingpolicy or correct the prior period error retrospectively.


54C IFRS 13 Fair Value Measurement, issued in May 2011, amendedparagraph 52. An entity shall apply that amendment when itapplies IFRS 13.



IAS 10 Events after the Reporting Period


11 An example of a non-adjusting event after the reporting periodis a decline in market fair value of investments between the endof the reporting period and the date when the financialstatements are authorised for issue. The decline in market fairvalue does not normally relate to the condition of theinvestments at the end of the reporting period, but reflectscircumstances that have arisen subsequently. …


23A IFRS 13, issued in May 2011, amended paragraph 11. An entityshall apply that amendment when it applies IFRS 13.

IAS 16 Property, Plant and Equipment


26 The fair value of an asset for which comparable markettransactions do not exist is reliably measurable if (a) thevariability in the range of reasonable fair value estimatesmeasurements is not significant for that asset or (b) theprobabilities of the various estimates within the range can bereasonably assessed and used in estimating when measuringfair value. If an entity is able to determine measure reliably thefair value of either the asset received or the asset given up, thenthe fair value of the asset given up is used to measure the costof the asset received unless the fair value of the asset received ismore clearly evident.

D56 Paragraphs 32 and 33 are deleted.


35 When an item of property, plant and equipment is revalued,any accumulated depreciation at the date of the revaluation istreated in one of the following ways:

(a) restated proportionately with the change in the grosscarrying amount of the asset so that the carrying amountof the asset after revaluation equals its revalued amount.



This method is often used when an asset is revalued bymeans of applying an index to determine its depreciatedreplacement cost (see IFRS 13).

…

77 If items of property, plant and equipment are stated at revaluedamounts, the following shall be disclosed in addition to thedisclosures required by IFRS 13:

…

(c) [deleted] the methods and significant assumptionsapplied in estimating the items’ fair values;

(d) [deleted] the extent to which the items’ fair values weredetermined directly by reference to observable prices inan active market or recent market transactions on arm’slength terms or were estimated using other valuationtechniques;

…


81F IFRS 13, issued in May 2011, amended the definition of fairvalue in paragraph 6, amended paragraphs 26, 35 and 77 anddeleted paragraphs 32 and 33. An entity shall apply thoseamendments when it applies IFRS 13.

IAS 17 Leases


6A IAS 17 uses the term ‘fair value’ in a way that differs in somerespects from the definition of fair value in IFRS 13 Fair ValueMeasurement. Therefore, when applying IAS 17 an entitymeasures fair value in accordance with IAS 17, not IFRS 13.

IAS 18 Revenue

D60 Paragraph 42 is added as follows:

42 IFRS 13, issued in May 2011, amended the definition of fairvalue in paragraph 7. An entity shall apply that amendmentwhen it applies IFRS 13.



IAS 19 Employee Benefits

D61 In the rubric, ‘paragraphs 1–161’ is amended to ‘paragraphs 1–162’.


50 Accounting by an entity for defined benefit plans involves thefollowing steps:

…

(c) determining measuring the fair value of any plan assets(see paragraphs 102–104);

…

102 The fair value of any plan assets is deducted in determining theamount recognised in the statement of financial position inaccordance with under paragraph 54. When no market price isavailable, the fair value of plan assets is estimated; for example,by discounting expected future cash flows using a discount ratethat reflects both the risk associated with the plan assets andthe maturity or expected disposal date of those assets (or, ifthey have no maturity, the expected period until the settlementof the related obligation).


162 IFRS 13, issued in May 2011, amended the definition of fair valuein paragraph 7 and amended paragraphs 50 and 102. An entityshall apply those amendments when it applies IFRS 13.

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance


45 IFRS 13, issued in May 2011, amended the definition of fairvalue in paragraph 3. An entity shall apply that amendmentwhen it applies IFRS 13.



IAS 21 The Effects of Changes in Foreign Exchange Rates


23 At the end of each reporting period:

…

(c) non-monetary items that are measured at fair value in aforeign currency shall be translated using the exchange ratesat the date when the fair value was determined measured.

D66 Paragraph 60G is added as follows:

60G IFRS 13, issued in May 2011, amended the definition of fairvalue in paragraph 8 and amended paragraph 23. An entityshall apply those amendments when it applies IFRS 13.

IAS 28 Investments in Associates (as amended at October 2009)


1 This Standard shall be applied in accounting for investmentsin associates. However, it does not apply to investments inassociates held by:



that upon initial recognition are designated as at fair valuethrough profit or loss or are classified as held for trading andaccounted for in accordance with IAS 39 Financial Instruments:Recognition and Measurement. For such Such investmentsshall be measured at fair value in accordance with IAS 39, anentity shall recognise with changes in fair value recognised inprofit or loss in the period of the change. An entity holdingsuch an investment shall make the disclosures required byparagraph 37(f).

37 The following disclosures shall be made:

(a) the fair value of investments in associates for which thereare published price quotations quoted market prices;

…




41G IFRS 13 Fair Value Measurement, issued in May 2011, amendedparagraphs 1 and 37. An entity shall apply those amendmentswhen it applies IFRS 13.

IAS 31 Interests in Joint Ventures (as amended at October 2009)


1 This Standard shall be applied in accounting for interests injoint ventures and the reporting of joint venture assets,liabilities, income and expenses in the financial statements ofventurers and investors, regardless of the structures or formsunder which the joint venture activities take place. However, itdoes not apply to venturers’ interests in jointly controlledentities held by:



that upon initial recognition are designated as at fair valuethrough profit or loss or are classified as held for trading andaccounted for in accordance with IAS 39 Financial Instruments:Recognition and Measurement. For such Such investments shallbe measured at fair value in accordance with IAS 39, an entityshall recognise with changes in fair value recognised in profitor loss in the period of the change. A venturer holding such aninterest shall make the disclosures required by paragraphs 55and 56.


58F IFRS 13 Fair Value Measurement, issued in May 2011, amendedparagraph 1. An entity shall apply that amendment when itapplies IFRS 13.

IAS 32 Financial Instruments: Presentation (as amended at September 2010)


23 … When the The financial liability is recognised initially underIAS 39, its fair value (at the present value of the redemptionamount), and is reclassified from equity. …



D72 Paragraph 97J is added as follows:

97J IFRS 13, issued in May 2011, amended the definition of fairvalue in paragraph 11 and amended paragraphs 23 and AG31.An entity shall apply those amendments when it appliesIFRS 13.

D73 In the Application Guidance paragraph AG31 is amended as follows:

AG31 A common form of compound financial instrument is a debtinstrument with an embedded conversion option, such as abond convertible into ordinary shares of the issuer, andwithout any other embedded derivative features. Paragraph 28requires the issuer of such a financial instrument to presentthe liability component and the equity component separatelyin the statement of financial position, as follows:

…

(b) The equity instrument is an embedded option to convertthe liability into equity of the issuer. The fair value of theoption comprises its time value and its intrinsic value, ifany. This option has value on initial recognition evenwhen it is out of the money.

IAS 33 Earnings per Share

D74 Paragraphs 8 and 47A are amended as follows:

8 Terms defined in IAS 32 Financial Instruments: Presentation areused in this Standard with the meanings specified in paragraph11 of IAS 32, unless otherwise noted. IAS 32 defines financialinstrument, financial asset, financial liability, and equityinstrument and fair value, and provides guidance on applyingthose definitions. IFRS 13 Fair Value Measurement defines fairvalue and sets out requirements for applying that definition.

47A For share options and other share-based payment arrangementsto which IFRS 2 Share-based Payment applies, the issue pricereferred to in paragraph 46 and the exercise price referred to inparagraph 47 shall include the fair value (measured inaccordance with IFRS 2) of any goods or services to be suppliedto the entity in the future under the share option or othershare-based payment arrangement.




74C IFRS 13, issued in May 2011, amended paragraphs 8, 47A and A2.An entity shall apply those amendments when it appliesIFRS 13.

D76 In Appendix A paragraph A2 is amended as follows:

A2 The issue of ordinary shares at the time of exercise orconversion of potential ordinary shares does not usually giverise to a bonus element. This is because the potential ordinaryshares are usually issued for full fair value, resulting in aproportionate change in the resources available to the entity.In a rights issue, however, the exercise price is often less thanthe fair value of the shares. … The theoretical ex-rights fairvalue per share is calculated by adding the aggregate marketfair value of the shares immediately before the exercise of therights to the proceeds from the exercise of the rights, anddividing by the number of shares outstanding after the exerciseof the rights. Where the rights are to be publicly tradedseparately from the shares before the exercise date, fair valuefor the purposes of this calculation is established measured atthe close of the last day on which the shares are traded togetherwith the rights.

IAS 34 Interim Financial Reporting (as amended at May 2010)

D77 In the rubric ‘paragraphs 1–49’ is amended to ‘paragraphs 1–50’.

D78 Paragraph 16A(j) is added as follows:

16A In addition to disclosing significant events and transactions inaccordance with paragraphs 15–15C, an entity shall include thefollowing information, in the notes to its interim financialstatements, if not disclosed elsewhere in the interim financialreport. The information shall normally be reported on afinancial year-to-date basis.

…

(j) for financial instruments, the disclosures about fair valuerequired by paragraphs 91–93(h), 94–96, 98 and 99 ofIFRS 13 Fair Value Measurement and paragraphs 25, 26 and28–30 of IFRS 7 Financial Instruments: Disclosures.




50 IFRS 13, issued in May 2011, added paragraph 16A(j). An entityshall apply that amendment when it applies IFRS 13.

IAS 36 Impairment of Assets


5 This Standard does not apply to financial assets within thescope of IAS 39, investment property measured at fair value inaccordance with within the scope of IAS 40, or biological assetsrelated to agricultural activity measured at fair value less coststo sell in accordance with within the scope of IAS 41. However,this Standard applies to assets that are carried at revaluedamount (ie fair value at the date of the revaluation less anysubsequent accumulated depreciation and subsequentaccumulated impairment losses) in accordance with otherIFRSs, such as the revaluation models in IAS 16 Property, Plantand Equipment and IAS 38 Intangible Assets. The only differencebetween an asset’s fair value and its fair value less costs ofdisposal is the direct incremental costs attributable to thedisposal of the asset. Identifying whether a revalued asset maybe impaired depends on the basis used to determine fair value:

(a) if the asset’s fair value is its market value, the onlydifference between the asset’s fair value and its fair valueless costs to sell is the direct incremental costs to disposeof the asset:

(i) if If the disposal costs are negligible, therecoverable amount of the revalued asset isnecessarily close to, or greater than, its revaluedamount (ie fair value). In this case, after therevaluation requirements have been applied, it isunlikely that the revalued asset is impaired andrecoverable amount need not be estimated.

(ii) if the disposal costs are not negligible, the fairvalue less costs to sell of the revalued asset isnecessarily less than its fair value. Therefore, therevalued asset will be impaired if its value in use isless than its revalued amount (ie fair value).In this case, after the revaluation requirements



have been applied, an entity applies this Standardto determine whether the asset may be impaired.

(b) [deleted] if the asset’s fair value is determined on a basisother than its market value, its revalued amount (ie fairvalue) may be greater or lower than its recoverableamount. Hence, after the revaluation requirements havebeen applied, an entity applies this Standard to determinewhether the asset may be impaired.

(c) If the disposal costs are not negligible, the fair value lesscosts of disposal of the revalued asset is necessarily lessthan its fair value. Therefore, the revalued asset will beimpaired if its value in use is less than its revaluedamount. In this case, after the revaluation requirementshave been applied, an entity applies this Standard todetermine whether the asset may be impaired.

D81 Paragraph 6 is amended as follows (as a consequence of the amendmentto the definition of fair value less costs to sell, all references to ‘fair valueless costs to sell’ in IAS 36 are replaced with ‘fair value less costs ofdisposal’):

6 The following terms are used in this Standard with themeanings specified:

An active market is a market where all the following conditionsexist:

(a) the items traded within the market are homogeneous;

(b) willing buyers and sellers can normally be found at anytime; and

(c) prices are available to the public.

Fair value less costs to sell is the amount obtainable from the saleof an asset or cash-generating unit in an arm’s lengthtransaction between knowledgeable, willing parties, less thecosts of disposal is the price that would be received to sell anasset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date.(See IFRS 13 Fair Value Measurement.)

D82 Paragraphs 12, 20 and 22 are amended as follows:

12 In assessing whether there is any indication that an asset maybe impaired, an entity shall consider, as a minimum, thefollowing indications:



External sources of information

(a) during the period, there are observable indications thatthe an asset’s market value has declined during the periodsignificantly more than would be expected as a result ofthe passage of time or normal use.

…

20 It may be possible to determine measure fair value less costs tosell of disposal, even if there is not a quoted price in an activemarket for an identical asset is not traded in an active market.However, sometimes it will not be possible to determinemeasure fair value less costs to sell of disposal because there isno basis for making a reliable estimate of the amountobtainable from the sale of the asset in an arm’s lengthtransaction between knowledgeable and willing parties price atwhich an orderly transaction to sell the asset would take placebetween market participants at the measurement date undercurrent market conditions. In this case, the entity may use theasset’s value in use as its recoverable amount.

22 Recoverable amount is determined for an individual asset …unless either:

…

(b) the asset’s value in use can be estimated to be close to itsfair value less costs to sell of disposal and fair value lesscosts to sell of disposal can be determined measured.

D83 Paragraphs 25–27 are deleted.


28 Costs of disposal, other than those that have been recognised asliabilities, are deducted in determining measuring fair valueless costs to sell of disposal. Examples …


53A Fair value differs from value in use. Fair value reflects theassumptions market participants would use when pricing theasset. In contrast, value in use reflects the effects of factorsthat may be specific to the entity and not applicable to entities



in general. For example, fair value does not reflect any of thefollowing factors to the extent that they would not be generallyavailable to market participants:

(a) additional value derived from the grouping of assets (such asthe creation of a portfolio of investment properties indifferent locations);

(b) synergies between the asset being measured and otherassets;

(c) legal rights or legal restrictions that are specific only tothe current owner of the asset; and

(d) tax benefits or tax burdens that are specific to the currentowner of the asset.

D86 Paragraphs 78, 105, 111, 130 and 134 are amended as follows:

78 It may be necessary to consider some recognised liabilities todetermine the recoverable amount of a cash-generating unit.This may occur if the disposal of a cash-generating unit wouldrequire the buyer to assume the liability. In this case, the fairvalue less costs to sell of disposal (or the estimated cash flowfrom ultimate disposal) of the cash-generating unit is theestimated selling price to sell for the assets of thecash-generating unit and the liability together, less the costs ofdisposal. To perform a meaningful comparison between thecarrying amount of the cash-generating unit and itsrecoverable amount, the carrying amount of the liability isdeducted in determining both the cash-generating unit’s valuein use and its carrying amount.

105 In allocating an impairment loss in accordance withparagraph 104, an entity shall not reduce the carrying amountof an asset below the highest of:

(a) its fair value less costs to sell of disposal (if determinablemeasurable);

…

111 In assessing whether there is any indication that animpairment loss recognised in prior periods for an asset other



than goodwill may no longer exist or may have decreased, anentity shall consider, as a minimum, the following indications:

External sources of information

(a) there are observable indications that the asset’s marketvalue has increased significantly during the period.

…

130 An entity shall disclose the following for each materialimpairment loss recognised or reversed during the period foran individual asset, including goodwill, or a cash-generatingunit:

…

(f) if recoverable amount is fair value less costs to sell ofdisposal, the basis used to determine measure fair valueless costs to sell of disposal (such as whether fair value wasdetermined measured by reference to a quoted price in anactive market for an identical asset). An entity is notrequired to provide the disclosures required by IFRS 13.

134 An entity shall disclose the information required by (a)–(f) foreach cash-generating unit (group of units) for which thecarrying amount of goodwill or intangible assets withindefinite useful lives allocated to that unit (group of units) issignificant in comparison with the entity’s total carryingamount of goodwill or intangible assets with indefinite usefullives:

…

(c) the recoverable amount of the unit (or group of units) andthe basis on which the unit’s (group of units’) recoverableamount has been determined (ie value in use or fair valueless costs to sell of disposal).

(d) if the unit’s (group of units’) recoverable amount is basedon value in use:

(i) a description of each key assumption on whichmanagement has based its cash flow projectionsfor the period covered by the most recent budgets/forecasts. Key assumptions are those to which theunit’s (group of units’) recoverable amount is mostsensitive.

…

(e) if the unit’s (group of units’) recoverable amount is basedon fair value less costs to sell of disposal, the methodology



valuation technique(s) used to determine measure fairvalue less costs to sell of disposal. An entity is notrequired to provide the disclosures required by IFRS 13.If fair value less costs to sell of disposal is not determinedmeasured using an observable market a quoted price forthe an identical unit (group of units), an entity shalldisclose the following information shall also be disclosed:

(i) a description of each key assumption on whichmanagement has based its determination of fairvalue less costs to sell of disposal. Key assumptionsare those to which the unit’s (group of units’)recoverable amount is most sensitive.

…

(iiA) the level of the fair value hierarchy (see IFRS 13)within which the fair value measurement iscategorised in its entirety (without giving regardto the observability of ‘costs of disposal’).

(iiB) if there has been a change in valuation technique,the change and the reason(s) for making it.

If fair value less costs to sell of disposal is determinedmeasured using discounted cash flow projections, anentity shall disclose the following information shall alsobe disclosed:

(iii) the period over which management has projectedcash flows.

(iv) the growth rate used to extrapolate cash flowprojections.

(v) the discount rate(s) applied to the cash flowprojections.

…

D87 Paragraph 140I is added as follows:

140I IFRS 13, issued in May 2011, amended paragraphs 5, 6, 12, 20,78, 105, 111, 130 and 134, deleted paragraphs 25–27 and addedparagraphs 25A and 53A. An entity shall apply thoseamendments when it applies IFRS 13.



IAS 38 Intangible Assets



An active market is a market in which all the followingconditions exist:

(a) the items traded in the market are homogeneous;



...

Fair value of an asset is the amount for which that asset could beexchanged between knowledgeable, willing parties in an arm’slength transaction is the price that would be received to sell anasset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date.(See IFRS 13 Fair Value Measurement.)


33 In accordance with IFRS 3 Business Combinations, if an intangibleasset is acquired in a business combination, the cost of thatintangible asset is its fair value at the acquisition date. The fairvalue of an intangible asset will reflect market participants’expectations at the acquisition date about the probability thatthe expected future economic benefits embodied in the assetwill flow to the entity. …

D90 The heading above paragraph 35 is amended as follows:

Measuring the fair value of an i Intangible asset acquired in a business combination


D92 Paragraphs 47, 50, 75, 78, 82, 84 and 100 are amended as follows:

47 Paragraph 21(b) specifies that a condition for the recognition ofan intangible asset is that the cost of the asset can be measuredreliably. The fair value of an intangible asset for whichcomparable market transactions do not exist is reliablymeasurable if (a) the variability in the range of reasonable fair



value estimates measurements is not significant for that asset or(b) the probabilities of the various estimates within the range canbe reasonably assessed and used in estimating when measuringfair value. If an entity is able to determine measure reliably thefair value of either the asset received or the asset given up, thenthe fair value of the asset given up is used to measure cost unlessthe fair value of the asset received is more clearly evident.

50 Differences between the market fair value of an entity and thecarrying amount of its identifiable net assets at any time maycapture a range of factors that affect the fair value of the entity.However, such differences do not represent the cost ofintangible assets controlled by the entity.

75 … For the purpose of revaluations under this Standard, fair valueshall be determined measured by reference to an active market. …

78 It is uncommon for an active market with the characteristicsdescribed in paragraph 8 to exist for an intangible asset,although this may happen. …

82 If the fair value of a revalued intangible asset can no longer bedetermined measured by reference to an active market, thecarrying amount of the asset shall be its revalued amount atthe date of the last revaluation by reference to the active marketless any subsequent accumulated amortisation and anysubsequent accumulated impairment losses.

84 If the fair value of the asset can be determined measured byreference to an active market at a subsequent measurementdate, the revaluation model is applied from that date.

100 The residual value of an intangible asset with a finite useful lifeshall be assumed to be zero unless:

…

(b) there is an active market (as defined in IFRS 13) for theasset and:

…


124 If intangible assets are accounted for at revalued amounts, anentity shall disclose the following:

(a) by class of intangible assets:

…

(iii) the carrying amount … paragraph 74; and



(b) the amount of … shareholders; and .

(c) [deleted] the methods and significant assumptionsapplied in estimating the assets’ fair values.

D94 Paragraph 130E is deleted.


130G IFRS 13, issued in May 2011, amended paragraphs 8, 33, 47, 50,75, 78, 82, 84, 100 and 124 and deleted paragraphs 39–41 and130E. An entity shall apply those amendments when it appliesIFRS 13.

IAS 39 Financial Instruments: Recognition and Measurement (as amended at October 2009)

D96 The heading above paragraph IN18 and paragraphs IN18 and IN19 aredeleted.



…

It should be noted that IFRS 13 Fair Value Measurementparagraphs 48, 48A, 49 and Appendix A paragraphsAG69–AG82, which sets out the requirements fordetermining a reliable measure of measuring the fairvalue of a financial asset or financial liability, applyequally to all items that are measured at fair value,whether by designation or otherwise, or whose fairvalue is disclosed.

...

Fair value is the amount for which an asset could beexchanged, or a liability settled, between knowledgeable,willing parties in an arm’s length transaction.* price thatwould be received to sell an asset or paid to transfer aliability in an orderly transaction between marketparticipants at the measurement date. (See IFRS 13.)

...

The footnote to the definition of fair value is deleted.




13 If an entity is unable to determine measure reliably the fairvalue of an embedded derivative on the basis of its terms andconditions (for example, because the embedded derivative isbased on an unquoted equity instrument that does not have aquoted price in an active market for an identical instrument,ie a Level 1 input), the fair value of the embedded derivative isthe difference between the fair value of the hybrid (combined)instrument and the fair value of the host contract, if those canbe determined under this Standard. If the entity is unable todetermine measure the fair value of the embedded derivativeusing this method, paragraph 12 applies and the hybrid(combined) instrument is designated as at fair value throughprofit or loss.

28 When an entity allocates the previous carrying amount of alarger financial asset between the part that continues to berecognised and the part that is derecognised, the fair value ofthe part that continues to be recognised needs to bedetermined measured. ...

D99 Paragraph 43A is added.

43A However, if the fair value of the financial asset or financialliability at initial recognition differs from the transaction price,an entity shall apply paragraph AG76.


47 After initial recognition, an entity shall measure all financialliabilities at amortised cost using the effective interest method,except for:

(a) financial liabilities at fair value through profit or loss.Such liabilities, including derivatives that are liabilities,shall be measured at fair value except for a derivativeliability that is linked to and must be settled by deliveryof an unquoted equity instrument that does not have aquoted price in an active market for an identicalinstrument (ie a Level 1 input) whose fair value cannototherwise be reliably measured, which shall be measuredat cost.

…





88 A hedging relationship qualifies for hedge accounting underparagraphs 89–102 if, and only if, all of the following conditionsare met.

…

(d) The effectiveness of the hedge can be reliably measured, iethe fair value or cash flows of the hedged item that areattributable to the hedged risk and the fair value of thehedging instrument can be reliably measured(see paragraphs 46 and 47 and Appendix A paragraphs AG80and AG81 for guidance on determining fair value).

…

D103 Paragraph 103Q is added as follows:

103Q IFRS 13, issued in May 2011, amended paragraphs 9, 13, 28, 47,88, AG46, AG52, AG64, AG76, AG76A, AG80, AG81, AG84 andAG96, added paragraph 43A and deleted paragraphs 48–49,AG69–AG75, AG77–AG79 and AG82. An entity shall apply thoseamendments when it applies IFRS 13.

D104 In Appendix A paragraphs AG46, AG52 and AG64 are amended as follows:

AG46 In estimating When measuring the fair values of the part thatcontinues to be recognised and the part that is derecognised forthe purposes of applying paragraph 27, an entity applies thefair value measurement requirements in IFRS 13 andparagraphs 48–49 and AG69–AG82 in addition to paragraph 28.

AG52 This paragraph illustrates the application of the continuinginvolvement approach when the entity’s continuinginvolvement is in a part of a financial asset.



D105 Paragraph AG64 is amended as follows:

AG64 The fair value of a financial instrument on initial recognition isnormally the transaction price (ie the fair value of the considerationgiven or received, see also IFRS 13 and paragraph AG76). However, ifpart of the consideration given or received is for something otherthan the financial instrument, an entity shall measure the fairvalue of the financial instrument is estimated using a valuationtechnique (see paragraphs AG74–AG79). For example, the fairvalue of a long-term loan or receivable that carries no interest canbe estimated measured as the present value of all future cashreceipts discounted using the prevailing market rate(s) of interestfor a similar instrument (similar as to currency, term, type ofinterest rate and other factors) with a similar credit rating.Any additional amount lent is an expense or a reduction of incomeunless it qualifies for recognition as some other type of asset.

D106 Paragraphs AG69–AG75 and their related headings are deleted.

Assume an entity has a portfolio of prepayable loans … The fair value of the loans at the date of the transaction is CU10,100 and the estimated fair value of the excess spread of 0.5 per cent is CU40.

…

The entity calculates the gain or loss on the sale of the 90 per cent share of cash flows. Assuming that separate fair values of the 90 per cent part transferred and the 10 per cent part retained are not available at the date of the transfer, the entity allocates the carrying amount of the asset in accordance with paragraph 28 as follows:

Estimatedfair Fair

value

Percentage Allocatedcarryingamount

Portion transferred 9,090 90% 9,000

Portion retained 1,010 10% 1,000

Total 10,100 10,000

…




AG76 Therefore, a valuation technique (a) incorporates all factors thatmarket participants would consider in setting a price and (b) isconsistent with accepted economic methodologies for pricingfinancial instruments. Periodically, an entity calibrates thevaluation technique and tests it for validity using prices from anyobservable current market transactions in the same instrument(ie without modification or repackaging) or based on anyavailable observable market data. An entity obtains market dataconsistently in the same market where the instrument wasoriginated or purchased. The best evidence of the fair value of afinancial instrument at initial recognition is normally thetransaction price (ie the fair value of the consideration given orreceived, see also IFRS 13). If an entity determines that the fairvalue at initial recognition differs from the transaction price asmentioned in paragraph 43A, the entity shall account for unlessthe fair value of that instrument at that date as follows:

(a) at the measurement required by paragraph 43 if that fairvalue is evidenced by comparison with other observablecurrent market transactions in the same instrument(ie without modification or repackaging) a quoted price inan active market for an identical asset or liability (ie a Level 1input) or based on a valuation technique whose variablesinclude that uses only data from observable markets.An entity shall recognise the difference between the fair valueat initial recognition and the transaction price as a gain orloss.

(b) in all other cases, at the measurement required byparagraph 43, adjusted to defer the difference betweenthe fair value at initial recognition and the transactionprice. After initial recognition, the entity shall recognisethat deferred difference as a gain or loss only to the extentthat it arises from a change in a factor (including time)that market participants would take into account whenpricing the asset or liability.

D108 Paragraph AG76A is amended as follows:

AG76A The subsequent measurement of the financial asset or financialliability and the subsequent recognition of gains and lossesshall be consistent with the requirements of this Standard.The application of paragraph AG76 may result in no gain or loss



being recognised on the initial recognition of a financial assetor financial liability. In such a case, IAS 39 requires that a gainor loss shall be recognised after initial recognition only to theextent that it arises from a change in a factor (including time)that market participants would consider in setting a price.

D109 Paragraphs AG77–AG79 are deleted.

D110 Paragraphs AG80 and AG81 are amended as follows:

AG80 The fair value of investments in equity instruments that do nothave a quoted market price in an active market for an identicalinstrument (ie a Level 1 input) and derivatives that are linked toand must be settled by delivery of such an unquoted equityinstrument (see paragraphs 46(c) and 47) is reliably measurableif (a) the variability in the range of reasonable fair valueestimates measurements is not significant for that instrumentor (b) the probabilities of the various estimates within the rangecan be reasonably assessed and used in estimating whenmeasuring fair value.

AG81 There are many situations in which the variability in the rangeof reasonable fair value estimates measurements ofinvestments in equity instruments that do not have a quotedmarket price in an active market for an identical instrument(ie a Level 1 input) and derivatives that are linked to and mustbe settled by delivery of such an unquoted equity instrument(see paragraphs 46(c) and 47) is likely not to be significant.Normally it is possible to estimate measure the fair value of afinancial asset that an entity has acquired from an outsideparty. However, if the range of reasonable fair value estimatesmeasurements is significant and the probabilities of thevarious estimates cannot be reasonably assessed, an entity isprecluded from measuring the instrument at fair value.

D111 The heading above paragraph AG82 and paragraph AG82 are deleted.


AG96 An investment in an unquoted equity instrument that does nothave a quoted price in an active market for an identicalinstrument (ie a Level 1 input) is not carried at fair valuebecause its fair value cannot otherwise be reliably measured ora derivative that is linked to and must be settled by delivery ofsuch an unquoted equity instrument (see paragraphs 46(c) and47) cannot be designated as a hedging instrument.



IAS 40 Investment Property


IN16 In exceptional cases, when an entity has adopted the fair valuemodel, there may be clear evidence when an entity firstacquires an investment property (or when an existing propertyfirst becomes investment property following the completion ofconstruction or development, or after a change in use) that itsfair value will not be reliably determinable measurable on acontinuing basis. …


26 … Guidance on determining measuring the fair value of aproperty interest is set out for the fair value model inparagraphs 33–35, 40, 41, 48, 50 and 52 and in IFRS 13. Thatguidance is also relevant to the determination measurement offair value when that value is used as cost for initial recognitionpurposes.

29 The fair value of an asset for which comparable markettransactions do not exist is reliably measurable if (a) thevariability in the range of reasonable fair value estimatesmeasurements is not significant for that asset or (b) theprobabilities of the various estimates within the range can bereasonably assessed and used in estimating when measuring fairvalue. If the entity is able to determine measure reliably the fairvalue of either the asset received or the asset given up, then thefair value of the asset given up is used to measure cost unless thefair value of the asset received is more clearly evident.

32 This Standard requires all entities to determine measure thefair value of investment property, for the purpose of eithermeasurement (if the entity uses the fair value model) ordisclosure (if it uses the cost model). An entity is encouraged,but not required, to determine measure the fair value ofinvestment property on the basis of a valuation by anindependent valuer who holds a recognised and relevantprofessional qualification and has recent experience in thelocation and category of the investment property being valued.





40 When measuring the The fair value of investment property inaccordance with IFRS 13, an entity shall ensure that the fair valuereflects, among other things, rental income from current leasesand reasonable and supportable other assumptions that representwhat knowledgeable, willing parties market participants wouldassume use when pricing the investment property about rentalincome from future leases in the light of under current marketconditions. It also reflects, on a similar basis, any cash outflows(including rental payments and other outflows) that could beexpected in respect of the property. Some of those outflows arereflected in the liability whereas others relate to outflows that arenot recognised in the financial statements until a later date(eg periodic payments such as contingent rents).

D117 Paragraphs 42–47, 49, 51 and 75(d) are deleted.


48 In exceptional cases, there is clear evidence when an entity firstacquires an investment property (or when an existing propertyfirst becomes investment property after a change in use) thatthe variability in the range of reasonable fair value estimatesmeasurements will be so great, and the probabilities of thevarious outcomes so difficult to assess, that the usefulness of asingle estimate measure of fair value is negated. This mayindicate that the fair value of the property will not be reliablydeterminable measurable on a continuing basis (see paragraph 53).

D119 The heading above paragraph 53 and paragraphs 53 and 53B are amendedas follows:

Inability to determine measure fair value reliably

53 There is a rebuttable presumption that an entity can reliablydetermine measure the fair value of an investment property ona continuing basis. However, in exceptional cases, there is clearevidence when an entity first acquires an investment property(or when an existing property first becomes investmentproperty after a change in use) that the fair value of theinvestment property is not reliably determinable measurableon a continuing basis. This arises when, and only when, themarket for comparable market properties is inactive (eg thereare few recent transactions, price quotations are not current orobserved transaction prices indicate that the seller was forced



to sell) are infrequent and alternative reliable estimatesmeasurements of fair value (for example, based on discountedcash flow projections) are not available. If an entity determinesthat the fair value of an investment property underconstruction is not reliably determinable measurable butexpects the fair value of the property to be reliablydeterminable measurable when construction is complete, itshall measure that investment property under construction atcost until either its fair value becomes reliably determinablemeasurable or construction is completed (whichever is earlier).If an entity determines that the fair value of an investmentproperty (other than an investment property underconstruction) is not reliably determinable measurable on acontinuing basis, the entity shall measure that investmentproperty using the cost model in IAS 16. The residual value ofthe investment property shall be assumed to be zero. The entityshall apply IAS 16 until disposal of the investment property.

53B … An entity that has measured an item of investment propertyunder construction at fair value may not conclude that the fairvalue of the completed investment property cannot bedetermined measured reliably.

D120 Paragraph 75(d) is deleted.

D121 Paragraphs 78–80 are amended as follows:

78 In the exceptional cases referred to in paragraph 53, when anentity measures investment property using the cost model inIAS 16, the reconciliation required by paragraph 76 shalldisclose amounts relating to that investment propertyseparately from amounts relating to other investment property.In addition, an entity shall disclose:

…

(b) an explanation of why fair value cannot be determinedmeasured reliably;

…

79 In addition to the disclosures required by paragraph 75, anentity that applies the cost model in paragraph 56 shall disclose:

…

(e) the fair value of investment property. In the exceptionalcases described in paragraph 53, when an entity cannotdetermine measure the fair value of the investmentproperty reliably, it shall disclose:

…



(ii) an explanation of why fair value cannot bedetermined measured reliably; and

…

80 An entity that has previously applied IAS 40 (2000) and elects forthe first time to classify and account for some or all eligibleproperty interests held under operating leases as investmentproperty shall recognise the effect of that election as anadjustment to the opening balance of retained earnings for theperiod in which the election is first made. In addition:

(a) if the entity has previously disclosed publicly (in financialstatements or otherwise) the fair value of those propertyinterests in earlier periods (determined measured on abasis that satisfies the definition of fair value inparagraph 5 and the guidance in paragraphs 36–52IFRS 13), the entity is encouraged, but not required:

…

D122 Paragraph 85B is amended as follows:

85B … An entity is permitted to apply the amendments toinvestment property under construction from any date before1 January 2009 provided that the fair values of investmentproperties under construction were determined measured atthose dates. …


85C IFRS 13, issued in May 2011, amended the definition of fair valuein paragraph 5, amended paragraphs 26, 29, 32, 40, 48, 53, 53B,78–80 and 85B and deleted paragraphs 36–39, 42–47, 49, 51 and75(d). An entity shall apply those amendments when it appliesIFRS 13.

IAS 41 Agriculture



IN3 There is a presumption that fair value can be measured reliablyfor a biological asset. However, that presumption can berebutted only on initial recognition for a biological asset forwhich quoted market-determined prices or values are notavailable and for which alternative estimates of fair valuemeasurements are determined to be clearly unreliable. …





An active market is a market where all the following conditionsexist:

(a) the items traded within the market are homogeneous;



...

Fair value is the amount for which an asset could be exchanged,or a liability settled, between knowledgeable, willing parties inan arm’s length transaction price that would be received to sellan asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date. (SeeIFRS 13 Fair Value Measurement.)

15 The determination of fair value measurement of for a biologicalasset or agricultural produce may be facilitated by groupingbiological assets or agricultural produce according tosignificant attributes; for example, by age or quality. …

16 Entities often enter into contracts to sell their biological assets oragricultural produce at a future date. Contract prices are notnecessarily relevant in determining measuring fair value,because fair value reflects the current market conditions inwhich a willing buyer and seller market participant buyers andsellers would enter into a transaction. …

D127 Paragraphs 9, 17–21 and 23 are deleted.


25 … An entity may use information regarding the combined assetsto determine measure the fair value for of the biological assets. …

30 There is a presumption that fair value can be measured reliablyfor a biological asset. However, that presumption can berebutted only on initial recognition for a biological asset forwhich quoted market-determined prices or values are notavailable and for which alternative estimates of fair valuemeasurements are determined to be clearly unreliable. …

D129 Paragraphs 47 and 48 are deleted.




61 IFRS 13, issued in May 2011, amended paragraphs 8, 15, 16, 25and 30 and deleted paragraphs 9, 17–21, 23, 47 and 48. An entityshall apply those amendments when it applies IFRS 13.

IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments (as amended at October 2009)

D131 In the rubric, ‘paragraphs 1–14A’ is amended to ‘paragraphs 1–16’

D132 Below the heading ‘References’ a reference to IFRS 13 Fair ValueMeasurement is added.


16 IFRS 13, issued in May 2011, amended paragraph A8. An entityshall apply that amendment when it applies IFRS 13.

D134 In the Appendix paragraph A8 is amended as follows:

A8 Members’ shares in excess of the prohibition againstredemption are financial liabilities. The co-operative entitymeasures this financial liability at fair value at initialrecognition. Because these shares are redeemable on demand,the co-operative entity determines measures the fair value ofsuch financial liabilities as required by paragraph 49 of IAS 3947 of IFRS 13, which states: ‘The fair value of a financial liabilitywith a demand feature (eg a demand deposit) is not less thanthe amount payable on demand …’ Accordingly, the co-operativeentity classifies as financial liabilities the maximum amountpayable on demand under the redemption provisions.

IFRIC 4 Determining whether an Arrangement contains a Lease


D136 In paragraph 15(a) ‘fair value’ is footnoted as follows:

* IAS 17 uses the term ‘fair value’ in a way that differs in somerespects from the definition of fair value in IFRS 13. Therefore,when applying IAS 17 an entity measures fair value in accordancewith IAS 17, not IFRS 13.



IFRIC 13 Customer Loyalty Programmes



6 The consideration allocated to the award credits shall bemeasured by reference to their fair value, ie the amount forwhich the award credits could be sold separately.

D139 Paragraph 10B is added as follows:

10B IFRS 13, issued in May 2011, amended paragraphs 6 and AG1–AG3.An entity shall apply those amendments when it applies IFRS 13.

D140 In the Application Guidance paragraphs AG1–AG3 are amended asfollows:

AG1 Paragraph 6 of the consensus requires the considerationallocated to award credits to be measured by reference to theirfair value, ie the amount for which the award credits could besold separately. If the fair value there is not directly observable aquoted market price for an identical award credit, it fair valuemust be estimated measured using another valuation technique.

AG2 An entity may estimate measure the fair value of award creditsby reference to the fair value of the awards for which they couldbe redeemed. The fair value of the award credits takes intoaccount, as appropriate:

(a) the amount of the discounts or incentives that wouldotherwise be offered to customers who have not earnedaward credits from an initial sale; and

(b) the proportion of award credits that are not expected tobe redeemed by customers. ; and

(c) non-performance risk.

If customers can choose from a range of different awards, thefair value of the award credits will reflects the fair values of therange of available awards, weighted in proportion to thefrequency with which each award is expected to be selected.

AG3 In some circumstances, other estimation valuation techniquesmay be available used. For example, if a third party will supplythe awards and the entity pays the third party for each award



credit it grants, it could estimate measure the fair value of theaward credits by reference to the amount it pays the thirdparty, adding a reasonable profit margin. Judgement isrequired to select and apply the estimation valuation techniquethat satisfies the requirements of paragraph 6 of the consensusand is most appropriate in the circumstances.

IFRIC 17 Distributions of Non-cash Assets to Owners




17 If, after the end of a reporting period but before the financialstatements are authorised for issue, an entity declares adividend to distribute a non-cash asset, it shall disclose:

…

(c) the estimated fair value of the asset to be distributed as ofthe end of the reporting period, if it is different from itscarrying amount, and the information about themethod(s) used to determine measure that fair valuerequired by IFRS 7 paragraph 27–27B(a) paragraphs 93(b),(d), (g) and (i) and 99 of IFRS 13.


19 IFRS 13, issued in May 2011, amended paragraph 17. An entityshall apply that amendment when it applies IFRS 13.

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (as amended at September 2010)




7 If the fair value of the equity instruments issued cannot be reliablymeasured then the equity instruments shall be measured to



reflect the fair value of the financial liability extinguished.In measuring the fair value of a financial liability extinguishedthat includes a demand feature (eg a demand deposit),paragraph 49 47 of IAS 39 IFRS 13 is not applied.


15 IFRS 13, issued in May 2011, amended paragraph 7. An entityshall apply that amendment when it applies IFRS 13.



Approval by the Board of IFRS 13 issued in May 2011

International Financial Reporting Standard 13 Fair Value Measurement wasapproved for issue by the fifteen members of the International AccountingStandards Board.

Sir David Tweedie Chairman

Stephen Cooper

Philippe Danjou

Jan Engström

Patrick Finnegan

Amaro Luiz de Oliveira Gomes

Prabhakar Kalavacherla

Elke König

Patricia McConnell

Warren J McGregor

Paul Pacter

Darrel Scott

John T Smith

Tatsumi Yamada

Wei-Guo Zhang


Basis for ConclusionsInternational Financial Reporting Standard®

International Accounting Standards Board (IASB)

The IASB is the independent standard-setting body of the IFRS Foundation

30 Cannon Street | London EC4M 6XH | United Kingdom

Telephone: +44 (0)20 7246 6410 | Fax: +44 (0)20 7246 6411

Email: [email protected] | Web: www.ifrs.org

Publications Department

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Email: [email protected]

BASIS FoR ConCLUSIonS ISBn 978-1-907877-12-4

Cover printed on 100 per cent recycled paper Text printed on 50 per cent recycled paper

100% 50%

May 2011

Basis for Conclusionson


This Basis for Conclusions accompanies IFRS 13 Fair Value Measurement(see separate booklet) and is published by the International AccountingStandards Board (IASB), 30 Cannon Street, London EC4M 6XH, United Kingdom.Tel: +44 (0)20 7246 6410Fax: +44 (0)20 7246 6411Email: [email protected]: www.ifrs.org






International Financial Reporting Standards (including International AccountingStandards and SIC and IFRIC Interpretations), Exposure Drafts, and other IASBpublications are copyright of the IFRS Foundation. The approved text ofInternational Financial Reporting Standards and other IASB publications is thatpublished by the IASB in the English language. Copies may be obtained from theIFRS Foundation. Please address publications and copyright matters to:






CONTENTSparagraphs

BASIS FOR CONCLUSIONS ONIFRS 13 FAIR VALUE MEASUREMENT

INTRODUCTION BC1–BC18

Overview BC4–BC8

Background BC9–BC18

SCOPE BC19–BC26

MEASUREMENT BC27–BC182

Definition of fair value BC27–BC45

The asset or liability BC46–BC47

The transaction BC48–BC54

Market participants BC55–BC59

The price BC60–BC62

Application to non-financial assets BC63–BC79

Application to liabilities BC80–BCZ103

Application to an entity’s own equity instruments BC104–BC107

Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk BC108–BC131

Fair value at initial recognition BC132–BC138

Valuation techniques BC139–BC148

Inputs to valuation techniques BC149–BC165

Fair value hierarchy BC166–BC182

DISCLOSURE BC183–BC224

Distinguishing between recurring and non-recurring fair value measurements BC186

Information about fair value measurements categorised within Level 3 of the fair value hierarchy BC187–BC210

Transfers between Levels 1 and 2 of the fair value hierarchy BC211–BC212

When an entity uses a non-financial asset in a way that differs from its highest and best use BC213–BC214

The categorisation within the level of the hierarchy for items that are not measured at fair value in the statement of financial position BC215–BC217

Assets with a recoverable amount that is fair value less costs of disposal BC218–BC221

IFRS 13 BASIS FOR CONCLUSIONS MAY 2011


Interim financial reporting BC222–BC224

EFFECTIVE DATE AND TRANSITION BC225–BC230

APPLICATION IN EMERGING AND TRANSITION ECONOMIES BC231–BC235

CONVERGENCE WITH US GAAP BC236–BC238

COST-BENEFIT CONSIDERATIONS BC239–BC243

SUMMARY OF MAIN CHANGES FROM THE EXPOSURE DRAFT BC244

APPENDIXAmendments to the Basis for Conclusions on other IFRSs



Basis for Conclusions on IFRS 13 Fair Value Measurement

This Basis for Conclusions accompanies, but is not part of, IFRS 13.

Introduction

BC1 This Basis for Conclusions summarises the considerations of theInternational Accounting Standards Board (IASB) in reaching theconclusions in IFRS 13 Fair Value Measurement. It includes the reasonsfor accepting particular views and rejecting others. Individual IASBmembers gave greater weight to some factors than to others.

BC2 IFRS 13 is the result of the IASB’s discussions about measuring fairvalue and disclosing information about fair value measurements inaccordance with International Financial Reporting Standards (IFRSs),including those held with the US national standard-setter, theFinancial Accounting Standards Board (FASB), in their joint project onfair value measurement.

BC3 As a result of those discussions, the FASB amended particular aspectsof Topic 820 Fair Value Measurement in the FASB Accounting StandardsCodification® (which codified FASB Statement of Financial AccountingStandards No. 157 Fair Value Measurements (SFAS 157)). The FASBseparately developed a Basis for Conclusions summarising itsconsiderations in reaching the conclusions resulting in thoseamendments.

Overview

BC4 Some IFRSs require or permit entities to measure or disclose the fairvalue of assets, liabilities or their own equity instruments. Becausethose IFRSs were developed over many years, the requirements formeasuring fair value and for disclosing information about fair valuemeasurements were dispersed and in many cases did not articulate aclear measurement or disclosure objective.

BC5 As a result, some of those IFRSs contained limited guidance about howto measure fair value, whereas others contained extensive guidanceand that guidance was not always consistent across those IFRSs thatrefer to fair value. Inconsistencies in the requirements for measuring



fair value and for disclosing information about fair valuemeasurements have contributed to diversity in practice and havereduced the comparability of information reported in financialstatements.

BC6 To remedy that situation, the IASB added a project to its agenda withthe following objectives:

(a) to establish a single set of requirements for all fair valuemeasurements required or permitted by IFRSs to reducecomplexity and improve consistency in their application,thereby enhancing the comparability of information reported infinancial statements;

(b) to clarify the definition of fair value and related guidance tocommunicate the measurement objective more clearly;

(c) to enhance disclosures about fair value measurements that willhelp users of financial statements assess the valuation techniquesand inputs used to develop fair value measurements; and

(d) to increase the convergence of IFRSs and US generally acceptedaccounting principles (GAAP).

BC7 IFRS 13 is the result of that project. IFRS 13 is a single source of fairvalue measurement guidance that clarifies the definition of fair value,provides a clear framework for measuring fair value and enhances thedisclosures about fair value measurements. It is also the result of theefforts of the IASB and the FASB to ensure that fair value has the samemeaning in IFRSs and in US GAAP and that their respective fair valuemeasurement and disclosure requirements are the same (except forminor differences in wording and style; see paragraphs BC237 andBC238 for the differences between IFRS 13 and Topic 820).

BC8 IFRS 13 applies to IFRSs that require or permit fair value measurementsor disclosures. It does not introduce new fair value measurements, nordoes it eliminate practicability exceptions to fair value measurements(eg the exception in IAS 41 Agriculture when an entity is unable tomeasure reliably the fair value of a biological asset on initialrecognition). In other words, IFRS 13 specifies how an entity shouldmeasure fair value and disclose information about fair valuemeasurements. It does not specify when an entity should measure anasset, a liability or its own equity instrument at fair value.



Background

BC9 The IASB and the FASB began developing their fair value measurementstandards separately.

BC10 The FASB began working on its fair value measurement project in June2003. In September 2005, during the FASB’s redeliberations on theproject, the IASB added to its agenda a project to clarify the meaningof fair value and to provide guidance for its application in IFRSs.

BC11 In September 2006 the FASB issued SFAS 157 (now in Topic 820).Topic 820 defines fair value, establishes a framework for measuringfair value and requires disclosures about fair value measurements.

BC12 In November 2006 as a first step in developing a fair valuemeasurement standard, the IASB published a discussion paper FairValue Measurements. In that discussion paper, the IASB used SFAS 157 asa basis for its preliminary views because of the consistency of SFAS 157with the existing fair value measurement guidance in IFRSs and theneed for increased convergence of IFRSs and US GAAP. The IASBreceived 136 comment letters in response to that discussion paper.In November 2007 the IASB began its deliberations for thedevelopment of the exposure draft Fair Value Measurement.

BC13 In May 2009 the IASB published that exposure draft, which proposed adefinition of fair value, a framework for measuring fair value anddisclosures about fair value measurements. Because the proposals inthe exposure draft were developed using the requirements of SFAS 157,there were many similarities between them. However, some of thoseproposals were different from the requirements of SFAS 157 and manyof them used wording that was similar, but not identical, to thewording in SFAS 157. The IASB received 160 comment letters inresponse to the proposals in the exposure draft. One of the mostprevalent comments received was a request for the IASB and the FASBto work together to develop common fair value measurement anddisclosure requirements in IFRSs and US GAAP.

BC14 In response to that request, the IASB and the FASB agreed at their jointmeeting in October 2009 to work together to develop commonrequirements. The boards concluded that having commonrequirements for fair value measurement and disclosure wouldimprove the comparability of financial statements prepared inaccordance with IFRSs and US GAAP. In addition, they concluded thathaving common requirements would reduce diversity in theapplication of fair value measurement requirements and would



simplify financial reporting. To achieve those goals, the boards neededto ensure that fair value had the same meaning in IFRSs and US GAAPand that IFRSs and US GAAP had the same fair value measurement anddisclosure requirements (except for minor differences in wording andstyle). Consequently, the FASB agreed to consider the commentsreceived on the IASB’s exposure draft and to propose amendments toUS GAAP if necessary.

BC15 The boards began their joint discussions in January 2010. Theydiscussed nearly all the issues together so that each board wouldbenefit from hearing the rationale for the other board’s decisions oneach issue. They initially focused on the following:

(a) differences between the requirements in Topic 820 and theproposals in the IASB’s exposure draft;

(b) comments received on the IASB’s exposure draft (includingcomments received from participants at the IASB’s round-tablemeetings held in November and December 2009); and

(c) feedback received on the implementation of Topic 820 (eg issuesdiscussed by the FASB’s Valuation Resource Group).

BC16 In March 2010 the boards completed their initial discussions. As aresult of those discussions, in June 2010 the FASB issued a proposedAccounting Standards Update (ASU) Fair Value Measurements andDisclosures (Topic 820): Amendments for Common Fair Value Measurement andDisclosure Requirements in U.S. GAAP and IFRSs and the IASB re-exposed aproposed disclosure of the unobservable inputs used in a fair valuemeasurement (Measurement Uncertainty Analysis Disclosure for Fair ValueMeasurements). The IASB concluded that it was necessary to re-exposethat proposal because in their discussions the boards agreed to requirea measurement uncertainty analysis disclosure that included theeffect of any interrelationships between unobservable inputs(a requirement that was not proposed in the May 2009 exposure draftand was not already required by IFRSs). The IASB received 92 commentletters on the re-exposure document.

BC17 In September 2010, after the end of the comment periods on the IASB’sre-exposure document and the FASB’s proposed ASU, the boardsjointly considered the comments received on those exposure drafts.The boards completed their discussions in March 2011.



BC18 Throughout the process, the IASB considered information from theIFRS Advisory Council, the Analysts’ Representative Group and theIASB’s Fair Value Expert Advisory Panel (see paragraph BC177) andfrom other interested parties.

Scope

BC19 The boards separately discussed the scope of their respective fair valuemeasurement standards because of the differences between IFRSs andUS GAAP in the measurement bases specified in other standards forboth initial recognition and subsequent measurement.

BC20 IFRS 13 applies when another IFRS requires or permits fair valuemeasurements or disclosures about fair value measurements(and measurements, such as fair value less costs to sell, based on fairvalue or disclosures about those measurements), except in thefollowing circumstances:

(a) The measurement and disclosure requirements of IFRS 13 do notapply to the following:

(i) share-based payment transactions within the scope ofIFRS 2 Share-based Payment;

(ii) leasing transactions within the scope of IAS 17 Leases; and

(iii) measurements that have some similarities to fair value butare not fair value, such as net realisable value inaccordance with IAS 2 Inventories and value in use inaccordance with IAS 36 Impairment of Assets.

(b) The disclosures required by IFRS 13 are not required for thefollowing:

(i) plan assets measured at fair value in accordance withIAS 19 Employee Benefits;

(ii) retirement benefit plan investments measured at fair valuein accordance with IAS 26 Accounting and Reporting byRetirement Benefit Plans; and

(iii) assets for which recoverable amount is fair value less costsof disposal in accordance with IAS 36.



BC21 The exposure draft proposed introducing a new measurement basis forIFRS 2, a market-based value. The definition of market-based value wouldhave been similar to the exit price definition of fair value except that itwould specify that the measurement does not take into account marketparticipant assumptions for vesting conditions and reload features.Respondents pointed out that some items measured at fair value inIFRS 2 were consistent with the proposed definition of fair value, not withthe proposed definition of market-based value, and were concerned thatthere could be unintended consequences of moving forward with amarket-based value measurement basis in IFRS 2. The IASB agreed withthose comments and concluded that amending IFRS 2 to distinguishbetween measures that are fair value and those based on fair value wouldrequire new measurement guidance for measures based on fair value.The IASB concluded that such guidance might result in unintendedchanges in practice with regard to measuring share-based paymenttransactions and decided to exclude IFRS 2 from the scope of IFRS 13.

BC22 The IASB concluded that applying the requirements in IFRS 13 mightsignificantly change the classification of leases and the timing ofrecognising gains or losses for sale and leaseback transactions. Becausethere is a project under way to replace IAS 17, the IASB concluded thatrequiring entities to make potentially significant changes to theiraccounting systems for the IFRS on fair value measurement and thenfor the IFRS on lease accounting could be burdensome.

BC23 The exposure draft proposed that the disclosures about fair valuemeasurements would be required for the fair value of plan assets inIAS 19 and the fair value of retirement benefit plan investments inIAS 26. In its project to amend IAS 19 the IASB decided to require anentity to disaggregate the fair value of the plan assets into classes thatdistinguish the risk and liquidity characteristics of those assets,subdividing each class of debt and equity instruments into those thathave a quoted market price in an active market and those that do not.As a result, the IASB decided that an entity does not need to provide thedisclosures required by IFRS 13 for the fair value of plan assets orretirement benefit plan investments.

BC24 The exposure draft was not explicit about whether the measurement anddisclosure requirements in the exposure draft applied to measurementsbased on fair value, such as fair value less costs to sell in IFRS 5 Non-currentAssets Held for Sale and Discontinued Operations or IAS 41. In the boards’discussions, they concluded that the measurement and disclosurerequirements should apply to all measurements for which fair value isthe underlying measurement basis (except that the disclosure



requirements would not apply to assets with a recoverable amount thatis fair value less costs of disposal in IAS 36; see paragraphs BC218–BC221).Consequently, the boards decided to clarify that the measurementand disclosure requirements apply to both fair value measurements andmeasurements based on fair value. The boards also decided to clarify thatthe measurement and disclosure requirements do not apply tomeasurements that have similarities to fair value but are not fair value,such as net realisable value in accordance with IAS 2 or value in use inaccordance with IAS 36.

BC25 The boards decided to clarify that the measurement requirementsapply when measuring the fair value of an asset or a liability that is notmeasured at fair value in the statement of financial position but forwhich the fair value is disclosed (eg for financial instrumentssubsequently measured at amortised cost in accordance with IFRS 9Financial Instruments or IAS 39 Financial Instruments: Recognition andMeasurement and for investment property subsequently measured usingthe cost model in accordance with IAS 40 Investment Property).

BC26 The IASB decided that two of the proposals about scope in the exposuredraft were not necessary:

(a) The exposure draft proposed excluding financial liabilitieswith a demand feature in IAS 39 from the scope of an IFRS onfair value measurement. In the light of the commentsreceived, the IASB confirmed its decision when developingIAS 39 that the fair value of financial liabilities with a demandfeature cannot be less than the present value of the demandamount (see paragraphs BC101–BC103) and decided to retainthe term fair value for such financial liabilities.

(b) The exposure draft proposed replacing the term fair value withanother term that reflects the measurement objective forreacquired rights in a business combination in IFRS 3 BusinessCombinations. In the redeliberations, the IASB concluded thatbecause IFRS 3 already describes the measurement of reacquiredrights as an exception to fair value, it was not necessary tochange that wording.



Measurement

Definition of fair value

Clarifying the measurement objective

BC27 IFRS 13 defines fair value as:

The price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date.

BC28 IFRS 13 also provides a framework that is based on an objective toestimate the price at which an orderly transaction to sell the asset orto transfer the liability would take place between market participantsat the measurement date under current market conditions (ie an exitprice from the perspective of a market participant that holds the assetor owes the liability at the measurement date).

BC29 That definition of fair value retains the exchange notion contained inthe previous definition of fair value in IFRSs:

The amount for which an asset could be exchanged, or a liability settled,between knowledgeable, willing parties in an arm’s length transaction.

BC30 Like the previous definition of fair value, the revised definitionassumes a hypothetical and orderly exchange transaction (ie it is notan actual sale or a forced transaction or distress sale). However, theprevious definition of fair value:

(a) did not specify whether an entity is buying or selling the asset;

(b) was unclear about what is meant by settling a liability because itdid not refer to the creditor, but to knowledgeable, willingparties; and

(c) did not state explicitly whether the exchange or settlement takesplace at the measurement date or at some other date.

BC31 The IASB concluded that the revised definition of fair value remediesthose deficiencies. It also conveys more clearly that fair value is amarket-based measurement, and not an entity-specific measurement,and that fair value reflects current market conditions (which reflectmarket participants’, not the entity’s, current expectations aboutfuture market conditions).



BC32 In determining how to define fair value in IFRSs, the IASB consideredwork done in its project to revise IFRS 3. In that project, the IASBconsidered whether differences between the definitions of fair value inUS GAAP (an explicit exit price) and IFRSs (an exchange amount, whichmight be interpreted in some situations as an entry price) would resultin different measurements of assets acquired and liabilities assumedin a business combination. That was a particularly important issuebecause in many business combinations the assets and liabilities arenon-financial.

BC33 The IASB asked valuation experts to take part in a case study involvingthe valuation of the identifiable assets acquired and liabilities assumedin a sample business combination. The IASB learned that differencesbetween an exit price and an exchange amount (which might beinterpreted as an entry price in a business combination) were unlikelyto arise, mainly because transaction costs are not a component of fairvalue in either definition. The IASB observed that although thedefinitions used different words, they articulated essentially the sameconcepts.

BC34 However, the valuation experts identified potential differences inparticular areas. The valuation experts told the IASB that an exit pricefor an asset acquired or a liability assumed in a business combinationmight differ from an exchange amount if:

(a) an entity’s intended use for an acquired asset is different fromits highest and best use by market participants (ie when theacquired asset provides defensive value); or

(b) a liability is measured on the basis of settling it with the creditorrather than transferring it to a third party and the entitydetermines that there is a difference between thosemeasurements. Paragraphs BC80–BC82 discuss perceiveddifferences between the settlement and transfer notions.

BC35 With respect to highest and best use, the IASB understood that theways of measuring assets on the basis of their defensive value (ie thevalue associated with improving the prospects of the entity’s otherassets by preventing the acquired asset from being used bycompetitors) in accordance with US GAAP at the time IFRS 3 wasissued were still developing. As a consequence, the IASB thought itwas too early to assess the significance of any differences that mightresult. With respect to liabilities, it was also not clear at that timewhether entities would use different valuation techniques to measure



the fair value of liabilities assumed in a business combination. In thedevelopment of IFRS 13, the IASB observed the discussions of theFASB’s Valuation Resource Group to learn from the implementation ofSFAS 157 and Topic 820 in US GAAP.

Fair value as a current exit price

BC36 The definition of fair value in IFRS 13 is a current exit price. Thatdefinition in and of itself is not a controversial issue. Manyrespondents thought the proposal to define fair value as a current,market-based exit price was appropriate because that definitionretains the notion of an exchange between unrelated, knowledgeableand willing parties in the previous definition of fair value in IFRSs,but provides a clearer measurement objective. Other respondentsthought an entry price would be more appropriate in some situations(eg at initial recognition, such as in a business combination).

BC37 However, the issue of when fair value should be used as a measurementbasis in IFRSs is controversial. There is disagreement about thefollowing:

(a) which assets and liabilities should be measured at fair value(eg whether fair value should be restricted to assets andliabilities with quoted prices in active markets that the entityintends to sell or transfer in the near term);

(b) when those assets and liabilities should be measured at fairvalue (eg whether the measurement basis should change whenmarkets have become less active); and

(c) where any changes in fair value should be recognised.

BC38 Although IFRS 13 does not address when fair value should be used as ameasurement basis for a particular asset or liability or revisit when fairvalue has been used in IFRSs, the IASB did consider whether each useof the term fair value in IFRSs was consistent with an exit pricedefinition (see paragraphs BC41–BC45). Furthermore, IFRS 13 willinform the IASB in the future as it considers whether to require fairvalue as a measurement basis for a particular type of asset or liability.

BC39 The IASB concluded that an exit price of an asset or a liability embodiesexpectations about the future cash inflows and outflows associated withthe asset or liability from the perspective of a market participant thatholds the asset or owes the liability at the measurement date. An entitygenerates cash inflows from an asset by using the asset or by selling it.Even if an entity intends to generate cash inflows from an asset by using



it rather than by selling it, an exit price embodies expectations of cashflows arising from the use of the asset by selling it to a marketparticipant that would use it in the same way. That is because a marketparticipant buyer will pay only for the benefits it expects to generatefrom the use (or sale) of the asset. Thus, the IASB concluded that an exitprice is always a relevant definition of fair value for assets, regardless ofwhether an entity intends to use an asset or sell it.

BC40 Similarly, a liability gives rise to outflows of cash (or other economicresources) as an entity fulfils the obligation over time or when ittransfers the obligation to another party. Even if an entity intends tofulfil the obligation over time, an exit price embodies expectations ofrelated cash outflows because a market participant transferee wouldultimately be required to fulfil the obligation. Thus, the IASBconcluded that an exit price is always a relevant definition of fair valuefor liabilities, regardless of whether an entity intends to fulfil theliability or transfer it to another party that will fulfil it.

BC41 In developing the revised definition of fair value, the IASB completed astandard-by-standard review of fair value measurements required orpermitted in IFRSs to assess whether the IASB or its predecessor intendedeach use of fair value to be a current exit price measurement basis. If itbecame evident that a current exit price was not the intention in aparticular situation, the IASB would use another measurement basis todescribe the objective. The other likely measurement basis candidatewas a current entry price. For the standard-by-standard review, the IASBdefined current entry price as follows:

The price that would be paid to buy an asset or received to incur a liabilityin an orderly transaction between market participants (including theamount imposed on an entity for incurring a liability) at themeasurement date.

BC42 That definition of current entry price, like fair value, assumes ahypothetical orderly transaction between market participants at themeasurement date. It is not necessarily the same as the price an entitypaid to acquire an asset or received to incur a liability, eg if thattransaction was not at arm’s length. In discussions with interestedparties, the IASB found that most people who assert that an asset or aliability should be measured using an entry price measurement basis,rather than an exit price measurement basis, would actually prefer touse the entity’s actual transaction price (or cost), not the market-basedcurrent entry price defined above. The IASB observed that in some



cases there is not an actual transaction price (eg when a group of assetsis acquired but the unit of account is an individual asset, or when abiological asset regenerates) and, as a result, an assumed, orhypothetical, price must be used.

BC43 During the standard-by-standard review, the IASB asked various partiesto provide information on whether, in practice, they interpreted fairvalue in a particular context in IFRSs as a current entry price or acurrent exit price. The IASB used that information in determiningwhether to define fair value as a current exit price, or to remove theterm fair value and use the terms current exit price and current entry pricedepending on the measurement objective in each IFRS that used theterm fair value.

BC44 As a result of the standard-by-standard review, the IASB concluded thata current entry price and a current exit price will be equal when theyrelate to the same asset or liability on the same date in the same formin the same market. Therefore, the IASB considered it unnecessary tomake a distinction between a current entry price and a current exitprice in IFRSs with a market-based measurement objective (ie fairvalue), and the IASB decided to retain the term fair value and define itas a current exit price.

BC45 The IASB concluded that some fair value measurement requirementsin IFRSs were inconsistent with a current exit price or therequirements for measuring fair value. For those fair valuemeasurements, IFRS 13 excludes the measurement from its scope(see paragraphs BC19–BC26).

The asset or liability

BC46 IFRS 13 states that a fair value measurement takes into account thecharacteristics of the asset or liability, eg the condition and location ofthe asset and restrictions, if any, on its sale or use. Restrictions on thesale or use of an asset affect its fair value if market participantswould take the restrictions into account when pricing the asset atthe measurement date. That is consistent with the fair valuemeasurement guidance already in IFRSs. For example:

(a) IAS 40 stated that an entity should identify any differencesbetween the property being measured at fair value and similarproperties for which observable market prices are available andmake the appropriate adjustments; and



(b) IAS 41 referred to measuring the fair value of a biological assetor agricultural produce in its present location and condition.

BC47 The IASB concluded that IFRS 13 should describe how to measure fairvalue, not what is being measured at fair value. Other IFRSs specifywhether a fair value measurement considers an individual asset orliability or a group of assets or liabilities (ie the unit of account).For example:

(a) IAS 36 states that an entity should measure the fair value lesscosts of disposal for a cash-generating unit when assessing itsrecoverable amount.

(b) In IAS 39 and IFRS 9 the unit of account is generally anindividual financial instrument.

The transaction

BC48 The exposure draft proposed that the transaction to sell an asset ortransfer a liability takes place in the most advantageous market towhich the entity has access. That was different from the approach inTopic 820, which refers to the principal market for the asset or liabilityor, in the absence of a principal market, the most advantageous marketfor the asset or liability. The IASB concluded that in most cases theprincipal market for an asset or a liability will be the mostadvantageous market and that an entity need not continuouslymonitor different markets in order to determine which market is mostadvantageous at the measurement date. That proposal contained apresumption that the market in which the entity normally enters intotransactions for the asset or liability is the most advantageous marketand that an entity may assume that the principal market for the assetor liability is the most advantageous market.

BC49 Many respondents agreed with the most advantageous market notionbecause most entities enter into transactions that maximise the pricereceived to sell an asset or minimise the price paid to transfer aliability. Furthermore, they thought that a most advantageous marketnotion works best for all assets and liabilities, regardless of the level ofactivity in a market or whether the market for an asset or a liability isobservable.

BC50 However, some respondents were concerned about the difficulty withidentifying and selecting the most advantageous market when an assetor a liability is exchanged in multiple markets throughout the world.Other respondents found the guidance confusing because it was not



clear whether the most advantageous market must be used or how themarket in which the entity normally enters into transactions relates tothe principal market or to the most advantageous market. In general,respondents preferred the approach in Topic 820.

BC51 Although the boards think that in most cases the principal market andthe most advantageous market would be the same, they concludedthat the focus should be on the principal market for the asset orliability and decided to clarify the definition of the principal market.

BC52 Some respondents to the exposure draft stated that the language inUS GAAP was unclear about whether the principal market should bedetermined on the basis of the volume or level of activity for the asset orliability or on the volume or level of activity of the reporting entity’stransactions in a particular market. Consequently, the boards decided toclarify that the principal market is the market for the asset or liabilitythat has the greatest volume or level of activity for the asset or liability.Because the principal market is the most liquid market for the asset orliability, that market will provide the most representative input for afair value measurement. As a result, the boards also decided to specifythat a transaction to sell an asset or to transfer a liability takes place inthe principal (or most advantageous) market, provided that the entitycan access that market on the measurement date.

BC53 In addition, the boards concluded that an entity normally enters intotransactions in the principal market for the asset or liability (ie themost liquid market, assuming that the entity can access that market).As a result, the boards decided to specify that an entity can use theprice in the market in which it normally enters into transactions,unless there is evidence that the principal market and that market arenot the same. Consequently, an entity does not need to perform anexhaustive search for markets that might have more activity for theasset or liability than the market in which that entity normally entersinto transactions. Thus, IFRS 13 addresses practical concerns about thecosts of searching for the market with the greatest volume or level ofactivity for the asset or liability.

BC54 The boards also concluded that the determination of the mostadvantageous market (which is used in the absence of a principalmarket) for an asset or a liability takes into account both transactioncosts and transport costs. However, regardless of whether an entitymeasures fair value on the basis of the price in the principal market or



in the most advantageous market, the fair value measurement takesinto account transport costs, but not transaction costs (see paragraphsBC60–BC62 for a discussion on transport and transaction costs). Thatis consistent with the proposal in the exposure draft.

Market participants

BC55 IFRS 13 states that a fair value measurement is a market-basedmeasurement, not an entity-specific measurement. Therefore, a fairvalue measurement uses the assumptions that market participantswould use when pricing the asset or liability.

BC56 The previous definition of fair value in IFRSs referred to‘knowledgeable, willing parties in an arm’s length transaction’.The IASB concluded that the previous definition expressed the samenotion as the definition of fair value in IFRS 13, but that the previousdefinition was less clear. Thus, IFRS 13 defines market participants asbuyers and sellers in the principal (or most advantageous) market forthe asset or liability who are independent of each other (ie they are notrelated parties), knowledgeable about the asset or liability, and ableand willing to enter into a transaction for the asset or liability.

Independence

BC57 IFRS 13 states that market participants are independent of each other(ie they are not related parties). That is consistent with the proposalin the exposure draft. Given that proposal, some respondents notedthat in some jurisdictions entities often have common ownership(eg state-owned enterprises or entities with cross ownership) andquestioned whether transactions observed in those jurisdictionswould be permitted as an input into a fair value measurement.The boards decided to clarify that the price in a related partytransaction may be used as an input into a fair value measurement ifthe entity has evidence that the transaction was entered into atmarket terms. The boards concluded that this is consistent withIAS 24 Related Party Disclosures.

Knowledge

BC58 The exposure draft stated that market participants were presumed tobe as knowledgeable as the entity about the asset or liability. Somerespondents questioned that conclusion because they thought theentity might have access to information that is not available to othermarket participants (information asymmetry).



BC59 In the IASB’s view, if a market participant is willing to enter into atransaction for an asset or a liability, it would undertake efforts,including usual and customary due diligence efforts, necessary tobecome knowledgeable about the asset or liability and would factorany related risk into the measurement.

The price

BC60 IFRS 13 states that the price used to measure fair value should not bereduced (for an asset) or increased (for a liability) by the costs an entitywould incur when selling the asset or transferring the liability(ie transaction costs).

BC61 Some respondents stated that transaction costs are unavoidable whenentering into a transaction for an asset or a liability. However, the IASBnoted that the costs may differ depending on how a particular entityenters into a transaction. Therefore, the IASB concluded thattransaction costs are not a characteristic of an asset or a liability, but acharacteristic of the transaction. That decision is consistent with therequirements for measuring fair value already in IFRSs. An entityaccounts for those costs in accordance with relevant IFRSs.

BC62 Transaction costs are different from transport costs, which are thecosts that would be incurred to transport the asset from its currentlocation to its principal (or most advantageous) market. Unliketransaction costs, which arise from a transaction and do not changethe characteristics of the asset or liability, transport costs arise from anevent (transport) that does change a characteristic of an asset(its location). IFRS 13 states that if location is a characteristic of anasset, the price in the principal (or most advantageous) market shouldbe adjusted for the costs that would be incurred to transport the assetfrom its current location to that market. That is consistent with thefair value measurement guidance already in IFRSs. For example, IAS 41required an entity to deduct transport costs when measuring the fairvalue of a biological asset or agricultural produce.

Application to non-financial assets

Distinguishing between financial assets, non-financial assets and liabilities

BC63 The exposure draft stated that the concepts of highest and best use andvaluation premise would not apply to financial assets or to liabilities.



The IASB reached that conclusion for the following reasons:

(a) Financial assets do not have alternative uses because a financialasset has specific contractual terms and can have a different useonly if the characteristics of the financial asset (ie thecontractual terms) are changed. However, a change incharacteristics causes that particular asset to become a differentasset. The objective of a fair value measurement is to measurethe asset that exists at the measurement date.

(b) Even though an entity may be able to change the cash flowsassociated with a liability by relieving itself of the obligation indifferent ways, the different ways of doing so are not alternativeuses. Moreover, although an entity might have entity-specificadvantages or disadvantages that enable it to fulfil a liabilitymore or less efficiently than other market participants, thoseentity-specific factors do not affect fair value.

(c) Those concepts were originally developed within the valuationprofession to value non-financial assets, such as land.

BC64 Before the amendments to Topic 820, US GAAP specified that theconcepts of highest and best use and valuation premise applied whenmeasuring the fair value of assets, but it did not distinguish betweenfinancial assets and non-financial assets.

BC65 The FASB agreed with the IASB that the concepts of highest and bestuse and valuation premise are relevant when measuring the fairvalue of non-financial assets, and are not relevant when measuringthe fair value of financial assets or the fair value of liabilities.The boards also concluded that those concepts do not apply to anentity’s own equity instruments because those arrangements, similarto financial instruments, typically have specific contractual terms.Paragraphs BC108–BC131 describe the boards’ rationale indeveloping the requirements for measuring the fair value of financialassets and financial liabilities with offsetting positions in marketrisks and counterparty credit risk.

BC66 Some respondents to the FASB’s proposed ASU were concerned thatlimiting the highest and best use concept to non-financial assetsremoved the concept of value maximisation by market participants,which they considered fundamental to a fair value measurement forfinancial assets and financial liabilities.



BC67 The boards decided to clarify that although there are no excess returnsavailable from holding financial assets and financial liabilities withina portfolio (because in an efficient market, the price reflects thebenefits that market participants would derive from holding the assetor liability in a diversified portfolio), a fair value measurementassumes that market participants seek to maximise the fair value of afinancial or non-financial asset or to minimise the fair value of afinancial or non-financial liability by acting in their economic bestinterest in a transaction to sell the asset or to transfer the liability inthe principal (or most advantageous) market for the asset or liability.Such a transaction might involve grouping assets and liabilities in away in which market participants would enter into a transaction, if theunit of account in other IFRSs does not prohibit that grouping.

Highest and best use

BC68 Highest and best use is a valuation concept used to value manynon-financial assets (eg real estate). The highest and best use of anon-financial asset must be physically possible, legally permissible andfinancially feasible. In developing the proposals in the exposure draft,the IASB concluded that it was necessary to describe those threecriteria, noting that US GAAP at the time did not.

BC69 Some respondents asked for further guidance about whether a use thatis legally permissible must be legal at the measurement date, or if, forexample, future changes in legislation can be taken into account.The IASB concluded that a use of an asset does not need to be legal at themeasurement date, but must not be legally prohibited in thejurisdiction (eg if the government of a particular country has prohibitedbuilding or development in a protected area, the highest and best use ofthe land in that area could not be to develop it for industrial use).The illustrative examples that accompany IFRS 13 show how an asset canbe zoned for a particular use at the measurement date, but how a fairvalue measurement can assume a different zoning if marketparticipants would do so (incorporating the cost to convert the asset andobtain that different zoning permission, including the risk that suchpermission would not be granted).

BC70 IFRS 13 states that fair value takes into account the highest and bestuse of an asset from the perspective of market participants. That is thecase even if an entity acquires an asset but, to protect its competitiveposition or for other reasons, the entity does not intend to use itactively or does not intend to use the asset in the same way as othermarket participants (eg if an intangible asset provides defensive value



because the acquirer holds the asset to keep it from being used bycompetitors). When revising IFRS 3 in 2008, the IASB decided that anentity must recognise such an asset at fair value because the intentionof IFRS 3 was that assets, both tangible and intangible, should bemeasured at their fair values regardless of how or whether the acquirerintends to use them (see paragraph BC262 of IFRS 3). IFRS 13 sets outrequirements for measuring the fair value of those assets.

BC71 IFRS 13 does not require an entity to perform an exhaustive search forother potential uses of a non-financial asset if there is no evidence tosuggest that the current use of an asset is not its highest and best use.The IASB concluded that an entity that seeks to maximise the value ofits assets would use those assets at their highest and best use and thatit would be necessary for an entity to consider alternative uses of thoseassets only if there was evidence that the current use of the assets is nottheir highest and best use (ie an alternative use would maximise theirfair value). Furthermore, after discussions with valuationprofessionals, the IASB concluded that in many cases it would beunlikely for an asset’s current use not to be its highest and best useafter taking into account the costs to convert the asset to thealternative use.

BC72 When the IASB was developing the proposals in the exposure draft,users of financial statements asked the IASB to consider how toaccount for assets when their highest and best use within a group ofassets is different from their current use by the entity (ie when thereis evidence that the current use of the assets is not their highest andbest use, and an alternative use would maximise their fair value). Forexample, the fair value of a factory is linked to the value of the landon which it is situated. The fair value of the factory would be nil ifthe land has an alternative use that assumes the factory isdemolished. The IASB concluded when developing the exposure draftthat measuring the factory at nil would not provide usefulinformation when an entity is using that factory in its operations.In particular, users would want to see depreciation on that factory sothat they could assess the economic resources consumed ingenerating cash flows from its operation. Therefore, the exposuredraft proposed requiring an entity to separate the fair value of theasset group into its current use and fair value components.



BC73 Respondents found that proposal confusing and thought thatcalculating two values for a non-financial asset would be costly. As aresult, the boards decided that when an entity uses a non-financialasset in a way that differs from its highest and best use (and that assetis measured at fair value), the entity must simply disclose that fact andwhy the asset is being used in a manner that differs from its highestand best use (see paragraphs BC213 and BC214).

Valuation premise

Terminology

BC74 As an application of the highest and best use concept, the exposuredraft identified two valuation premises that may be relevant whenmeasuring the fair value of an asset:

(a) The in-use valuation premise, which applies when the highest andbest use of an asset is to use it with other assets or with otherassets and liabilities as a group. The in-use valuation premiseassumes that the exit price would be the price for a sale to amarket participant that has, or can obtain, the other assets andliabilities needed to generate cash inflows by using the asset(complementary assets and the associated liabilities).

(b) The in-exchange valuation premise, which applies when the highestand best use of an asset is to use it on a stand-alone basis.It assumes that the sale would be to a market participant thatuses the asset on a stand-alone basis.

BC75 Many respondents found the terms in use and in exchange confusingbecause they thought that the terminology did not accurately reflectthe objective of the valuation premise (ie in both cases the asset isbeing exchanged, and both cases involve an assessment of how theasset will be used by market participants). In addition, somerespondents stated that the in-use valuation premise could beconfused with the term value in use, as defined in IAS 36.

BC76 In response, the boards decided to remove the terms in use and inexchange and instead describe the objective of the valuation premise:the valuation premise assumes that an asset would be used either (a) incombination with other assets or with other assets and liabilities(formerly referred to as in use) or (b) on a stand-alone basis (formerly



referred to as in exchange). Respondents to the FASB’s proposed ASUgenerally supported that proposal. The boards concluded that thechange improves the understandability of the valuation premiseconcept.

Valuation premise for a single non-financial asset

BC77 IFRS 13 states that the valuation premise assumes that thenon-financial asset being measured at fair value is sold on its own(at the unit of account level) and should be measured accordingly, evenif transactions in the asset are typically the result of sales of the assetas part of a group of assets or a business. Even when an asset is used incombination with other assets, the exit price for the asset is a price forthat asset individually because a fair value measurement assumes thata market participant (buyer) of the asset already holds thecomplementary assets and the associated liabilities. Because the buyeris assumed to hold the other assets (and liabilities) necessary for theasset to function, that buyer would not be willing to pay more for theasset solely because it was sold as part of a group. That conclusion isconsistent with the conclusion reached in IFRS 3 for measuring the fairvalue of the identifiable assets acquired in a business combination.

Valuation premise for specialised non-financial assets

BC78 Some respondents to the exposure draft expressed concerns aboutusing an exit price notion for specialised non-financial assets that havea significant value when used together with other non-financial assets,for example in a production process, but have little value if sold forscrap to another market participant that does not have thecomplementary assets. They were concerned that an exit price wouldbe based on that scrap value (particularly given the requirement tomaximise the use of observable inputs, such as market prices) andwould not reflect the value that an entity expects to generate by usingthe asset in its operations. However, IFRS 13 clarifies that this is not thecase. In such situations, the scrap value for an individual asset wouldbe irrelevant because the valuation premise assumes that the assetwould be used in combination with other assets or with other assetsand liabilities. Therefore, an exit price reflects the sale of the asset toa market participant that has, or can obtain, the complementary assetsand the associated liabilities needed to use the specialised asset in itsown operations. In effect, the market participant buyer steps into theshoes of the entity that holds that specialised asset.



BC79 It is unlikely in such a situation that a market price, if available, wouldcapture the value that the specialised asset contributes to the businessbecause the market price would be for an unmodified asset. When amarket price does not capture the characteristics of the asset (eg if thatprice represents the use of the asset on a stand-alone basis, not installedor otherwise configured for use, rather than in combination with otherassets, installed and configured for use), that price will not represent fairvalue. In such a situation, an entity will need to measure fair value usinganother valuation technique (such as an income approach) or the cost toreplace or recreate the asset (such as a cost approach) depending on thecircumstances and the information available.

Application to liabilities

General principles

BC80 The exposure draft proposed that a fair value measurement assumesthat a liability is transferred to a market participant at themeasurement date because the liability that is the subject of the fairvalue measurement remains outstanding (ie it is owed by the entityand is not settled with the counterparty or otherwise extinguished atthe measurement date). Because the liability is assumed to betransferred to a market participant, the liability remains outstandingand the market participant transferee, like the entity, would berequired to fulfil it. The same concept applies to an entity’s own equityinstrument, as discussed in paragraphs BC104–BC107.

BC81 In many cases, an entity might not intend (or be able) to transfer itsliability to a third party. For example, an entity might have advantagesrelative to the market that would make it more beneficial for the entityto fulfil the liability using its own internal resources or thecounterparty might not permit the liability to be transferred toanother party. However, the IASB concluded that a fair valuemeasurement provides a market benchmark to use as a basis forassessing an entity’s advantages or disadvantages in performance orsettlement relative to the market (for both assets and liabilities).Therefore, when a liability is measured at fair value, the relativeefficiency of an entity in settling the liability using its own internalresources appears in profit or loss over the course of its settlement, andnot before.



BC82 Furthermore, even if an entity is unable to transfer its liability to athird party, the IASB concluded that the transfer notion was necessaryin a fair value measurement because that notion captures marketparticipants’ expectations about the liquidity, uncertainty and otherfactors associated with the liability, whereas a settlement notion maynot because it may incorporate entity-specific factors. In the IASB’sview, the fair value of a liability from the perspective of a marketparticipant that owes the liability is the same regardless of whether itis settled or transferred. That is because:

(a) both a settlement and a transfer of a liability reflect all coststhat would be incurred to fulfil the obligation, including themarket-based profit an entity and a market participanttransferee desire to earn on all their activities.

(b) an entity faces the same risks when fulfilling an obligation thata market participant transferee faces when fulfilling thatobligation. Neither the entity nor the market participanttransferee has perfect knowledge about the timing and amountof the cash outflows, even for financial liabilities.

(c) a settlement in a fair value measurement does not assume asettlement with the counterparty over time (eg as principal andinterest payments become due), but a settlement at themeasurement date. Accordingly, the settlement amount in a fairvalue measurement reflects the present value of the economicbenefits (eg payments) the counterparty would have receivedover time.

As a result, the IASB concluded that similar thought processes areneeded to estimate both the amount to settle a liability and theamount to transfer that liability.

BC83 The exposure draft proposed that an entity could estimate the amountat which a liability could be transferred in a transaction betweenmarket participants by using the same methodology that would beused to measure the fair value of the liability held by another entity asan asset (ie the fair value of the corresponding asset). If the liability wastraded as an asset, the observed price would also represent the fairvalue of the issuer’s liability. If there was no corresponding asset (eg aswould be the case with a decommissioning liability), the fair value ofthe liability could be measured using a valuation technique, such asthe present value of the future cash outflows that market participantswould expect to incur in fulfilling the obligation.



BC84 That proposal was consistent with the approach in Topic 820 in US GAAP(in August 2009, after the IASB’s exposure draft was published, the FASBamended Topic 820 to provide additional guidance about measuring thefair value of liabilities). However, Topic 820 provided more guidancethan the IASB’s exposure draft, including additional examples forapplying that guidance. Because the guidance in Topic 820 wasconsistent with but not identical to the proposals in the IASB’s exposuredraft, the boards worked together to develop a combination of the two.

BC85 The boards concluded that the objective of a fair value measurement ofa liability when using a valuation technique (ie when there is not anobservable market to provide pricing information about the transfer ofthe liability) is to estimate the price that would be paid to transfer theliability in an orderly transaction between market participants at themeasurement date under current market conditions.

BC86 Therefore, the boards decided to describe how an entity shouldmeasure the fair value of a liability when there is no observablemarket to provide pricing information about the transfer of aliability. For example, IFRS 13 states that an entity may measure thefair value of a liability by using a quoted price for an identical or asimilar liability held by another party as an asset or by using anothervaluation technique (such as an income approach).

BC87 The boards clarified that regardless of the approach used, when there isno observable market price for the transfer of a liability and the identicalliability is held by another party as an asset, an entity measures the fairvalue of the liability from the perspective of a market participant thatholds the identical liability as an asset at the measurement date.That approach is consistent with the exposure draft and US GAAP.

BC88 Thus, in the boards’ view, the fair value of a liability equals the fairvalue of a properly defined corresponding asset (ie an asset whosefeatures mirror those of the liability), assuming an exit from bothpositions in the same market. In reaching their decision, the boardsconsidered whether the effects of illiquidity could create a differencebetween those values. The boards noted that the effects of illiquidityare difficult to differentiate from credit-related effects. The boardsconcluded that there was no conceptual reason why the liability valuewould diverge from the corresponding asset value in the same marketbecause the contractual terms are the same, unless the unit of accountfor the liability is different from the unit of account for the asset or thequoted price for the asset relates to a similar (but not identical) liabilityheld as an asset.



BC89 Furthermore, the boards concluded that in an efficient market, theprice of a liability held by another party as an asset must equal theprice for the corresponding asset. If those prices differed, the marketparticipant transferee (ie the party taking on the obligation) would beable to earn a profit by financing the purchase of the asset with theproceeds received by taking on the liability. In such cases the price forthe liability and the price for the asset would adjust until the arbitrageopportunity was eliminated.

BC90 The exposure draft stated that when using a present value techniqueto measure the fair value of a liability that is not held by another partyas an asset, an entity should include the compensation that a marketparticipant would require for taking on the obligation. Topic 820contained such a requirement. Respondents asked for clarification onthe meaning of compensation that a market participant would requirefor taking on the obligation. Therefore, the boards decided to provideadditional guidance about the compensation that market participantswould require, such as the compensation for taking on theresponsibility of fulfilling an obligation and for assuming the riskassociated with an uncertain obligation (ie the risk that the actual cashoutflows might differ from the expected cash outflows). The boardsconcluded that including this description will improve the applicationof the requirements for measuring the fair value of liabilities that arenot held as assets.

BC91 Some respondents to the FASB’s proposed ASU requested clarificationabout applying risk premiums when measuring the fair value of aliability that is not held by another party as an asset (eg adecommissioning liability assumed in a business combination) whenusing a present value technique. They noted that the description ofpresent value techniques described adjustments for risk as additions tothe discount rate, which they agreed was consistent with assetvaluation, but not necessarily consistent with liability valuation in theabsence of a corresponding asset. The boards reasoned that from amarket participant’s perspective, compensation for the uncertaintyrelated to a liability results in an increase to the amount that themarket participant would expect to receive for assuming theobligation. If that compensation was accounted for in the discountrate, rather than in the cash flows, it would result in a reduction of thediscount rate used in the fair value measurement of the liability.Therefore, the boards concluded that, all else being equal, the riskassociated with an asset decreases the fair value of that asset, whereasthe risk associated with a liability increases the fair value of thatliability. However, the boards decided not to prescribe how an entity



would adjust for the risk inherent in an asset or a liability, but to statethat the objective is to ensure that the fair value measurement takesthat risk into account. That can be done by adjusting the cash flows orthe discount rate or by adding a risk adjustment to the present valueof the expected cash flows (which is another way of adjusting the cashflows).

Non-performance risk

BC92 IFRS 13 states that a fair value measurement assumes that the fairvalue of a liability reflects the effect of non-performance risk, which isthe risk that an entity will not fulfil an obligation. Non-performancerisk includes, but is not limited to, an entity’s own credit risk (creditstanding). That is consistent with the fair value measurementguidance already in IFRSs. For example, IAS 39 and IFRS 9 referred tomaking adjustments for credit risk if market participants wouldreflect that risk when pricing a financial instrument. However, therewas inconsistent application of that principle because:

(a) IAS 39 and IFRS 9 refer to credit risk generally and do notspecifically refer to the reporting entity’s own credit risk; and

(b) there were different interpretations about how an entity’s owncredit risk should be reflected in the fair value of a liabilityusing the settlement notion in the previous definition of fairvalue because it is unlikely that the counterparty would accept adifferent amount as settlement of the obligation if the entity’scredit standing changed.

BC93 As a result, some entities took into account changes in their own creditrisk when measuring the fair value of their liabilities, whereas otherentities did not. Consequently, the IASB decided to clarify in IFRS 13that the fair value of a liability includes an entity’s own credit risk.

BC94 In a fair value measurement, the non-performance risk related to aliability is the same before and after its transfer. Although the IASBacknowledges that such an assumption is unlikely to be realistic for anactual transaction (because in most cases the reporting entitytransferor and the market participant transferee are unlikely to havethe same credit standing), the IASB concluded that such an assumptionwas necessary when measuring fair value for the following reasons:

(a) A market participant taking on the obligation would not enterinto a transaction that changes the non-performance riskassociated with the liability without reflecting that change in



the price (eg a creditor would not generally permit a debtor totransfer its obligation to another party of lower credit standing,nor would a transferee of higher credit standing be willing toassume the obligation using the same terms negotiated by thetransferor if those terms reflect the transferor’s lower creditstanding).

(b) Without specifying the credit standing of the entity taking onthe obligation, there could be fundamentally different fairvalues for a liability depending on an entity’s assumptions aboutthe characteristics of the market participant transferee.

(c) Those who might hold the entity’s obligations as assets wouldconsider the effect of the entity’s credit risk and other riskfactors when pricing those assets (see paragraphs BC83–BC89).

The FASB reached the same conclusions when developing SFAS 157 andASU No. 2009-05 Fair Value Measurements and Disclosures (Topic 820):Measuring Liabilities at Fair Value.

BC95 Few respondents questioned the usefulness of reflectingnon-performance risk in the fair value measurement of a liability atinitial recognition. However, many questioned the usefulness of doingso after initial recognition, because they reasoned that it would lead tocounter-intuitive and potentially confusing reporting (ie gains forcredit deterioration and losses for credit improvements). The IASBunderstands that these concerns are strongly held, but concluded thataddressing them was beyond the scope of the fair value measurementproject. The purpose of that project was to define fair value, not todetermine when to use fair value or how to present changes in fairvalue. A measurement that does not consider the effect of an entity’snon-performance risk is not a fair value measurement. The IASBaddressed those concerns in developing IFRS 9 (issued in October 2010).

Liabilities issued with third-party credit enhancements

BC96 IFRS 13 includes requirements for measuring the fair value of aliability issued with an inseparable third-party credit enhancementfrom the issuer’s perspective. Those requirements are consistent withTopic 820.

BC97 A credit enhancement (also referred to as a guarantee) may bepurchased by an issuer that combines it with a liability, such as debt,and then issues the combined security to an investor. For example,debt may be issued with a financial guarantee from a third party that



guarantees the issuer’s payment obligations. Generally, if the issuer ofthe liability fails to meet its payment obligations to the investor, theguarantor has an obligation to make the payments on the issuer’sbehalf and the issuer has an obligation to the guarantor. By issuingdebt combined with a credit enhancement, the issuer is able to marketits debt more easily and can either reduce the interest rate paid to theinvestor or receive higher proceeds when the debt is issued.

BC98 The boards concluded that the measurement of a liability shouldfollow the unit of account of the liability for financial reportingpurposes. When the unit of account for such liabilities is theobligation without the credit enhancement, the fair value of theliability from the issuer’s perspective will not equal its fair value as aguaranteed liability held by another party as an asset. Therefore, thefair value of the guaranteed liability held by another party as an assetwould need to be adjusted because any payments made by theguarantor in accordance with the guarantee result in a transfer of theissuer’s debt obligation from the investor to the guarantor.The issuer’s resulting debt obligation to the guarantor has not beenguaranteed. Consequently, the boards decided that if the third-partycredit enhancement is accounted for separately from the liability, thefair value of that obligation takes into account the credit standing ofthe issuer and not the credit standing of the guarantor.

Restrictions preventing transfer

BC99 A restriction on an entity’s ability to transfer its liability to another partyis a function of the requirement to fulfil the obligation and the effect ofsuch a restriction normally is already reflected in the price. As a result,IFRS 13 states that the fair value of a liability should not be adjustedfurther for the effect of a restriction on its transfer if that restriction isalready included in the other inputs to the fair value measurement.However, if an entity is aware that a restriction on transfer is not alreadyreflected in the price (or in the other inputs used in the measurement),the entity would adjust those inputs to reflect the existence of therestriction.

BC100 The boards concluded that there are two fundamental differencesbetween the fair value measurement of an asset and the fair valuemeasurement of a liability that justify different treatments for assetrestrictions and liability restrictions. First, restrictions on the transferof a liability relate to the performance of the obligation (ie the entity islegally obliged to satisfy the obligation and needs to do something tobe relieved of the obligation), whereas restrictions on the transfer of an



asset relate to the marketability of the asset. Second, nearly allliabilities include a restriction preventing the transfer of the liability,whereas most assets do not include a similar restriction. As a result,the effect of a restriction preventing the transfer of a liability,theoretically, would be consistent for all liabilities and, therefore,would require no additional adjustment beyond the factors consideredin determining the original transaction price. The inclusion of arestriction preventing the sale of an asset typically results in a lowerfair value for the restricted asset than for the non-restricted asset, allother factors being equal.

Measurement of financial liabilities with a demand feature

BC101 In developing IFRS 13, the IASB confirmed its decision in developingIAS 39 that the fair value of a financial liability with a demand featurecannot be less than the amount payable on demand, discounted fromthe first date that the amount could be required to be repaid.

BCZ102 Some comments received on the exposure draft published in 2002preceding IAS 39 requested clarification of how to measure the fairvalue of financial liabilities with a demand feature (eg demanddeposits) when the fair value measurement option is applied or theliability is otherwise measured at fair value. In other words, could thefair value be less than the amount payable on demand, discountedfrom the first date that an amount could be required to be paid(the demand amount), such as the amount of the deposit discountedfor the period that the entity expects the deposit to be outstanding?Some commentators believed that the fair value of financial liabilitieswith a demand feature is less than the demand amount, for reasonsthat include the consistency of such measurement with how thosefinancial liabilities are treated for risk management purposes.

BCZ103 In developing IAS 39 the IASB agreed that this issue should beclarified. It confirmed that the fair value of a financial liability witha demand feature is not less than the amount payable on demand,discounted from the first date that the amount could be required tobe paid (this is now in paragraph 47 of IFRS 13). That conclusion is thesame as in the original IAS 32 Financial Instruments: Disclosure andPresentation (issued by the IASB’s predecessor body, IASC, in 1995),which is now IAS 32 Financial Instruments: Presentation. The IASB notedthat in many cases, the market price observed for such financialliabilities is the price at which they are originated between the



customer and the deposit-taker—ie the demand amount. It also notedthat recognising a financial liability with a demand feature at lessthan the demand amount would give rise to an immediate gain on theorigination of such a deposit, which the IASB believes is inappropriate.

Application to an entity’s own equity instruments

BC104 The exposure draft and Topic 820 stated that although the definitionof fair value refers to assets and liabilities, it also should be applied toan instrument measured at fair value that is classified in an entity’sown shareholders’ equity. Respondents to the discussion paper askedfor explicit guidance for measuring the fair value of such instrumentsbecause Topic 820 did not contain explicit guidance. Consequently,the boards decided to describe how an entity should measure the fairvalue of its own equity instruments (eg when an acquirer issues equityin consideration for an acquiree in a business combination).

BC105 The exposure draft proposed requiring an entity to measure the fairvalue of its own equity instruments from the perspective of a marketparticipant that holds the instrument as an asset. That was because theissuer of an equity instrument can exit from that instrument only ifthe instrument ceases to exist or if the entity repurchases theinstrument from the holder. The FASB agreed with that conclusion.

BC106 The boards also noted that some instruments may be classified asliabilities or equity, depending on the characteristics of thetransaction and the characteristics of the instrument. Examples ofsuch instruments include contingent consideration issued in abusiness combination in accordance with IFRS 3 and equity warrantsissued by an entity in accordance with IAS 39 or IFRS 9. The boardsconcluded that the requirements for measuring the fair value of anentity’s own equity instruments should be consistent with therequirements for measuring the fair value of liabilities. Consequently,the boards decided to clarify that the accounting classification of aninstrument should not affect that instrument’s fair valuemeasurement.

BC107 The boards decided to clarify that the objective of a fair valuemeasurement for liabilities and an entity’s own equity instrumentsshould be an exit price from the perspective of a market participantthat holds the instrument as an asset at the measurement date if there



is a corresponding asset, regardless of whether there is an observablemarket for the instrument as an asset. That decision is consistent withthe boards’ decisions about the requirements for measuring the fairvalue of a liability.

Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk

BC108 An entity that holds a group of financial assets and financial liabilitiesis exposed to market risks (ie interest rate risk, currency risk or otherprice risk) and to the credit risk of each of the counterparties. Financialinstitutions and similar entities that hold financial assets andfinancial liabilities often manage those instruments on the basis of theentity’s net exposure to a particular market risk (or risks) or to thecredit risk of a particular counterparty.

BC109 The previous requirements in IFRSs and US GAAP for measuring thefair value of financial assets and financial liabilities that are managedin this way were expressed differently. Therefore, the boardsconcluded that it is important that IFRSs and US GAAP express therequirements for measuring the fair value of those financialinstruments in the same way.

BC110 When applying IFRSs, entities applied IFRS 9 or IAS 39, whichpermitted an entity to take into account the effects of offsettingpositions in the same market risk (or risks) when measuring the fairvalue of a financial asset or financial liability. Many entities wereusing the same approach for offsetting positions in the credit risk of aparticular counterparty by analogy.

BC111 When applying US GAAP, many entities applied the in-use valuationpremise when measuring the fair value of such financial assets andfinancial liabilities. In other words, an entity would take into accounthow the fair value of each financial asset or financial liability might beaffected by the combination of that asset or liability with other financialassets or financial liabilities held by the entity. Other entities appliedthe in-exchange valuation premise to the entity’s net risk exposure andassumed that the transaction took place for the net position, not for theindividual assets and liabilities making up that position. Those differingapplications of the valuation premise arose because Topic 820 did notspecify the valuation premise for financial assets.



BC112 In developing the exposure draft, the IASB concluded that the fair valueof a financial asset reflects any benefits that market participants wouldderive from holding that asset within a diversified portfolio. An entityderives no incremental value from holding a financial asset within aportfolio. Furthermore, the IASB noted that the valuation premiserelated only to assets, not to liabilities, and as such could not be appliedto portfolios of financial instruments that include financial liabilities.Therefore, the exposure draft proposed that the in-exchange valuationpremise must be used to measure the fair value of a financial asset.The IASB also proposed an amendment to IAS 39 making it explicit thatthe unit of account for financial instruments is the individual financialinstrument at all levels of the fair value hierarchy (Level 1, 2 or 3).

BC113 The boards understand that although the approaches used to measurethe fair value of financial assets and financial liabilities were expresseddifferently in IFRSs and US GAAP, they resulted in similar fair valuemeasurement conclusions in many cases. However, the FASB was awarethat before the amendments Topic 820 was sometimes interpretedmore broadly than the FASB intended, such as when an entity used thein-use valuation premise to measure the fair value of a group offinancial assets when the entity did not have offsetting positions ina particular market risk (or risks) or counterparty credit risk.That interpretation led the IASB to propose requiring the in-exchangevaluation premise for financial assets in its exposure draft.

BC114 The IASB’s proposal to require the fair value of a financial asset to bemeasured using the in-exchange valuation premise was one of themore controversial proposals in the exposure draft. That proposal,combined with a proposed amendment to IAS 39 about the unit ofaccount for financial instruments, led respondents to believe that thefair value of financial assets cannot reflect the fact that those assets areheld within a portfolio, even when an entity manages its financialinstruments on the basis of the entity’s net exposure, rather than itsgross exposure, to market risks and credit risk.

BC115 Respondents were concerned that the proposal in the exposure draftwould separate the valuation of financial instruments for financialreporting from the entity’s internal risk management practices.In addition, they were concerned about the systems changes thatwould be necessary to effect a change in practice. To preserve therelationship between financial reporting and risk management, some



respondents asked whether they would be able to apply the bid-askspread guidance to each of the individual instruments so that the sumof the fair values of the individual instruments equals the value of thenet position.

BC116 Other respondents suggested that the IASB should continue to allowthe practice that has developed using paragraph AG72 of IAS 39, whichstated:

When an entity has assets and liabilities with offsetting market risks, itmay use mid-market prices as a basis for establishing fair values for theoffsetting risk positions and apply the bid or asking price to the net openposition as appropriate.

BC117 The previous requirements in IFRSs and US GAAP did not clearlyspecify the relationship between the fair value measurement offinancial instruments and how an entity manages its net risk exposure.For example, Topic 820, IAS 39 and IFRS 9 did not explicitly addresshow the following meet the objective of a fair value measurement forfinancial instruments:

(a) Entities typically do not manage their exposure to market risksand credit risk by selling a financial asset or transferring afinancial liability (eg by unwinding a transaction). Instead, theymanage their risk exposure by entering into a transaction foranother financial instrument (or instruments) that would resultin an offsetting position in the same risk. The resultingmeasurement represents the fair value of the net risk exposure,not the fair value of an individual financial instrument.The sum of the fair values of the individual instruments is notequal to the fair value of the net risk exposure.

(b) An entity’s net risk exposure is a function of the other financialinstruments held by the entity and of the entity’s riskpreferences (both of which are entity-specific decisions and,thus, do not form part of a fair value measurement). Marketparticipants may hold different groups of financial instrumentsor may have different risk preferences, and it is those factorsthat are taken into account when measuring fair value.However, the boards understand that market participantsholding that particular group of financial instruments and withthose particular risk preferences would be likely to price thosefinancial instruments similarly (ie using similar valuationtechniques and similar market data). As a result, the marketparticipants’ measurement of those financial instrumentswithin that particular group is a market-based measurement,



and a measurement using an entity’s risk preferences wouldnot be a fair value measurement, but an entity-specificmeasurement.

BC118 Consequently, the boards decided to permit an exception to therequirements in IFRS 13 and Topic 820 for measuring fair value whenan entity manages its financial assets and financial liabilities on thebasis of the entity’s net exposure to market risks or to the credit risk ofa particular counterparty. Respondents to the FASB’s proposed ASUgenerally supported that proposal and stated that it was consistentwith current practice for measuring the fair value of such financialassets and financial liabilities.

BC119 That exception permits an entity to measure the fair value of a groupof financial assets and financial liabilities on the basis of the price thatwould be received to sell a net long position (ie asset) for a particularrisk exposure or to transfer a net short position (ie liability) for aparticular risk exposure in an orderly transaction between marketparticipants at the measurement date under current marketconditions, subject to specific requirements.

Evidence of managing financial instruments on the basis of the net risk exposure

BC120 IFRS 13 states that to use the exception, an entity must provideevidence that it consistently manages its financial instruments on thebasis of its net exposure to market risks or credit risk. In addition, theentity must be required (or must have elected, for example, inaccordance with the fair value option) to measure the financialinstruments at fair value on a recurring basis. The boards concludedthat if an entity does not manage its risk exposure on a net basis anddoes not manage its financial instruments on a fair value basis, theentity should not be permitted to measure the fair value of its financialinstruments on the basis of the entity’s net risk exposure.

BC121 The boards decided to require an entity to provide evidence that itmanages its net risk exposure consistently from period to period.The boards decided this because an entity that can provide evidencethat it manages its financial instruments on the basis of its net riskexposure would do so consistently for a particular portfolio fromperiod to period, and not on a net basis for that portfolio in someperiods and on a gross basis in other periods. Some respondents to theFASB’s proposed ASU found that requirement limiting because theynoted that the composition of a portfolio changes continually as the



entity rebalances the portfolio and changes its risk exposurepreferences over time. Although the entity does not need to maintaina static portfolio, the boards decided to clarify that the entity mustmake an accounting policy decision (in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors) to use theexception described in paragraphs BC118 and BC119. The boards alsodecided that the accounting policy decision could be changed if theentity’s risk exposure preferences change. In that case the entity candecide not to use the exception but instead to measure the fair value ofits financial instruments on an individual instrument basis. However,if the entity continues to value a portfolio using the exception, it mustdo so consistently from period to period.

Exposure to market risks

BC122 The boards decided that an entity could apply the bid-ask spreadguidance to the entity’s net position in a particular market risk (ratherthan to each individual financial instrument included in that position)only if the market risks that are being offset are substantially the same.Some respondents to the FASB’s proposed ASU asked for additionalguidance on what is meant by substantially the same given the differentinstruments and types of instruments that might make up a portfolio.In addition, they were concerned that the proposed requirement thatthe market risks be substantially the same meant that there could beno basis risk in the portfolio or, conversely, that the basis risk wouldnot be reflected in the fair value measurement.

BC123 Consequently, the boards decided to include additional guidance fordetermining whether market risks are substantially the same.The boards held discussions with several financial institutions thatmanage their financial assets and financial liabilities on the basis oftheir net exposure to market risks. From those discussions, the boardsconcluded that when measuring fair value on the basis of an entity’snet exposure to market risks, the entity should not combine a financialasset that exposes it to a particular market risk with a financial liabilitythat exposes it to a different market risk that does not mitigate eitherof the market risk exposures that the entity faces. The boards alsoconcluded that it is not necessary that the grouping of particularfinancial assets and financial liabilities results in an entity having nobasis risk because the fair value measurement would take into accountany basis risk. Furthermore, on the basis of their discussions withfinancial institutions, the boards concluded that an entity should notcombine a financial asset that exposes it to a particular market risk



over a particular duration with a financial liability that exposes it tosubstantially the same market risk over a different duration withouttaking into account the fact that the entity is fully exposed to thatmarket risk over the time period for which the market risks are notoffset. If there is a time period in which a market risk is not offset, theentity may measure its net exposure to that market risk over the timeperiod in which the market risk is offset and must measure its grossexposure to that market risk for the remaining time period (ie the timeperiod in which the market risk is not offset).

Exposure to the credit risk of a particular counterparty

BC124 Because the bid-ask spread (which is the basis for making adjustmentsfor an entity’s exposure to market risk to arrive at the fair value of thenet position) does not include adjustments for counterparty credit risk(see paragraph BC164), the boards decided to specify that an entity maytake into account its net exposure to the credit risk of a particularcounterparty when applying the exception.

BC125 The boards decided that when measuring fair value, an entity mayconsider its net exposure to credit risk when it has entered into anarrangement with a counterparty that mitigates its credit riskexposure in the event of default (eg a master netting agreement).On the basis of their discussions with financial institutions the boardsconcluded that a fair value measurement reflects market participants’expectations about the likelihood that such an arrangement would belegally enforceable.

BC126 Some respondents to the FASB’s proposed ASU asked whether theexistence of a master netting agreement was necessary or whetherother credit mitigating arrangements could be taken into account inthe fair value measurement. The boards decided to clarify that in a fairvalue measurement, an entity must take into account otherarrangements that mitigate credit risk, such as an agreement thatrequires the exchange of collateral on the basis of each party’s netexposure to the credit risk of the other party, if market participantswould expect such arrangements to be legally enforceable in the eventof default.



BC127 The boards acknowledged that the group of financial assets andfinancial liabilities for which an entity manages its net exposure to aparticular market risk (or risks) could differ from the group of financialassets and financial liabilities for which an entity manages its netexposure to the credit risk of a particular counterparty because it isunlikely that all contracts would be with the same counterparty.

Relationship between measurement and presentation

BC128 In some cases the basis for the presentation of financial instruments inthe statement of financial position differs from the basis for themeasurement of those financial instruments. For example, that wouldbe the case if an IFRS does not require or permit financial instrumentsto be presented on a net basis. The FASB’s proposed ASU stated that theexception would not apply to financial statement presentation (ie anentity must comply with the financial statement presentationrequirements specified in other standards).

BC129 The boards discussed the different approaches to measurement andpresentation, particularly in the light of their currently differingrequirements for offsetting financial assets and financial liabilities.In IAS 32 an entity may not use net presentation unless specific criteriaare met, whereas in US GAAP many entities are able to use netpresentation in their financial statements. However, the criteria fornet presentation in US GAAP relate to credit risk, not to market risks.As a result, the presentation and measurement bases are differentwhen an entity applies bid-ask adjustments on a net basis but isrequired to present fair value information on a gross basis (althoughgenerally the financial instruments with bid-ask adjustments wouldqualify for net presentation in US GAAP because of the existence ofmaster netting agreements and other credit risk mitigatingarrangements).

BC130 The boards concluded that a relationship between presentation andmeasurement is not necessary and that adjustments for market risksor credit risk (ie portfolio-level adjustments) are a matter ofmeasurement rather than presentation. They reasoned that fair valuemeasurements are meant to reflect (a) the risk exposure faced by theentity and (b) how that risk exposure would be priced by marketparticipants (which is one reason the boards decided to permit theexception; see paragraph BC117). When pricing financial instruments,a market participant would take into account the other instruments itholds to the extent that those instruments reduce or enhance itsoverall risk exposure. That is a consequence of requiring or permitting



financial instruments to be measured at fair value. The boards’considerations for requiring net or gross presentation of financialinstruments are different from those for requiring net or grossmeasurement.

BC131 Some respondents asked for additional guidance for allocating thebid-ask and credit adjustments to the individual assets and liabilitiesthat make up the group of financial assets and financial liabilities.Although any allocation method is inherently subjective, the boardsconcluded that a quantitative allocation would be appropriate if it wasreasonable and consistently applied. Therefore, the boards decided notto require a particular method of allocation.

Fair value at initial recognition

BC132 The exposure draft proposed guidance for measuring fair value atinitial recognition, using both observable and unobservable inputs(as appropriate). The exposure draft also proposed a list of indicatorsspecifying when the transaction price might not be the best evidenceof the fair value of an asset or a liability at initial recognition.

BC133 Respondents generally agreed with the list of indicators, but thoughtthat the wording used implied that those were the only indicators,rather than examples of indicators. They suggested that the IFRS onfair value measurement should use the wording in US GAAP.The boards agreed with respondents that the list of indicators was notexhaustive and decided to use the wording in Topic 820.

BC134 Some respondents suggested that market inactivity should be includedin the list of indicators. The boards concluded that market inactivityis not an indicator that the transaction price may not represent fairvalue, but an indicator that the entity should do further work todetermine whether the transaction price represents fair value.

BC135 The exposure draft did not address the recognition of a day 1 gain or lossbut stated that an entity would recognise such gains or losses unlessanother IFRS specifies otherwise. For example, IAS 39 and IFRS 9 statethat an entity cannot recognise a day 1 gain or loss for a financialinstrument unless its fair value is evidenced by a quoted price in anactive market for an identical asset or liability or based on a valuationtechnique that uses only data from observable markets. In contrast,IFRS 3 and IAS 41 require the recognition of day 1 gains or losses evenwhen fair value is measured using unobservable inputs.



BC136 The IASB concluded that fair value should be measured at initialrecognition without regard to whether it would result in a gain or lossat initial recognition of the asset or liability. Respondents’ viewsranged from the view that the transaction price is the best evidence offair value at initial recognition unless the fair value is measured usingonly observable inputs (the approach in IAS 39 and IFRS 9) to the viewthat the transaction price might sometimes, but not always, representfair value at initial recognition, and that the degree of observability ofinputs is not always the best indicator of whether this is the case(the approach in US GAAP).

BC137 Many respondents suggested that IFRSs and US GAAP should have thesame requirements for recognising gains or losses at initialrecognition. The boards concluded that determining whether torecognise a day 1 gain or loss was beyond the scope of the fair valuemeasurement project. The boards noted that the measurement basisat initial recognition of financial instruments in IFRSs and US GAAP isnot always the same, and so the boards could not addresscomparability at this time. As a result, the boards decided that anentity would refer to relevant IFRSs for the asset or liability whendetermining whether to recognise those amounts. The boardsconcluded that if the relevant IFRS does not specify whether and, if so,where to recognise those amounts, the entity should recognise them inprofit or loss.

BC138 Although the IASB did not change the recognition threshold, itamended IAS 39 and IFRS 9 to clarify that the fair value of financialinstruments at initial recognition should be measured in accordancewith IFRS 13 and that any deferred amounts arising from theapplication of the recognition threshold in IAS 39 and IFRS 9 areseparate from the fair value measurement. In other words, therecognition threshold in IAS 39 and IFRS 9 is not a constraint whenmeasuring fair value. Rather, it determines whether (and when) theresulting difference (if any) between fair value at initial recognitionand the transaction price is recognised.

Valuation techniques

BC139 When measuring fair value, the objective of using a valuationtechnique is to estimate the price at which an orderly transactionwould take place between market participants at the measurementdate under current market conditions.



BC140 To meet that objective, the exposure draft proposed that valuationtechniques used to measure fair value should be consistent with themarket approach, income approach or cost approach. Such valuationtechniques are consistent with those already described in IFRSs andwith valuation practice.

BC141 Respondents generally agreed with the descriptions of the threevaluation techniques. Some respondents questioned whether a costapproach is consistent with an exit price definition of fair valuebecause they think that the cost to replace an asset is more consistentwith an entry price than an exit price. The IASB noted that an entity’scost to replace an asset would equal the amount that a marketparticipant buyer of that asset (that would use it similarly) would payto acquire it (ie the entry price and the exit price would be equal in thesame market). Thus, the IASB concluded that the cost approach isconsistent with an exit price definition of fair value.

Single versus multiple valuation techniques

BC142 IFRS 13 does not contain a hierarchy of valuation techniques becauseparticular valuation techniques might be more appropriate in somecircumstances than in others. The IASB concluded that determiningthe appropriateness of valuation techniques in the circumstancesrequires judgement and noted that Topic 820 and the fair valuemeasurement guidance already in IFRSs do not contain a hierarchy ofvaluation techniques. For example, IAS 41 acknowledged that in somecases the various approaches used by an entity might suggest differentfair value conclusions for a biological asset or agricultural produce,but that the entity should consider the reasons for the differences toarrive at a fair value within a reasonable range.

Valuation adjustments

BC143 Some respondents asked for more explicit requirements aboutapplying valuation adjustments (including risk adjustments related tothe uncertainty inherent in the inputs used in a fair valuemeasurement; see paragraphs BC149 and BC150). They found thedescriptions of valuation adjustments in the IASB’s Fair Value ExpertAdvisory Panel’s October 2008 report Measuring and disclosing the fairvalue of financial instruments in markets that are no longer active helpful(see paragraph BC177). In addition, regulators asked the IASB to



address measurement uncertainty to ensure that fair valuemeasurements are not overstated or understated in the statement offinancial position, thus improving the quality of information availableto users of financial statements.

BC144 Although the exposure draft was not explicit with respect to valuationadjustments, it stated that an entity must use the assumptions thatmarket participants would use in pricing the asset or liability,including assumptions about the risk inherent in a particularvaluation technique or in the inputs to the valuation technique.That implicitly included measurement uncertainty.

BC145 The boards noted that entities found the IASB’s Fair Value ExpertAdvisory Panel’s report helpful when measuring the fair value offinancial instruments during a period of market inactivity. As a result,the boards decided to describe the valuation adjustments that entitiesmight need to make when using a valuation technique because marketparticipants would make those adjustments when pricing a financialasset or financial liability under the market conditions at themeasurement date, including adjustments for measurementuncertainty. Those valuation adjustments include the following:

(a) an adjustment to a valuation technique to take into account acharacteristic of an asset or a liability that is not captured by thevaluation technique (the need for such an adjustment istypically identified during calibration of the value calculatedusing the valuation technique with observable marketinformation).

(b) applying the point within the bid-ask spread that is mostrepresentative of fair value in the circumstances.

(c) an adjustment to take into account non-performance risk (eg anentity’s own credit risk or the credit risk of the counterparty to atransaction).

(d) an adjustment to take into account measurement uncertainty(eg when there has been a significant decrease in the volume orlevel of activity when compared with normal market activity forthe asset or liability, or similar assets or liabilities, and the entityhas determined that the transaction price or quoted price doesnot represent fair value).



BC146 The boards decided that it would be appropriate to apply suchvaluation adjustments if those adjustments are consistent with theobjective of a fair value measurement. Valuation adjustments mayhelp avoid an understatement or overstatement of a fair valuemeasurement and should be applied when a valuation technique orthe inputs to a valuation technique do not capture factors that marketparticipants would take into account when pricing an asset or aliability at the measurement date, including assumptions about risk.

Consistency constraint

BC147 IFRS 13 emphasises the need for consistency in the valuation techniqueor techniques used to measure fair value. It does not preclude a changein valuation technique, provided that the change results in ameasurement that is equally or more representative of fair value in thecircumstances. The exposure draft proposed requiring an entity todisclose the effect of a change in valuation technique on a fair valuemeasurement (similar to the disclosures required by IAS 8 for a changein valuation technique). Respondents did not support that proposalbecause they thought it would be difficult to determine whether achange in fair value was attributable to a change in the valuationtechnique used or attributable to changes in other factors (such aschanges in the observability of the inputs used in the measurement).

BC148 The IASB agreed with those respondents and decided that in theabsence of an error (eg in the selection or application of a particularvaluation technique), revisions resulting from a change in thevaluation technique or its application should be accounted for as achange in accounting estimate in accordance with IAS 8. The IASBconcluded that disclosing the effect of a change in valuation techniqueon the fair value measurement or requiring the disclosures in IAS 8 fora change in accounting estimate would not be cost-beneficial.

Inputs to valuation techniques

Assumptions about risk

BC149 In IFRS 13 inputs refer broadly to the assumptions that marketparticipants would use when pricing the asset or liability, includingassumptions about risk. The IASB decided that a necessary input to avaluation technique is an adjustment for risk because marketparticipants would make such an adjustment when pricing an asset ora liability. Therefore, including an adjustment for risk ensures that the



measurement reflects an exit price for the asset or liability, ie the pricethat would be received in an orderly transaction to sell an asset or paidin an orderly transaction to transfer the liability at the measurementdate under current market conditions.

BC150 The IASB accepted that it might be difficult for an entity to quantify arisk adjustment in some cases, but concluded that this difficulty doesnot justify the exclusion of this input if market participants wouldtake it into account. The exposure draft focused on the need to adjustfor the risk inherent in a particular valuation technique used tomeasure fair value, such as a pricing model (model risk) and the riskinherent in the inputs to the valuation technique (input risk).That proposal was consistent with US GAAP.

Observable and unobservable inputs

BC151 IFRS 13 distinguishes between observable inputs and unobservableinputs, and requires an entity to maximise the use of relevant observableinputs and minimise the use of unobservable inputs (consistently withthe fair value measurement guidance that was already in IFRSs).Respondents to the exposure draft expressed concerns about beingrequired to use observable inputs during the global financial crisis thatstarted in 2007 when the available observable inputs were notrepresentative of the asset or liability being measured at fair value.Given that feedback, the IASB wanted to ensure that observability wasnot the only criterion applied when selecting the inputs to a valuationtechnique. Consequently, IFRS 13 focuses on relevant observable inputsbecause the IASB noted that in some cases the available observableinputs will require an entity to make significant adjustments to themgiven the characteristics of the asset or liability and the circumstancesat the measurement date (eg market conditions).

Application of premiums and discounts in a fair value measurement

BC152 The exposure draft proposed an amendment to IAS 39 making itexplicit that the unit of account for a financial instrument is theindividual financial instrument at all levels of the fair value hierarchy.That proposal in effect would have prohibited the application ofpremiums and discounts related to the size of an entity’s holding in a



fair value measurement categorised within any level of the fair valuehierarchy for financial instruments within the scope of IAS 39.The IASB proposed that amendment for the following reasons:

(a) The unit of account for a financial instrument should not dependon an instrument’s categorisation within the fair value hierarchy.

(b) Market participants will enter into a transaction to sell afinancial instrument that maximises the fair value of an asset orminimises the fair value of a liability. An entity’s decision to sellat a less advantageous price because it sells an entire holdingrather than each instrument individually is a factor specific tothat reporting entity.

BC153 Before the amendments to Topic 820, US GAAP generally prohibitedany adjustment to a quoted price in an active market for an identicalasset or liability for a fair value measurement categorised withinLevel 1 of the fair value hierarchy (including either a blockage factor,which was described as an adjustment to a quoted price for an assetor a liability when the normal daily trading volume for the asset orliability is not sufficient to absorb the quantity held and thereforeplacing orders to sell the asset or liability in a single transaction mightaffect the quoted price, or any other premium or discount). However,Topic 820 did not specify whether a blockage factor (or anotherpremium or discount, such as a control premium or a non-controllinginterest discount) should be applied in a fair value measurementcategorised within Level 2 or Level 3 of the fair value hierarchy ifmarket participants would take it into account when pricing the assetor liability.

BC154 Respondents interpreted the proposal in the exposure draft as beingconsistent with Topic 820 for fair value measurements categorisedwithin Level 1 of the fair value hierarchy, but they thought it wasinconsistent with Topic 820 for fair value measurements categorisedwithin Level 2 and Level 3. For example, some respondents thoughtthat the IASB intended to prohibit the application of any premiums ordiscounts (such as a control premium) for fair value measurementscategorised within Level 2 and Level 3 of the fair value hierarchy evenwhen market participants would take into account a premium ordiscount when pricing the asset or liability for a particular unit ofaccount.



BC155 Some respondents supported the proposal for fair value measurementscategorised within Level 1 of the fair value hierarchy even though, intheir view, entities do not typically exit a position on an individualinstrument basis (eg by entering into a transaction to sell a single shareof equity). Those respondents understood the boards’ concerns aboutverifiability within Level 1. Other respondents stated that the fair valuemeasurement should reflect the fair value of the entity’s holding, not ofeach individual instrument within that holding (ie they did not agreethat the unit of account for a financial instrument should be a singleinstrument). Those respondents maintained that the principle shouldbe that the unit of account reflects how market participants would enterinto a transaction for the asset or liability. They asserted that marketparticipants would not (and often cannot) sell individual items.The FASB received similar comments when developing SFAS 157.The boards concluded that such concerns were outside the scope of thefair value measurement project because the project addressed how tomeasure fair value and not what is measured at fair value.

BC156 In addition, the comments received on the exposure draft indicatedthat respondents had different interpretations of the term blockagefactor. Many respondents interpreted a blockage factor as anyadjustment made because of the size of an asset or a liability. In theboards’ view, there is a difference between size being a characteristicof the asset or liability and size being a characteristic of the entity’sholding. Accordingly, the boards clarified that a blockage factorencompasses the latter and is not relevant in a fair value measurementbecause a fair value measurement reflects the value of the asset orliability to a market participant for a particular unit of account and isnot necessarily representative of the value of the entity’s entireholding.

BC157 Given the description of a blockage factor, the boards concluded thatan entity’s decision to realise a blockage factor is specific to that entity,not to the asset or liability. In many cases the unit of account for afinancial instrument for financial reporting is the individual financialinstrument. In such cases the size of an entity’s holding is not relevantin a fair value measurement. An entity would realise a blockage factorwhen that entity decides to enter into a transaction to sell a blockconsisting of a large number of identical assets or liabilities.Therefore, blockage factors are conceptually similar to transactioncosts in that they will differ depending on how an entity enters into atransaction for an asset or a liability. The boards concluded that if an



entity decides to enter into a transaction to sell a block, theconsequences of that decision should be recognised when the decisionis carried out regardless of the level of the fair value hierarchy in whichthe fair value measurement is categorised.

BC158 Therefore, the boards decided to clarify that the application ofpremiums and discounts in a fair value measurement is related to thecharacteristics of the asset or liability being measured at fair value andits unit of account. IFRS 13 specifies that when a Level 1 input is notavailable, a fair value measurement should incorporate premiums ordiscounts if market participants would take them into account in atransaction for the asset or liability. Paragraph BC168 describes theIASB’s rationale for requiring an entity to use Level 1 inputs withoutadjustment whenever available. However, the boards decided to clarifythat the application of premiums or discounts must be consistent withthe unit of account in the IFRS that requires or permits the fair valuemeasurement.

BC159 The boards decided not to provide detailed descriptions of premiumsand discounts or to provide detailed guidance about their applicationin a fair value measurement. They reasoned that such descriptions andguidance would be too prescriptive because the application ofpremiums and discounts in a fair value measurement depends on thefacts and circumstances at the measurement date. In the boards’ view,different facts and circumstances might lead to particular premiumsor discounts being relevant for some assets and liabilities but not forothers (eg in different jurisdictions). Furthermore, the boards did notintend to preclude the use of particular premiums or discounts, exceptfor blockage factors.

Inputs based on bid and ask prices

BC160 In some situations, inputs might be determined on the basis of bid andask prices, eg an input from a dealer market, in which the bid pricerepresents the price the dealer is willing to pay and the ask pricerepresents the price at which the dealer is willing to sell. IAS 39required the use of bid prices for asset positions and ask prices forliability positions. IAS 36 and IAS 38 Intangible Assets had similarrequirements.

BC161 The exposure draft proposed that a fair value measurement should usethe price within the bid-ask spread that is most representative of fairvalue in the circumstances. Furthermore, the exposure draft statedthat the bid-ask spread guidance applied at all levels of the fair value



hierarchy, when bid and ask prices are relevant (see paragraph BC165),and did not preclude the use of mid-market pricing or other pricingconventions that are used by market participants as a practicalexpedient.

BC162 Many respondents supported the proposal because in their experiencedifferent market participants enter into transactions at differentprices within a bid-ask spread. Some respondents preferred a singlebid-ask spread pricing method, as described in IAS 39, because it wouldmaximise the consistency and comparability of fair valuemeasurements using bid and ask prices.

BC163 The IASB observed that, in many situations, bid and ask prices establishthe boundaries within which market participants would negotiate theprice in the exchange for the asset or liability. Having clarified the fairvalue measurement objective, the IASB concluded that an entityshould use judgement in meeting that objective. Accordingly, IFRS 13states that a fair value measurement should use the price within thebid-ask spread that is most representative of fair value in thecircumstances, and that the use of bid prices for asset positions and askprices for liability positions is permitted but is not required.

BC164 IAS 39 stated that the bid-ask spread includes only transaction costs.In IAS 39 other adjustments to arrive at fair value (eg for counterpartycredit risk) were not included in the term bid-ask spread. Somerespondents asked whether the proposed bid-ask guidance reflectedthat view. Although the boards decided not to specify what, ifanything, is in a bid-ask spread besides transaction costs, in the boards’view the bid-ask spread does not include adjustments for counterpartycredit risk (see paragraphs BC124–BC127 for a discussion onadjustments for counterparty credit risk when measuring fair value).Therefore, an entity will need to make an assessment of what is in thebid-ask spread for an asset or a liability when determining the pointwithin the bid-ask spread that is most representative of fair value in thecircumstances.

BC165 Some respondents noted that there could be a difference betweenentry prices and exit prices when entities enter into transactions atdifferent points within the bid-ask spread. For example, an entitymight buy an asset at the ask price (entry price) and measure fair valueusing the bid price (exit price). The boards concluded that bid-askspreads are only relevant for financial instruments and in markets inwhich an intermediary (eg a broker) is necessary to bring together abuyer and a seller to engage in a transaction (ie when the buyer and



seller need an intermediary to find one another). When measuring thefair value of a non-financial asset or non-financial liability, the notionof a bid-ask spread will not be relevant because the buyers and sellersin the principal (or most advantageous) market have already found oneanother and are assumed to have negotiated the transaction price(ie fair value).

Fair value hierarchy

BC166 IFRS 13 uses a three-level fair value hierarchy, as follows:

(a) Level 1 comprises unadjusted quoted prices in active markets foridentical assets and liabilities.

(b) Level 2 comprises other observable inputs not included withinLevel 1 of the fair value hierarchy.

(c) Level 3 comprises unobservable inputs (including the entity’sown data, which are adjusted if necessary to reflect theassumptions market participants would use in thecircumstances).

BC167 The IASB noted that many IFRSs already contained an implicit fairvalue hierarchy by referring to observable market transactions ormeasuring fair value using a valuation technique. For example, thefollowing three-level measurement hierarchy was implicit in IAS 39and IFRS 9:

(a) financial instruments quoted in an active market;

(b) financial instruments whose fair value is evidenced bycomparison with other observable current market transactionsin the same instrument (ie without modification orrepackaging) or based on a valuation technique whose variablesinclude only data from observable markets; and

(c) financial instruments whose fair value is determined in wholeor in part using a valuation technique based on assumptionsthat are not supported by prices from observable current markettransactions in the same instrument (ie without modification orrepackaging) and not based on available observable market data.



Level 1 inputs

BC168 Level 1 inputs are unadjusted quoted prices in active markets foridentical assets and liabilities. The IASB concluded that those pricesgenerally provide the most reliable evidence of fair value and should beused to measure fair value whenever available.

BC169 IFRS 13 defines an active market as a market in which transactions forthe asset or liability take place with sufficient frequency and volume toprovide pricing information on an ongoing basis. The IASB concludedthat although different words are used, that definition is consistentwith the definitions of an active market already in IFRSs:

(a) IASs 36, 38 and 41 stated that an active market is one in which‘(i) the items traded in the market are homogeneous; (ii) willingbuyers and sellers can normally be found at any time; and (iii)prices are available to the public.’

(b) IAS 39 and IFRS 9 stated that an active market is one in which‘quoted prices are readily and regularly available from anexchange, dealer, broker, industry group, pricing service orregulatory agency, and those prices represent actual andregularly occurring market transactions on an arm’s lengthbasis.’

BC170 IFRS 13 states that when an entity holds a large number of similarassets and liabilities that are required to be measured at fair value anda quoted price in an active market is not readily accessible for each ofthose assets and liabilities, the entity can use an alternative pricingmethod that does not rely exclusively on quoted prices as a practicalexpedient (although the resulting fair value measurement is a lowerlevel measurement). For example, an entity might hold a large numberof similar debt instruments (such as sovereign debt securities) and usematrix pricing, which does not rely exclusively on quoted prices, tomeasure the fair value of those instruments. In such a situation,although a Level 1 input is used to measure fair value, the fair valuemeasurement would not be categorised within Level 1 of the fair valuehierarchy. That is a departure from the principle that a fair valuemeasurement should maximise the use of relevant observable inputs.However, the IASB regards this particular practical expedient asjustified on cost-benefit grounds.



Level 2 inputs

BC171 Level 2 inputs are all inputs other than quoted prices included in Level 1that are observable (either directly or indirectly) for the asset or liability.The IASB concluded that it is appropriate to include in Level 2market-corroborated inputs that might not be directly observable, butare based on or supported by observable market data, because suchinputs are less subjective than unobservable inputs classified withinLevel 3.

Level 3 inputs

BC172 Level 3 inputs are unobservable inputs for the asset or liability.

BC173 Some respondents stated that it would be misleading to describe ameasurement using significant unobservable inputs as a fair valuemeasurement. They also expressed concerns that unobservable inputsmay include entity-specific factors that market participants would notconsider. Therefore, they suggested that the IASB should use adifferent label for measurements that use significant unobservableinputs. However, the IASB concluded that it would be more helpful tousers of financial statements to use the label fair value for all threelevels of the hierarchy described in the exposure draft, for thefollowing reasons:

(a) The proposed definition of fair value identifies a clear objectivefor valuation techniques and the inputs to them: consider allfactors that market participants would consider and exclude allfactors that market participants would exclude. An alternativelabel for Level 3 measurements would be unlikely to identifysuch a clear objective.

(b) The distinction between Levels 2 and 3 is inevitably subjective.It is undesirable to adopt different measurement objectives oneither side of such a subjective boundary.

Rather than requiring a different label for measurements derivedusing significant unobservable inputs, the IASB concluded thatconcerns about the subjectivity of those measurements are bestaddressed by requiring enhanced disclosure for those measurements(see paragraphs BC187–BC210).



BC174 The IASB accepts that the starting point for Level 3 inputs might beestimates developed by the entity. However, the entity must adjustthose inputs if reasonably available information indicates that othermarket participants would use different data when pricing the asset orliability or there is something particular to the entity that is notavailable to other market participants (eg an entity-specific synergy).

BC175 Some respondents expressed concerns that an entity would becompelled by its auditors or regulators to undertake exhaustive effortsto obtain information about the assumptions that market participantswould use when pricing the asset or liability. Furthermore, they wereconcerned that their judgement would be questioned when assertingthe absence of contrary data. IFRS 13 states that such exhaustiveefforts would not be necessary. However, when information aboutmarket participant assumptions is reasonably available, an entitycannot ignore it.


BC176 The global financial crisis that started in 2007 emphasised theimportance of having common fair value measurement requirementsin IFRSs and US GAAP, particularly for measuring fair value when themarket activity for an asset or a liability declines. As a result, andconsistently with the recommendations of the Group of Twenty (G20)Leaders, the Financial Stability Board and the IASB’s and FASB’sFinancial Crisis Advisory Group, the IASB and the FASB workedtogether to develop common requirements for measuring the fairvalue of assets and liabilities when markets are no longer active.

BC177 In May 2008 the IASB set up a Fair Value Expert Advisory Panel inresponse to recommendations made by the Financial Stability Forum(now the Financial Stability Board) to address the measurement anddisclosure of financial instruments when markets are no longer active.The Panel’s discussions were observed by FASB staff. In October 2008the IASB staff published a staff report on the Panel’s discussions.

BC178 Also in response to the global financial crisis, in April 2009 the FASBissued FASB Staff Position (FSP) No. FAS 157-4 Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly. That FSP wascodified in Topic 820 and provides guidance for:

(a) measuring fair value when the volume or level of activity for theasset or liability has significantly decreased; and



(b) identifying circumstances that indicate a transaction is notorderly.

BC179 IASB published a Request for Views that asked respondents whetherthey believed that the guidance in that FSP was consistent with thePanel’s report. The IASB also asked members of the Fair Value ExpertAdvisory Panel the same question. The IASB received 69 responses tothe Request for Views. The respondents to the Request for Views andthe members of the Fair Value Expert Advisory Panel indicated that theFSP was consistent with the Panel’s report. As a result, the IASBincluded the guidance from FSP FAS 157-4 in the exposure draft.

BC180 Respondents to the exposure draft generally agreed with the proposedguidance and found it consistent with the concepts in the IASB’s FairValue Expert Advisory Panel’s report and in US GAAP. However, somerespondents noted that the words used in the exposure draft weredifferent from those used in US GAAP and wondered whether therequirements were meant to be different. The boards acknowledgedthose concerns and decided to align the wording. In addition, theboards decided to clarify that the requirements pertain to when therehas been a significant decline in the volume or level of activity for theasset or liability, not to assets and liabilities for which there is typicallyno observable market.

BC181 Furthermore, the boards concluded that when applying IFRS 13 andTopic 820 an entity should focus on whether an observed transactionprice is the result of an orderly transaction, not only on the level ofactivity in a market, because even in a market with little activity,transactions can be orderly. Accordingly, the boards concluded that anentity should consider observable transaction prices unless there isevidence that the transaction is not orderly. If an entity does not havesufficient information to determine whether a transaction is orderly,it performs further analysis to measure fair value.

BC182 Also as a result of the global financial crisis, there was a particularlyurgent need to improve transparency of fair value measurements forfinancial instruments. To address that need, the IASB amended IFRS 7Financial Instruments: Disclosures in March 2009. The amended disclosuresabout fair value measurements have been relocated to IFRS 13.



Disclosure

BC183 The disclosures about fair value measurements in IFRSs vary, althoughmany require, at a minimum, information about the methods andsignificant assumptions used in the measurement, and whether fairvalue was measured using observable prices from recent markettransactions for the same or a similar asset or liability.

BC184 The IASB decided that having established a framework for measuringfair value, it should also enhance and harmonise the disclosures aboutfair value measurements. The IASB decided to limit the disclosures tofair values measured in the statement of financial position after initialrecognition, whether those measurements are made on a recurring ornon-recurring basis, because other IFRSs address the disclosure of fairvalues at initial recognition (eg IFRS 3 requires disclosure of themeasurement of assets acquired and liabilities assumed in a businesscombination).

BC185 The objective of the disclosures in IFRS 13 is to provide users offinancial statements with information about the valuation techniquesand inputs used to develop fair value measurements and how fair valuemeasurements using significant unobservable inputs affected profit orloss or other comprehensive income for the period. To meet thoseobjectives, the disclosure framework (a) combines the disclosurescurrently required by IFRSs and US GAAP and (b) provides additionaldisclosures that users of financial statements suggested would behelpful in their analyses. In developing the disclosures, the IASB usedinformation received from users and preparers of financial statementsand the IASB’s Fair Value Expert Advisory Panel.

Distinguishing between recurring and non-recurring fair value measurements

BC186 The disclosures in US GAAP differentiate fair value measurements thatare recurring from those that are non-recurring. The exposure draftdid not propose differentiating recurring from non-recurring fairvalue measurements and required the same information about all fairvalue measurements. However, users of financial statements asked theIASB to include the same principles for disclosing information aboutfair value measurements in IFRSs that are in US GAAP. As a result, theboards decided to differentiate the two types of fair valuemeasurements and to describe their differences.



Information about fair value measurements categorised within Level 3 of the fair value hierarchy

BC187 The boards received requests from users of financial statements formore information about fair value measurements categorised withinLevel 3 of the fair value hierarchy. The following sections describe theboards’ response to those requests.

Quantitative information

BC188 The exposure draft proposed requiring an entity to disclose themethods and inputs used in a fair value measurement, including theinformation used to develop those inputs. That proposal wasdeveloped using feedback from users of financial statements and theIASB’s Fair Value Expert Advisory Panel. Although the proposal was notexplicit, the IASB intended that the information about the inputs usedin the measurement would be quantitative.

BC189 Before the amendments to Topic 820, US GAAP required an entity toprovide a description of the inputs used when measuring the fair valueof an asset or a liability that is categorised within Level 2 or Level 3 ofthe fair value hierarchy. Topic 820 was not explicit about whether thatdescription needed to include quantitative information.

BC190 Users of financial statements asked the boards to clarify that entitiesmust provide quantitative information about the inputs used in a fairvalue measurement, particularly information about unobservableinputs used in a measurement categorised within Level 3 of the fairvalue hierarchy. When limited or no information is publicly available,disclosures about such information help users to understand themeasurement uncertainty inherent in the fair value measurement.

BC191 Therefore, the boards decided to clarify that an entity should disclosequantitative information about the significant unobservable inputsused in a fair value measurement categorised within Level 3 of the fairvalue hierarchy.

BC192 Some respondents to the FASB’s proposed ASU questioned theusefulness of quantitative information about the unobservable inputsused in a fair value measurement because of the level of aggregationrequired in those disclosures. The boards noted that the objective ofthe disclosure is not to enable users of financial statements to replicatethe entity’s pricing models, but to provide enough information forusers to assess whether the entity’s views about individual inputsdiffered from their own and, if so, to decide how to incorporate the



entity’s fair value measurement in their decisions. The boardsconcluded that the information required by the disclosure willfacilitate comparison of the inputs used over time, providing userswith information about changes in management’s views aboutparticular unobservable inputs and about changes in the market forthe assets and liabilities within a particular class. In addition, thatdisclosure might facilitate comparison between entities with similarassets and liabilities categorised within Level 3 of the fair valuehierarchy.

BC193 IFRS 13 and Topic 820 state that an entity should determineappropriate classes of assets and liabilities on the basis of the nature,characteristics and risks of the assets and liabilities, noting thatfurther disaggregation might be required for fair value measurementscategorised within Level 3 of the fair value hierarchy. Consequently,the boards concluded that the meaningfulness of the disclosure ofquantitative information used in Level 3 fair value measurements willdepend on an entity’s determination of its asset and liability classes.

BC194 Some respondents to the IASB’s re-exposure document and the FASB’sproposed ASU suggested requiring quantitative information about theunobservable inputs used in fair value measurements categorisedwithin Level 2 of the fair value hierarchy because determining whetherto categorise fair value measurements within Level 2 or Level 3 can besubjective. The boards concluded that for a fair value measurement tobe categorised within Level 2 of the fair value hierarchy, theunobservable inputs used, if any, must not be significant to themeasurement in its entirety. As a result, the boards decided thatquantitative information about unobservable inputs would be oflimited use for those measurements.

BC195 In addition, the boards understand that fair value is sometimesmeasured on the basis of prices in prior transactions (eg adjustmentsto the last round of financing for a venture capital investment)or third-party pricing information (eg broker quotes). Suchmeasurements might be categorised within Level 3 of the fair valuehierarchy. In such cases, the boards concluded that an entity should berequired to disclose how it has measured the fair value of the asset orliability, but that it should not need to create quantitative information(eg an implied market multiple or future cash flows) to comply withthe disclosure requirement if quantitative information other than theprior transaction price or third-party pricing information is not usedwhen measuring fair value. However, the boards concluded that whenusing a prior transaction price or third-party pricing information, an



entity cannot ignore other quantitative information that is reasonablyavailable. If there was an adjustment to the price in a prior transactionor third-party pricing information that is significant to the fair valuemeasurement in its entirety, that adjustment would be anunobservable input about which the entity would disclose quantitativeinformation even if the entity does not disclose the unobservableinformation used when pricing the prior transaction or developing thethird-party pricing information.

Level 3 reconciliation for recurring fair value measurements

BC196 The exposure draft proposed requiring an entity to provide areconciliation from the opening balances to the closing balances of fairvalue measurements categorised within Level 3 of the fair valuehierarchy. IFRS 7 required such a disclosure for financial instrumentsafter it was amended in March 2009 to introduce a three-level fair valuehierarchy, and to require more detailed information about fair valuemeasurements categorised within Level 3 of the fair value hierarchy.In addition, many IFRSs already required a similar reconciliation for allfair value measurements, not only for those that are categorised withinLevel 3 of the fair value hierarchy.

BC197 Some respondents agreed with the proposed reconciliation disclosurebecause they thought it would help meet the objective to providemeaningful information to users of financial statements about therelative subjectivity of fair value measurements. Other respondentsthought that the disclosure requirement would be onerous and did notbelieve that the benefits would outweigh the costs, particularly fornon-financial assets and liabilities. The IASB received similar feedbackon the proposed amendments to IFRS 7. However, users of financialstatements told the IASB that the disclosures made in accordance withUS GAAP and IFRS 7 were helpful, particularly in the light of the globalfinancial crisis that started in 2007. They indicated that the disclosuresallowed them to make more informed judgements and to segregatethe effects of fair value measurements that are inherently subjective,thereby enhancing their ability to assess the quality of an entity’sreported earnings. Consequently, the IASB decided to require an entityto provide such a reconciliation.

BC198 The exposure draft and IFRS 7 did not distinguish between realised andunrealised gains or losses. That was because those documents referredto gains or losses attributable to assets and liabilities held at the end of thereporting period, which the IASB meant to be equivalent to unrealisedgains or losses (ie realised gains or losses result from the sale, disposal



or settlement of an asset or a liability, and therefore the asset orliability is no longer held by the entity at the reporting date, whereasunrealised gains or losses relate to changes in the fair value of an assetor a liability that is held by the entity at the reporting date).Respondents to the exposure draft wondered whether the differentterminology used in the exposure draft and in Topic 820 meant thatthe disclosure proposed for IFRSs would be different from thedisclosure required by US GAAP. To ensure that there would be nodifferences in interpretation of the requirements in IFRSs andUS GAAP, the IASB decided to use the terms realised and unrealised in thereconciliation disclosure.

BC199 The IASB concluded that the disclosure should focus on recurring fairvalue measurements because it would be difficult to reconcile theopening balances to the closing balances for non-recurring fair valuemeasurements when the carrying amount of an asset or a liability isnot determined on the basis of fair value at each reporting period.For example, it would be difficult to reconcile changes in fair valuewhen an asset held for sale is recognised at its carrying amount inaccordance with IFRS 5 in one period and at fair value less costs tosell in the next period. The information gained from requiring areconciliation of changes in fair value from one period to the next isnot available when requiring changes resulting from the use ofdifferent measurement bases from one period to the next.

Valuation processes

BC200 The boards decided to require an entity to disclose the valuationprocesses used for fair value measurements categorised within Level 3of the fair value hierarchy (including, for example, how an entitydecides its valuation policies and procedures and analyses changes infair value measurements from period to period). They made thatdecision because users of financial statements told the boards thatinformation about an entity’s valuation processes helps them assessthe relative subjectivity of the entity’s fair value measurements,particularly for those categorised within Level 3 of the fair valuehierarchy.

BC201 In addition, the requirements in IFRS 13 are consistent with theconclusions of the IASB’s Fair Value Expert Advisory Panel as describedin its report in October 2008.



Sensitivity to changes in unobservable inputs

BC202 The exposure draft proposed requiring a quantitative sensitivityanalysis for fair value measurements categorised within Level 3 of thefair value hierarchy. That proposal was taken from the requirement inIFRS 7 to disclose a sensitivity analysis if changing any of theunobservable inputs used in the measurement to reasonably possiblealternative assumptions would change the fair value significantly.Although in IFRS 7 that disclosure was required for financial assets andfinancial liabilities measured at fair value, under the proposal it wouldhave been required for all assets and liabilities measured at fair value.

BC203 In August 2009 the FASB proposed a similar disclosure requirement inits proposed ASU Fair Value Measurements and Disclosures (Topic 820):Improving Disclosures about Fair Value Measurements, although thatproposal would have required an entity to take into account the effectof interrelationships between inputs. Very few respondents to thatproposed ASU supported the proposed disclosure, stating that it wouldnot provide useful information and would be costly and operationallychallenging. However, users were supportive of the proposeddisclosure. The FASB decided to defer the consideration of a sensitivityanalysis disclosure requirement to the joint fair value measurementproject.

BC204 In the boards’ discussions about that sensitivity analysis disclosure,they considered whether the IASB’s proposed disclosure and that inIFRS 7 would be improved if the boards required an entity to includethe effect of interrelationships between unobservable inputs, therebyshowing a range of fair values (exit prices) that reasonably could havebeen measured in the circumstances as of the measurement date.Because that refinement of the disclosure was not included in theIASB’s May 2009 exposure draft and was not required by IFRS 7, theIASB needed to expose the proposal to require the sensitivity analysisincluding the effect of interrelationships between unobservableinputs. That disclosure was referred to in the IASB’s re-exposuredocument and the FASB’s proposed ASU in June 2010 as a measurementuncertainty analysis disclosure.

BC205 Respondents to the FASB’s proposed ASU and the IASB’s re-exposuredocument were concerned about whether the proposal would beoperational (those comments were consistent with those received onthe FASB’s proposed ASU in August 2009). Although that proposal wasin response to requests from users of financial statements to requireadditional information about the measurement uncertainty inherent



in fair value measurements (particularly those categorised withinLevel 3 of the fair value hierarchy), the responses from preparers offinancial statements indicated that the costs associated with preparingsuch a disclosure would outweigh the benefits to users once theinformation had been aggregated by class of asset or liability. As analternative to the proposal, those respondents suggested that theboards should require a qualitative assessment of the subjectivity offair value measurements categorised within Level 3 of the fair valuehierarchy, as well as an alternative quantitative approach that wouldbe less costly to prepare (see paragraphs BC188–BC195).

BC206 Therefore, the boards decided to require an entity to provide a narrativedescription, by class of asset or liability, of the sensitivity of a recurringfair value measurement categorised within Level 3 of the fair valuehierarchy to changes in the unobservable inputs used in themeasurement if a change in those inputs to a different amount wouldresult in a significantly higher or lower fair value measurement. If thereare interrelationships between those inputs and other unobservableinputs, the boards decided to require an entity to provide a descriptionof those interrelationships and of how they might magnify or mitigatethe effect of changes in the unobservable inputs on the fair valuemeasurement. The boards concluded that such information wouldprovide users of financial statements with information about how theselection of unobservable inputs affects the valuation of a particularclass of assets or liabilities. The boards expect that the narrativedescription will focus on the unobservable inputs for which quantitativeinformation is disclosed because those are the unobservable inputs thatthe entity has determined are most significant to the fair valuemeasurement. They will continue to assess whether a quantitativemeasurement uncertainty analysis disclosure would be practical afterissuing IFRS 13, with the aim of reaching a conclusion about whether torequire such a disclosure at a later date.

BC207 The boards concluded that a narrative description about sensitivityprovides users of financial statements with information about thedirectional effect of a change in a significant unobservable input on afair value measurement. That disclosure, coupled with quantitativeinformation about the inputs used in fair value measurementscategorised within Level 3 of the fair value hierarchy, providesinformation for users to assess whether the entity’s views aboutindividual inputs differed from their own and, if so, to decide how toincorporate the entity’s fair value measurement in their decisions.



In addition, that disclosure provides information about the pricingmodel for those users who are not familiar with the valuation of aparticular class of assets or liabilities (eg complex financialinstruments).

BC208 In addition to the narrative sensitivity analysis disclosure, IFRS 13requires a quantitative sensitivity analysis for financial instrumentsthat are measured at fair value and categorised within Level 3 of thefair value hierarchy (ie the disclosure that was previously in IFRS 7).The IASB decided to move that requirement from IFRS 7 to IFRS 13 sothat all the fair value measurement disclosure requirements in IFRSsare in a single location. When developing IFRS 7, the IASB concludedthat information about the sensitivities of fair value measurements tothe main valuation assumptions would provide users of financialstatements with a sense of the potential variability of themeasurement. In forming that conclusion, the IASB considered theview that disclosure of sensitivities could be difficult, particularlywhen there are many assumptions to which the disclosure would applyand those assumptions are interdependent. However, the IASB notedthat a detailed quantitative disclosure of sensitivity to all assumptionsis not required (only those that could result in a significantly differentestimate of fair value are required) and that the disclosure does notrequire the entity to reflect interdependencies between assumptionswhen making the disclosure.

BC209 The boards concluded that the objective of the narrative andquantitative sensitivity analysis disclosures about fair value aredifferent from the objectives of other disclosures that an entity may berequired to make in IFRSs and US GAAP, such as the market risksensitivity analysis disclosure required by IFRS 7 (see paragraph 40 ofIFRS 7). The IASB concluded that even though there is some overlap inthose disclosures, the objective of each disclosure is different: themarket risk sensitivity analysis disclosure in IFRS 7 providesinformation about an entity’s exposure to future changes in marketrisks (ie currency risk, interest rate risk and other price risk), whereasthe fair value measurement disclosures provide information about thesensitivity of the fair value measurement at the measurement date tochanges in unobservable inputs for those fair value measurementswith the greatest level of subjectivity (ie fair value measurementscategorised within Level 3 of the fair value hierarchy). In addition, themarket risk sensitivity analysis disclosure in IFRS 7 relates only tofinancial instruments (as does the quantitative sensitivity analysis



disclosure in IFRS 13), whereas the narrative sensitivity analysisdisclosure in IFRS 13 relates to all assets and liabilities measured at fairvalue.

BC210 The IASB identified the following differences between the market riskand fair value sensitivity analysis disclosures:

(a) The market risk disclosure is not specific to financial instrumentsmeasured at fair value, but also relates to financial instrumentsmeasured at amortised cost.

(b) The market risk disclosure focuses on the effect on profit or lossand equity, not specifically on the change in value.

(c) The market risk disclosure focuses only on the entity’s exposureto market risks (ie interest rate risk, currency risk or other pricerisk), whereas the fair value disclosures take into account theeffect on a fair value measurement of changes in significantunobservable inputs.

(d) The market risk disclosure does not distinguish betweenobservable and unobservable inputs (or level in the fair valuehierarchy, ie Level 1, 2 or 3), whereas the fair value disclosuresrelate only to the unobservable inputs used in fair valuemeasurements categorised within Level 3 of the fairvalue hierarchy.

Transfers between Levels 1 and 2 of the fair value hierarchy

BC211 The exposure draft proposed requiring an entity to disclose theamounts of significant transfers into or out of Level 1 and Level 2 of thefair value hierarchy and the reasons for those transfers. Thatdisclosure was also required in Topic 820. In their discussions, theboards decided instead to require a disclosure of any transfers into orout of Levels 1 and 2. Respondents to the FASB’s proposed ASUgenerally did not support that proposal because it would require anentity to monitor all transfers on a daily basis, regardless of whetherthose transfers were significant. In addition, respondents wereconcerned about the accuracy of information about all transfersbecause there can be an unclear distinction between less active Level 1fair value measurements and more active Level 2 fair valuemeasurements.



BC212 The boards concluded that the objective of the disclosure is to provideinformation that will help users of financial statements assess changesin market and trading activity (the entity’s or others’) so that users can(a) incorporate into their analyses the entity’s future liquidity risk and(b) analyse the entity’s exposure to the relative subjectivity of its fairvalue measurements. In the boards’ view, the only way to provide thatinformation, and to reduce the subjectivity involved in preparing theinformation, is to require information about all transfers betweenLevel 1 and Level 2 of the fair value hierarchy.

When an entity uses a non-financial asset in a way that differs from its highest and best use

BC213 The boards decided to require an entity to disclose information aboutwhen it uses a non-financial asset in a way that differs from its highestand best use (when that asset is measured at fair value in the statementof financial position or when its fair value is disclosed). The boardsconcluded that such a disclosure provides useful information for usersof financial statements that rely on fair value information whenforecasting future cash flows, whether that fair value information ispresented in the statement of financial position or is disclosed in thenotes. Users told the boards that they would need to know hownon-financial assets are being used and how that use fits with anentity’s strategic and operating plans.

BC214 The boards considered whether to limit the disclosure to somenon-financial assets and not others. The boards concluded that becausethe measurement and disclosure requirements are principle-based,those requirements should not need to be amended in the future if theboards should decide to use fair value as the measurement basis forparticular assets or liabilities. Therefore, the disclosure is required forany non-financial asset measured at fair value that an entity uses in away that differs from its highest and best use.

The categorisation within the level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position

BC215 IFRS 7 requires an entity to disclose the fair value of financialinstruments even if they are not measured at fair value in thestatement of financial position. An example is a financial instrumentthat is measured at amortised cost in the statement of financialposition.



BC216 The boards decided to require an entity to disclose the level of the fairvalue hierarchy in which an asset or a liability (financial ornon-financial) would be categorised if that asset or liability hadbeen measured at fair value in the statement of financial position.The boards concluded that such a disclosure would providemeaningful information about the relative subjectivity of that fairvalue measurement.

BC217 Respondents to the IASB’s exposure draft and the FASB’s proposed ASUwere concerned about the cost associated with preparing thatdisclosure because it is not always clear in which level a fair valuemeasurement would be categorised. The boards concluded that evenif determining the level in which to categorise a fair valuemeasurement requires judgement, the benefits of doing so outweighthe costs. Therefore, the boards decided to require an entity to disclosethe level of the fair value hierarchy in which an asset or a liabilitywould be categorised if that asset or liability had been measured at fairvalue in the statement of financial position.

Assets with a recoverable amount that is fair value less costs of disposal

BC218 Because IAS 36 requires disclosures that are specific to impaired assets,the exposure draft did not propose requiring the disclosures about fairvalue measurements for assets with a recoverable amount that is fairvalue less costs of disposal in IAS 36. Some respondents (mainly usersof financial statements) noted that the disclosures about impairedassets are different in IFRSs and in US GAAP (which requires assets tobe tested for impairment by comparing their carrying amounts withtheir fair values) and asked the IASB to minimise those differences toensure that users have access to similar information for their analysesof impaired assets.

BC219 The IASB noted that the disclosure requirements in IAS 36 weredeveloped specifically to ensure consistency in the disclosure ofinformation about impaired assets so that the same type ofinformation is provided whether the recoverable amount wasdetermined on the basis of value in use or fair value less costs ofdisposal. Consequently, the IASB did not think it would beappropriate to require an entity to provide information when therecoverable amount is determined on the basis of fair value less costsof disposal (ie as required by IFRS 13) that is significantly differentfrom what the entity would provide when the recoverable amount isdetermined on the basis of value in use.



BC220 Although IFRSs and US GAAP have different impairment models, theIASB concluded that requiring the following information (in additionto what IAS 36 currently requires) about impaired assets measured atfair value less costs of disposal would improve comparability betweenentities applying IFRSs and those applying US GAAP as well as increasethe convergence of IFRSs and US GAAP:

(a) the fair value less costs of disposal;

(b) the level of the fair value hierarchy within which the fair valueless costs of disposal is categorised in its entirety (Level 1, 2 or 3);

(c) if applicable, changes to valuation techniques and reasons forthose changes; and

(d) quantitative information about significant inputs used whenmeasuring fair value less costs of disposal (along with aconforming amendment to the disclosures about value in use).

BC221 In addition, those disclosures are consistent with the disclosuresrequired for non-recurring fair value measurements in IFRS 13 and inUS GAAP.

Interim financial reporting

BC222 For financial instruments, the exposure draft proposed that particularfair value disclosures required in annual financial statements wouldalso be required for interim financial reports. That differed from theapproach proposed for non-financial assets and non-financialliabilities, for which there is no specific fair value disclosurerequirement beyond the existing requirements in IAS 34 InterimFinancial Reporting.

BC223 Respondents generally thought that the principle underlying IAS 34addresses when disclosures should be updated in interim financialreports. Some respondents thought the costs of providing updatedinformation outweighed the benefits to users of financial statementsof having that information.

BC224 The IASB decided to include in IAS 34 an explicit requirement toprovide updated disclosures because it concluded that the benefit ofhaving incremental disclosures for financial instruments outweighedthe associated costs given the increased interest in those instrumentsduring the global financial crisis that started in 2007.



Effective date and transition

BC225 When deciding the effective date for IFRS 13, the IASB considered thecomments received on the Request for Views Effective Date and TransitionMethods. Many respondents said that the effective date should allowenough time for them to put the necessary systems in place to ensurethat their accounting policies and models meet the requirements ofIFRS 13. Some of those respondents, particularly those with many assetsand liabilities measured at fair value, requested a later effective date.Other respondents requested an earlier effective date, mainly forcomparability reasons and because in their view many entities mighthave inadvertently already started applying the revised concepts.

BC226 The IASB concluded that although IFRS 13 is a major new standard, itdoes not require any new fair value measurements and it does notfundamentally change many of the requirements for measuring fairvalue or for disclosing information about those measurements. The IASBconcluded that in many respects, IFRS 13 uses different words toarticulate the concepts already present in IFRSs. However, the IASB alsoconsidered the time that a particular country might require fortranslation and for introducing the mandatory requirements into law.

BC227 Consequently, the IASB decided that IFRS 13 should be effective forannual periods beginning on or after 1 January 2013. Because IFRS 13applies when other IFRSs require or permit fair value measurements(and does not introduce any new fair value measurements), the IASBbelieves that the extended transition period for IFRS 13 providesenough time for entities, their auditors and users of financialstatements to prepare for implementation of its requirements.

BC228 The IASB decided to permit early application of IFRS 13 because thatwould allow entities to apply the measurement and disclosurerequirements as soon as practicable, thereby improving comparabilityin measurement and transparency in disclosures. That would alsoimprove comparability with entities applying US GAAP.

BC229 The exposure draft proposed prospective application because the IASBconcluded that a change in the methods used to measure fair valuewould be inseparable from a change in the fair value measurements(ie as new events occur or as new information is obtained, eg throughbetter insight or improved judgement). Respondents to the exposuredraft and the Request for Views supported that proposal. Therefore,the IASB concluded that IFRS 13 should be applied prospectively (in thesame way as a change in accounting estimate).



BC230 To achieve comparability in future periods, the IASB decided to requirethe disclosures in IFRS 13 for the first interim period in which the IFRSis initially applied. However, those disclosures need not be presentedin periods before initial application of the IFRS because it would bedifficult to apply some of the requirements in IFRS 13 without the useof hindsight in selecting the inputs that would have been appropriatein prior periods.

Application in emerging and transition economies

BC231 During the development of IFRS 13, the IASB received informationfrom entities in emerging and transition economies that had concernsabout applying the fair value measurement principles in IFRS 13 intheir jurisdictions. Common concerns included the following:

(a) The fair value measurement guidance is not detailed enough toallow them to measure fair value on a consistent basis.

(b) There is limited availability of practitioners in their jurisdictionswho have the skills to apply the guidance (and as a result entitiesmight be unfamiliar with applying the necessary judgements).

(c) There is limited access to market data to develop fair valuemeasurements because there are few deep and liquid markets,there are often few willing buyers and sellers and prices oftenfluctuate considerably within short periods of time.

(d) Models, inputs and assumptions may be new and may not becomparable across entities because of rapidly developingsocio-economic changes.

(e) Measuring fair value (and preparing the resulting disclosures)could be expensive.

BC232 The IASB noted that because fair value is used in many IFRSs,knowledge about its application is necessary for applying IFRSsgenerally and noted that the concerns raised are not specific to entitiesin emerging and transition economies. Entities in developedeconomies faced similar challenges during the global financial crisisthat started in 2007 and asked the IASB for guidance for measuring thefair value of equity instruments without active markets given therequirement to recognise them at fair value in IFRS 9. Furthermore,the IASB concluded that there should not be a different threshold formeasuring fair value depending on jurisdiction. Only by performingfair value measurements will entities applying IFRSs learn how to dothose measurements appropriately and robustly.



BC233 Therefore, the IASB concluded that entities applying IFRSs wouldbenefit from educational material to accompany IFRS 13. The IFRSFoundation sometimes publishes educational material that isleveraged from the standard-setting process to reinforce the goal ofpromoting the adoption and consistent application of a single set ofhigh quality international accounting standards. The IASB asked thestaff to develop educational material on fair value measurement thatdescribes at a high level the thought process for measuring assets,liabilities and an entity’s own equity instruments at fair valueconsistent with the objective of a fair value measurement.

BC234 The IASB concluded that any educational material developed mustbenefit all entities equally. Thus, the educational material cannotbenefit entities in emerging and transition economies without beingmade available to entities in developed economies.

BC235 The IASB staff and the FASB staff will liaise during the development ofthe educational material.

Convergence with US GAAP

BC236 As noted above, the fair value measurement project was a joint projectwith the FASB. The boards worked together to ensure that fair valuehas the same meaning in IFRSs and in US GAAP and that theirrespective fair value measurement and disclosure requirements arethe same (except for minor differences in wording and style).

BC237 The boards worked together to ensure that, to the extent possible,IFRS 13 and Topic 820 are identical. The following style differencesremain:

(a) There are differences in references to other IFRSs and US GAAP—For example, regarding related party transactions, IFRS 13 refersto IAS 24 Related Party Disclosures and Topic 820 refers to Topic 850Related Party Disclosures.

(b) There are differences in style—For example, IFRS 13 refers to anentity and Topic 820 refers to a reporting entity.

(c) There are differences in spelling—For example, IFRS 13 refers tolabour costs and Topic 820 refers to labor costs.

(d) There are differences in whether references are to a particularjurisdiction or are generic—For example, IFRS 13 refers to risk-freegovernment securities and Topic 820 refers to US Treasury securities.



The boards concluded that those differences will not result ininconsistent interpretations in practice by entities applying IFRSs orUS GAAP.

BC238 In addition, IFRS 13 and Topic 820 have the following differences:

(a) There are different accounting requirements in IFRSs andUS GAAP for measuring the fair value of investments ininvestment companies. Topic 946 Financial Services—InvestmentCompanies in US GAAP requires an investment company torecognise its underlying investments at fair value at eachreporting period. Topic 820 provides a practical expedient thatpermits an entity with an investment in an investment companyto use as a measure of fair value in specific circumstances thereported net asset value without adjustment. IFRS 10Consolidated Financial Statements requires an investment companyto consolidate its controlled underlying investments. BecauseIFRSs do not have accounting requirements that are specific toinvestment companies, the IASB decided that it would bedifficult to identify when such a practical expedient could beapplied given the different practices for calculating net assetvalues in jurisdictions around the world. For example,investment companies may report in accordance with nationalGAAP, which may have recognition and measurementrequirements that differ from those in IFRSs (ie the underlyinginvestments might not be measured at fair value, or they mightbe measured at fair value in accordance with national GAAP, notIFRSs). The boards are reviewing the accounting for investmentcompanies as part of a separate project.

(b) There are different requirements for measuring the fair valueof a financial liability with a demand feature. In US GAAP,Topic 825 Financial Instruments and Topic 942 Financial Services—Depository and Lending describe the fair value measurement of adeposit liability as the amount payable on demand at thereporting date. In IFRSs, IFRS 13 states that the fair valuemeasurement of a financial liability with a demand feature(eg demand deposits) cannot be less than the present value ofthe amount payable on demand. That requirement in IFRS 13was relocated unchanged from IAS 39 and IFRS 9 as aconsequence of the IASB’s fair value measurement project.



(c) There are different disclosure requirements in IFRSs andUS GAAP. For example:

(i) Because IFRSs generally do not allow net presentation forderivatives, the amounts disclosed for fair valuemeasurements categorised within Level 3 of the fair valuehierarchy might differ. The boards are reviewing thepresentation requirements for offsetting financial assetsand financial liabilities in their joint project on theaccounting for financial instruments.

(ii) IFRSs require a quantitative sensitivity analysis forfinancial instruments that are measured at fair value andcategorised within Level 3 of the fair value hierarchy(that disclosure was previously in IFRS 7). The boards willanalyse the feasibility of incorporating information aboutinterrelationships between unobservable inputs into aquantitative measurement uncertainty analysis disclosure.After completing that analysis, the boards will decidewhether to require such a disclosure.

(iii) Topic 820 has different disclosure requirements fornon-public entities. The FASB concluded that some of thedisclosures should not be required for non-public entitiesbecause of the characteristics of the users of the financialstatements of those entities. The FASB considered theability of those users to access information about thefinancial position of the entity and the relevance to thoseusers of the information that would be provided by therequirements in the disclosure amendments. In contrast,the IASB recently completed a project on the accountingfor small and medium-sized entities. As a result, the IFRSfor Small and Medium-Sized Entities addresses the accountingfor entities that do not have public accountability, and thedisclosures about their fair value measurements.

Cost-benefit considerations

BC239 The objective of general purpose financial reporting is to providefinancial information about the reporting entity that is useful toexisting and potential investors, lenders and other creditors in makingdecisions about providing resources to the entity. To meet thatobjective, the IASB seeks to ensure that an IFRS will meet a significant



need and that the overall benefits of the resulting information justifythe costs of providing it. Although the costs to implement a newstandard might not be borne evenly, users of financial statementsbenefit from improvements in financial reporting, thereby facilitatingthe functioning of markets for capital and credit and the efficientallocation of resources in the economy.

BC240 The evaluation of costs and benefits is necessarily subjective.In making its judgement, the IASB considers the following:

(a) the costs incurred by preparers of financial statements;

(b) the costs incurred by users of financial statements wheninformation is not available;

(c) the comparative advantage that preparers have in developinginformation, compared with the costs that users would incur todevelop surrogate information; and

(d) the benefit of better economic decision-making as a result ofimproved financial reporting.

BC241 IFRS 13 defines fair value, provides a framework for measuring fairvalue and requires disclosures about fair value measurements. A cleardefinition of fair value, together with a framework for measuring fairvalue that eliminates inconsistencies across IFRSs that havecontributed to diversity in practice, should improve consistency inapplication, thereby enhancing the comparability of informationreported in financial statements.

BC242 The disclosures about fair value measurements would increasetransparency and improve the quality of information provided to usersof financial statements. In developing the disclosure requirements inIFRS 13, the IASB obtained input from users and preparers of financialstatements and other interested parties to enable the IASB to assesswhether the disclosures could be provided within reasonablecost-benefit constraints.

BC243 Although the framework for measuring fair value builds on currentpractice and requirements, some methods in IFRS 13 may result in achange to practice for some entities. Furthermore, some entities willneed to make systems and operational changes, thereby incurringincremental costs. Other entities also might incur incremental costs inapplying the measurement and disclosure requirements. However, theIASB concluded that the benefits resulting from increased consistencyin application of fair value measurement requirements and enhancedcomparability of fair value information and improved communication



of that information to users of financial statements will continue.On balance, the IASB concluded that improvements in financialreporting resulting from the application of the requirements inIFRS 13 will exceed the increased costs of applying the requirements.

Summary of main changes from the exposure draft

BC244 The main changes from the proposals in the exposure draft publishedin May 2009 are as follows:

(a) IFRS 13 excludes from its scope share-based payment transactionsin IFRS 2 and leasing transactions in IAS 17. The exposure draftproposed the following:

(i) replacing the term fair value with another term thatreflects the measurement objective for share-basedpayment transactions in IFRS 2 and for reacquired rights ina business combination in IFRS 3.

(ii) excluding financial liabilities with a demand feature inIAS 39 from the scope of an IFRS on fair valuemeasurement.

The exposure draft did not propose excluding leasing transactionsfrom the scope of an IFRS on fair value measurement.

(b) IFRS 13 requires fair value to be measured using the price in theprincipal market for the asset or liability, or in the absence of aprincipal market, the most advantageous market for the asset orliability. The exposure draft proposed that fair value should bemeasured using the price in the most advantageous market.

(c) IFRS 13 states that market participants have a reasonableunderstanding about the asset or liability and the transactionusing all available information, including information thatmight be obtained through due diligence efforts that are usualand customary. The exposure draft stated that marketparticipants are presumed to be as knowledgeable as the entityabout the asset or liability (ie there was no informationasymmetry between market participants and the entity).

(d) IFRS 13 contains detailed guidance for measuring the fair valueof liabilities, including the compensation market participantswould require to assume the liability and how a third-partycredit enhancement affects the fair value of a liability.The exposure draft provided high level guidance.



(e) IFRS 13 contains detailed guidance for measuring the fair valueof an entity’s own equity instruments. That guidance isconsistent with the guidance for measuring the fair value of aliability. The exposure draft proposed requiring an entity tomeasure the fair value of its own equity instruments byreference to the fair value of the instrument held by a marketparticipant as an asset (ie the corresponding asset) withoutproviding information about when the fair value of the equityinstrument might differ from the fair value of thecorresponding asset.

(f) IFRS 13 provides guidance for measuring the fair value offinancial assets and financial liabilities with offsetting positionsin market risks or counterparty credit risk. The exposure draftproposed requiring financial assets to be measured using anin-exchange valuation premise.

(g) IFRS 13 states that classes of asset or liability for disclosurepurposes should be determined on the basis of the nature,characteristics and risks of the asset or liability and the level ofthe fair value hierarchy within which the fair valuemeasurement is categorised. The exposure draft did not provideguidance for determining the appropriate class of asset orliability for disclosures about fair value measurements.

(h) IFRS 13 provides examples of policies for when to recognisetransfers between levels of the fair value hierarchy, such as thedate of the transfer, the beginning of the reporting period orthe end of the reporting period. IFRS 13 also states that thepolicy about the timing of recognising transfers must be thesame for transfers into a level as that for transfers out of a level.The exposure draft did not provide guidance for determiningwhen transfers are deemed to have occurred or propose torequire an entity to disclose its policy for determining whentransfers between levels are recognised.

(i) IFRS 13 requires a narrative discussion of the sensitivity of a fairvalue measurement categorised within Level 3 of the fair valuehierarchy to changes in significant unobservable inputs and anyinterrelationships between those inputs that might magnify ormitigate the effect on the measurement. It also requires aquantitative sensitivity analysis for financial instrumentscategorised within Level 3 of the fair value hierarchy(that disclosure was relocated from IFRS 7). The exposure draft



proposed a quantitative sensitivity analysis for assets andliabilities categorised within Level 3 of the fair value hierarchy.The IASB re-exposed that proposal, including a requirement totake into account the interrelationships between unobservableinputs in the analysis (referred to as a measurement uncertaintyanalysis disclosure). Respondents were concerned aboutwhether the proposal would be operational. The boards willcontinue to assess whether a quantitative measurementuncertainty analysis disclosure would be practical after the IFRSis issued, with the aim of reaching a conclusion about whetherto require such a disclosure at a later date.

(j) IFRS 13 requires an entity to disclose information about itsvaluation processes (eg valuation policies and procedures) forfair value measurements categorised within Level 3 of the fairvalue hierarchy. The disclosure is similar to the description ofvaluation processes in the IASB’s Fair Value Expert AdvisoryPanel’s October 2008 report.

(k) If the highest and best use of a non-financial asset differs fromits current use, IFRS 13 requires an entity to disclose that factand why the asset is being used in a manner that differs from itshighest and best use. The exposure draft proposed requiring anentity to disclose the value of the asset assuming its current use,the amount by which the fair value of the asset differs from itsfair value in its current use (ie the incremental value of the assetgroup) and the reasons the asset is being used in a manner thatdiffers from its highest and best use.



AppendixAmendments to the Basis for Conclusions on other IFRSs

This appendix contains amendments to the Basis for Conclusions on other IFRSs that arenecessary in order to ensure consistency with IFRS 13 and the related amendments to otherIFRSs. Amended paragraphs are shown with new text underlined and deleted text struckthrough.

IFRS 1 First-time Adoption of International Financial Reporting Standards

BCA1 In paragraph BC37(a) the first reference to ‘fair value’ is footnoted asfollows:

* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains the requirements for measuring fair value.


BCA2 In paragraph BC197 ‘the definition of fair value’ is footnoted as follows:


BCA3 The heading above paragraph BC246 is footnoted as follows:

* IFRS 13, issued in May 2011, defines fair value.

BCA4 Paragraph BC246 is footnoted as follows:

* IFRS 13, issued in May 2011, is the result of the IASB’s and theFASB’s joint project on fair value measurement. As a result, thedefinition of fair value in IFRSs is identical to the definition inUS GAAP (Topic 820 Fair Value Measurement in the FASB AccountingStandards Codification® codified SFAS 157).


* IFRS 13, issued in May 2011, describes the concept of highest andbest use and provides examples of its application in a businesscombination.



BCA6 In paragraph BC306 ‘the definitions of fair value’ is footnoted asfollows:

* IFRS 13, issued in May 2011, defines fair value and describes theeffect that transaction costs have on a fair value measurement.


* The combination of IFRS 3 and IFRS 13, issued in May 2011,provides guidance for measuring the fair value of an acquirer’sinterest in the acquiree (including mutual entities).

BCA8 In paragraph BC422 the second sentence is footnoted as follows:

* IFRS 13, issued in May 2011, requires disclosures about fair valuemeasurements after initial recognition. Although thedisclosures required by IFRS 13 are not required for IFRS 3, thewording has been aligned.


BCA9 In paragraph BC6(c) ‘the definition of fair value’ is footnoted as follows:


BCA10 The footnote to paragraph BC7 is amended as follows:

* The Board completed the second phase of its project on businesscombinations in 2008 by issuing a revised IFRS 3 BusinessCombinations and an amended version of IAS 27 Consolidated andSeparate Financial Statements. IFRS 13, issued in May 2011, definesfair value and contains the requirements for measuring fairvalue.

BCA11 In paragraph BC153 ‘how fair value should be defined and determined’is footnoted as follows:

* IFRS 13, issued in May 2011, defines fair value and contains therequirements for measuring fair value.

BCA12 Paragraph BC185(f) is footnoted as follows:

* IFRS 13, issued in May 2011, states that the fair value of a liabilityreflects the effect of non-performance risk, which includes, butmay not be limited to, an entity’s own credit risk.



BCA13 In paragraph BC225(a) ‘how to determine fair value’ is footnoted asfollows:



BCA14 In paragraph BC13 the footnote to ‘IAS 41 Agriculture’ is amended asfollows:

* In Improvements to IFRSs issued in May 2008 the Board amendedIAS 41: the term ‘estimated point-of-sale costs’ was replaced by‘costs to sell’. IFRS 13 Fair Value Measurement, issued in May 2011,defines fair value and contains the requirements for measuringfair value.

BCA15 Paragraph BC80(b) is footnoted as follows:


IFRS 7 Financial Instruments: Disclosures


* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains requirements for measuring fair value andfor disclosing information about fair value measurements. As aconsequence paragraphs 27–27B of IFRS 7 have been deleted.

BCA17 In paragraph BC37 ‘unquoted equity instruments’ is footnoted asfollows:

* IFRS 13, issued in May 2011, defines a Level 1 input as a quotedprice in an active market for an identical asset or liability.Level 2 inputs include quoted prices for identical assets orliabilities in markets that are not active. As a result IAS 39 andIFRS 9 refer to such equity instruments as ‘an equity instrumentthat does not have a quoted price in an active market for anidentical instrument (ie a Level 1 input)’.



BCA18 In paragraph BC37 ‘fair value cannot be measured reliably’ is footnotedas follows:

* IFRS 9, issued in November 2009, amended the measurementrequirements for investments in equity instruments.

BCA19 The first sentence of paragraph BC38 is footnoted as follows:

* IFRS 13, issued in May 2011, resulted in paragraph 27B(e) of IFRS 7being deleted.

BCA20 Paragraph BC39A is footnoted as follows:

* IFRS 13, issued in May 2011, contains a three-level fair valuehierarchy for the inputs used in the valuation techniques used tomeasure fair value and for the related disclosures.

BCA21 Paragraph BC39B is footnoted as follows:

* IFRS 13, issued in May 2011, contains a three-level fair valuehierarchy for the inputs used in the valuation techniques used tomeasure fair value and for the related disclosures. Thathierarchy is identical to the hierarchy in Topic 820 Fair ValueMeasurement in the FASB Accounting Standards Codification®, whichcodified SFAS 157.

BCA22 In paragraph BC39C ‘IAS 39’ is footnoted as follows:

* IFRS 13, issued in May 2011, contains a three-level fair valuehierarchy for the inputs used in the valuation techniques used tomeasure fair value and for the related disclosures.

BCA23 Paragraph BC39D is footnoted as follows:

* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a result paragraphs AG71–AG73 andparagraph AG76A of IAS 39 have been deleted. In addition, therequirements in paragraph AG76A have been relocated toparagraph AG76(b).

BCA24 In paragraph BC39F the first sentence is footnoted as follows:

* IFRS 13, issued in May 2011, requires disclosures about fair valuemeasurements. As a consequence paragraphs 27–27B of IFRS 7have been deleted.

BCA25 Paragraph BC39G is footnoted as follows:

* IFRS 13, issued in May 2011, resulted in paragraph 27 of IFRS 7being deleted.




BCA26 In paragraph BC17 ‘the fair value hierarchy’ is footnoted as follows:

* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains the requirements for measuring fair valueand for disclosing information about fair value measurements.IFRS 13 contains a three-level fair value hierarchy for the inputsused in the valuation techniques used to measure fair value andfor the related disclosures. As a consequence paragraph 27A ofIFRS 7 has been deleted.

BCA27 In paragraph BC18 ‘IFRS 7’ is footnoted as follows:

* IFRS 13, issued in May 2011, requires disclosures about fair valuemeasurements. As a consequence paragraph 27B(c) and (d) ofIFRS 7 has been deleted.

BCA28 In the heading above paragraph BC75 and in paragraph BC79(b)‘unquoted equity instruments’ is footnoted as follows:

* IFRS 13, issued in May 2011, defines a Level 1 input as a quotedprice in an active market for an identical asset or liability.Level 2 inputs include quoted prices for identical assets orliabilities in markets that are not active. As a result IFRS 9 refersto such equity instruments as ‘an equity instrument that doesnot have a quoted price in an active market for an identicalinstrument (ie a Level 1 input)’.

BCA29 In paragraph BC101 ‘unquoted equity instrument’ is footnoted asfollows:

* IFRS 13, issued in May 2011, defines a Level 1 input as a quotedprice in an active market for an identical asset or liability.Level 2 inputs include quoted prices for identical assets orliabilities in markets that are not active. As a result IFRS 9refers to such equity instruments as ‘an equity instrument thatdoes not have a quoted price in an active market for anidentical instrument (ie a Level 1 input)’.

BCA30 In the appendix of amendments to the Basis for Conclusions on otherIFRSs, in paragraph BCA25 the amendment to paragraph BC29 of theBasis for Conclusions accompanying IFRIC 17 Distributions of Non-cashAssets to Owners is amended as follows:

* IFRS 9 Financial Instruments, issued in November 2009, amendedparagraphs AG80 and AG81 of IAS 39 so that they apply only to



derivatives on unquoted equity instruments. IFRS 13 Fair ValueMeasurement, issued in May 2011, defines fair value and containsrequirements for measuring fair value. IFRS 13 defines a Level 1input as a quoted price in an active market for an identical asset orliability. Level 2 inputs include quoted prices for identical assets orliabilities in markets that are not active. As a result IAS 39 refers tosuch equity instruments as ‘an equity instrument that does nothave a quoted price in an active market for an identical instrument(ie a Level 1 input)’.


BCA31 In paragraph BC4.10 ‘the fair value hierarchy’ is footnoted as follows:

* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains requirements for measuring fair value andfor disclosing information about fair value measurements.IFRS 13 contains a three-level fair value hierarchy for the inputsused in valuation techniques to measure fair value and for therelated disclosures. As a consequence paragraph 27A of IFRS 7has been deleted.

BCA32 In paragraph BC4.11 ‘IFRS 7’ is footnoted as follows:

* IFRS 13, issued in May 2011, requires disclosures about fair valuemeasurements. As a consequence paragraph 27B(c) and (d) ofIFRS 7 has been deleted.

BCA33 In paragraph BC4.53 ‘unquoted equity instruments’ is footnoted asfollows:


BCA34 The heading above paragraph BCZ5.1 is footnoted as follows:

* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a consequence paragraphs 5.4.1–5.4.3and B5.4.1–B5.4.13 of IFRS 9 have been deleted.



BCA35 In paragraph BCZ5.4 ‘most advantageous active market’ is footnoted asfollows:

* IFRS 13, issued in May 2011, states that a fair value measurementassumes that the transaction to sell an asset or to transfer aliability takes place in the principal market, or in the absence ofa principal market, the most advantageous market for the assetor liability.

BCA36 In paragraph BCZ5.5 the first sentence is footnoted as follows:

* IFRS 13, issued in May 2011, states that fair value is measuredusing the price within the bid-ask spread that is mostrepresentative of fair value in the circumstances.

BCA37 Paragraph BCZ5.6 is footnoted as follows:

* IFRS 13, issued in May 2011, permits an exception to the fairvalue measurement requirements when an entity manages itsfinancial assets and financial liabilities on the basis of theentity’s net exposure to market risks or the credit risk of aparticular counterparty, allowing the entity to measure the fairvalue of its financial instruments on the basis of the entity’s netexposure to either of those risks.

BCA38 In paragraph BCZ5.9 ‘fair value measurement hierarchy’ is footnotedas follows:

* IFRS 13, issued in May 2011, contains a three-level fair valuehierarchy for the inputs used in the valuation techniques used tomeasure fair value.

BCA39 In paragraph BCZ5.10 ‘the best evidence of fair value’ is footnoted asfollows:

* IFRS 13, issued in May 2011, describes when a transaction pricemight not represent the fair value of an asset or a liability atinitial recognition.

BCA40 Paragraph BCZ5.10 is footnoted as follows:

* FASB Statement of Financial Accounting Standards No. 157 FairValue Measurements (SFAS 157) superseded EITF Issue No. 02-3 IssuesInvolved in Accounting for Derivative Contracts Held for Trading Purposesand Involved in Energy Trading and Risk Management Activities(Topic 820 Fair Value Measurement in the FASB Accounting StandardsCodification® codified SFAS 157). As a result, IFRSs and US GAAPhave different requirements for when an entity may recognise a



gain or loss when there is a difference between fair value and thetransaction price at initial recognition.

BCA41 The heading above paragraph BCZ5.11 is footnoted as follows:

* IFRS 13, issued in May 2011, resulted in the relocation ofparagraphs BCZ5.11 and BCZ5.12 of IFRS 9 to paragraphsBCZ102 and BCZ103 of IFRS 13. As a consequence minornecessary edits have been made to that material.

BCA42 Paragraphs BCZ5.11 and BCZ5.12 are deleted.

BCA43 In the heading above BC5.13 ‘unquoted equity instruments’ isfootnoted as follows:


BCA44 Paragraph BC5.17(a) is footnoted as follows:

* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value.

BCA45 Paragraph BC5.17(b) is footnoted as follows:


BCA46 In paragraph BC5.20 ‘unquoted equity instruments’ is footnoted asfollows:




BCA47 Paragraph BC5.34A is added as follows:

BC5.34A IFRS 13, issued in May 2011, includes requirements formeasuring the fair value of a liability issued with aninseparable third-party credit enhancement from the issuer’sperspective.

BCA48 In paragraph BC7.15 ‘unquoted equity instrument’ is footnoted asfollows:


BCA49 In the appendix of amendments to the Basis for Conclusions on otherIFRSs, in paragraph BCA7 the amended paragraph BC39D of the Basisfor Conclusions accompanying IFRS 7 Financial Instruments: Disclosures isfootnoted as follows:

* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a consequence paragraphs B5.4.3–B5.4.5of IFRS 9 have been deleted and paragraph B5.4.9 of IFRS 9 hasbeen relocated to paragraphs B5.1.2A and B5.2.2A.

BCA50 In paragraph BCA20 the amended footnote to paragraph BCZ15(d) ofthe Basis for Conclusions accompanying IAS 36 is amended as follows:

* The IASB’s project to revise IAS 32 and IAS 39 in 2003 resulted inthe relocation of the requirements on fair value measurementfrom IAS 32 to IAS 39. In November 2009 and October 2010 theIASB amended some of the requirements of IAS 39 and relocatedthem to IFRS 9 Financial Instruments. IFRS 9 applies to all itemswithin the scope of IAS 39. In 2011 the IASB’s project on fairvalue measurement resulted in the relocation of therequirements for measuring fair value to IFRS 13 Fair ValueMeasurement.

BCA51 In paragraph BCA22 the amended footnote to paragraph BC12 of theBasis for Conclusions accompanying IAS 39 is amended as follows:

* In November 2009 the Board amended the requirements ofIAS 39 relating to classification and measurement of assetswithin the scope of IAS 39 and relocated them to IFRS 9 Financial



Instruments. In October 2010 the Board amended IFRS 9 to add therequirements for classifying and measuring financial liabilitiesand derecognising financial assets and financial liabilities. Thoserequirements were relocated from IAS 39. In 2011 the Board’sproject on fair value measurement resulted in the relocation ofthe requirements for measuring fair value to IFRS 13.

BCA52 In paragraph BCA32 the footnote to ‘AG81’ in paragraph BC29 of theBasis for Conclusions accompanying IFRIC 17 is amended as follows:

* IFRS 9 Financial Instruments, issued in November 2009, amendedparagraphs AG80 and AG81 of IAS 39 so that they apply only toderivatives on unquoted equity instruments. IFRS 9, issued inOctober 2010, deleted paragraphs AG80 and AG81 of IAS 39.IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains requirements for measuring fair value. IFRS13 defines a Level 1 input as a quoted price in an active marketfor an identical asset or liability. Level 2 inputs include quotedprices for identical assets or liabilities in markets that are notactive. As a result IAS 39 and IFRS 9 refer to such equityinstruments as ‘an equity instrument that does not have aquoted price in an active market for an identical instrument(ie a Level 1 input)’.

IAS 1 Presentation of Financial Statements



IAS 19 Employee Benefits

BCA54 Paragraph BC3(i) is footnoted as follows:


BCA55 In paragraph BC69 ‘arm’s length transaction’ is footnoted as follows:

* IFRS 13, issued in May 2011, defines fair value, describes theeffect transaction costs have on a fair value measurement andaddresses the application of bid and ask prices when measuringfair value.



IAS 27 Consolidated and Separate Financial Statements

BCA56 In paragraph BC22 the first sentence is footnoted as follows:


BCA57 In paragraph BC66 the first reference to ‘fair value’ is footnoted asfollows:


BCA58 In paragraph BC66B ‘fair value less costs to sell’ is footnoted as follows:


IAS 28 Investments in Associates



IAS 31 Interests in Joint Ventures



IAS 36 Impairment of Assets

BCA61 At the end of the rubric above paragraph BC1 a paragraph is added asfollows:

In developing IFRS 13 Fair Value Measurement, issued in May 2011, theBoard changed the definition of fair value less costs to sell. As aconsequence all references to ‘fair value less costs to sell’ in IAS 36 werereplaced with ‘fair value less costs of disposal’. This Basis for Conclusionshas not been amended to ref lect that change.



BCA62 Paragraph BCZ10(b) is footnoted as follows:

* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains the requirements for measuring fair value.As a result the term ‘market value’ has been changed to ‘fairvalue’.

BCA63 In paragraph BCZ11(a) ‘fair value’ is footnoted as follows:


BCA64 In paragraph BCZ14 ‘fair value’ is footnoted as follows:

* IFRS 13, issued in May 2011, defines fair value as an exit price.

BCA65 In paragraph BCZ15 the first reference to ‘fair value’ is footnoted asfollows:

* IFRS 13, issued in May 2011, defines fair value and contains therequirements for measuring fair value. As a consequence therelevant requirements in IAS 16 and IAS 39 have been deletedfrom those Standards.

BCA66 In paragraph BCZ15(d) the footnote reference is amended as follows:

* The IASB’s project to revise IAS 32 and IAS 39 in 2003 resulted inthe relocation of the requirements on fair value measurementfrom IAS 32 to IAS 39. In 2011 the IASB’s project on fair valuemeasurement resulted in the relocation of the requirements formeasuring fair value to IFRS 13.

BCA67 In paragraph BCZ16 the first sentence is footnoted as follows:

* IFRS 13, issued in May 2011, describes valuation techniques formeasuring the fair value of an asset that is being used (andwould not be sold) by an entity, eg a current replacement costvaluation technique.

BCA68 Paragraph BCZ19 is footnoted as follows:

* IFRS 13, issued in May 2011, describes the objective of a fair valuemeasurement and the use of market participant assumptions.


* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a consequence paragraph 27 of IAS 36has been deleted.



BCA70 In paragraph BC68(b) ‘fair value less costs to sell’ is footnoted asfollows:


BCA71 In paragraph BC69 ‘the Board observed that’ is footnoted as follows:

* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a consequence paragraphs 25–27 ofIAS 36 have been deleted.

BCA72 Paragraph BCZ99 is footnoted as follows:


BCA73 After paragraph BC209A a heading and paragraphs BC209B–BC209Dare added as follows:

Changes as a result of IFRS 13 Fair Value Measurement

BC209B In developing IFRS 13, issued in May 2011, the Board wasasked by users of financial statements to minimise thedifferences between the disclosures made about impairedassets in IFRSs and in US GAAP (which requires assets to betested for impairment by comparing their carrying amountwith their fair value). The Board noted that the disclosurerequirements in IAS 36 were developed specifically to ensureconsistency in the disclosure of information about impairedassets so that the same type of information is providedwhether the recoverable amount was determined on thebasis of value in use or fair value less costs of disposal.Consequently, the Board did not think it would beappropriate to require an entity to provide information whenthe recoverable amount is determined on the basis of fairvalue less costs of disposal (ie those required in IFRS 13) thatis significantly different from what the entity would providewhen the recoverable amount is determined on the basis ofvalue in use.

BC209C Although IFRSs and US GAAP have different impairmentmodels, the Board concluded that requiring the followinginformation (in addition to what IAS 36 currently requires)about impaired assets measured at fair value less costs of



disposal would improve comparability between entitiesapplying IFRSs and those applying US GAAP as well asincrease the convergence of IFRSs and US GAAP:

(a) the fair value less costs of disposal;

(b) the level of the fair value hierarchy within which thefair value less costs of disposal is categorised in itsentirety (Level 1, 2 or 3);

(c) if applicable, changes to valuation techniques andreasons for those changes; and

(d) quantitative information about significant inputs usedwhen measuring fair value less costs of disposal (alongwith a conforming amendment to the disclosuresabout value in use).

BC209D In addition, those disclosures are consistent with thedisclosures required for non-recurring fair value measurementsin IFRS 13 and in US GAAP.

IAS 38 Intangible Assets

BCA74 In paragraph BC17 the second sentence is footnoted as follows:


BCA75 In paragraph BC19A ‘the asset’s fair value’ is footnoted as follows:


BCA76 In paragraph BC19D ‘fair value’ is footnoted as follows:

* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a consequence paragraphs 40 and 41 ofIAS 38 have been deleted.

BCA77 In paragraph BCZ38(c) the first reference to ‘an active market’ isfootnoted as follows:

* IFRS 13, issued in May 2011, defines an active market.

BCA78 In paragraph BCZ44(b) ‘exists for the asset’ is footnoted as follows:




BCA79 In paragraph BC50(b) ‘an active market’ is footnoted as follows:




BCA81 Paragraph BC69(b) is footnoted as follows:






IAS 39 Financial Instruments: Recognition and Measurement(as amended at October 2009)

BCA84 In paragraph BC89 the first reference to ‘the fair value of a financialliability’ is footnoted as follows:



* IFRS 13, issued in May 2011, describes the objective of a fair valuemeasurement of a liability.

BCA86 Paragraph BC92A is added as follows:

BC92A IFRS 13, issued in May 2011, includes requirements formeasuring the fair value of a liability issued with aninseparable third-party credit enhancement from the issuer’sperspective.


* IFRS 13, issued in May 2011, resulted in the relocation ofparagraphs BC93 and BC94 of IAS 39 to paragraphs BCZ102 andBCZ103 of IFRS 13. As a consequence minor necessary edits havebeen made to that material.

BCA88 Paragraphs BC93 and BC94 are deleted.






* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a consequence in Appendix A of IAS 39paragraphs AG69–AG75, AG76A–AG79 and AG82 have beendeleted and paragraphs AG76, AG80 and AG81 have beenamended.

BCA91 In paragraph BC97 ‘fair value as defined’ is footnoted as follows:


BCA92 In paragraph BC98 ‘the most advantageous active market’ is footnotedas follows:

* IFRS 13, issued in May 2011, states that a fair value measurementassumes that the transaction to sell an asset or to transfer aliability takes place in the principal market, or in the absence ofa principal market, the most advantageous market for the assetor liability.


* IFRS 13, issued in May 2011, states that fair value is measuredusing the price within the bid-ask spread that is mostrepresentative of fair value in the circumstances.


* IFRS 13, issued in May 2011, permits an exception to the fairvalue measurement requirements when an entity manages itsfinancial assets and financial liabilities on the basis of theentity’s net exposure to market risks or the credit risk of aparticular counterparty, allowing the entity to measure the fairvalue of its financial instruments on the basis of the entity’s netexposure to either of those risks.

BCA95 In paragraph BC103 ‘the fair value measurement hierarchy’ isfootnoted as follows:

* IFRS 13, issued in May 2011, contains a three-level fair valuehierarchy for the inputs used in the valuation techniques used tomeasure fair value.



BCA96 In paragraph BC104 ‘the best evidence of fair value’ is footnoted asfollows:

* IFRS 13, issued in May 2011, describes when a transaction pricemight not represent the fair value of an asset or a liability atinitial recognition.


* FASB Statement of Financial Accounting Standards No. 157 FairValue Measurements (SFAS 157) superseded EITF Issue No. 02-3 IssuesInvolved in Accounting for Derivative Contracts Held for Trading Purposesand Involved in Energy Trading and Risk Management Activities(Topic 820 Fair Value Measurement in the FASB Accounting StandardsCodification® codified SFAS 157). As a result, IFRSs and US GAAPhave different requirements for when an entity may recognise again or loss when there is a difference between fair value and thetransaction price at initial recognition.

BCA98 In paragraph BC105 ‘unquoted equity instruments’ is footnoted asfollows:

* IFRS 13, issued in May 2011, defines a Level 1 input as a quotedprice in an active market for an identical asset or liability.Level 2 inputs include quoted prices for identical assets orliabilities in markets that are not active. As a result IAS 39refers to such equity instruments as ‘an equity instrument thatdoes not have a quoted price in an active market for anidentical instrument (ie a Level 1 input)’.

IAS 40 Investment Property

BCA99 Paragraph B36 is footnoted as follows:


BCA100 The heading above paragraph B52 is footnoted as follows:



* The requirements for measuring fair value in IFRS 13, issued inMay 2011, differ in some respects from the guidance for



measuring market value in accordance with IVS 1. IFRS 13deleted paragraphs 36, 37 and 42–44 of IAS 40.


* IFRS 13, issued in May 2011, defines fair value and contains therequirements for measuring fair value. As a consequenceparagraphs 38, 45–47, 49 and 51 of IAS 40 have been deleted.


* IFRS 13, issued in May 2011, discusses the measurement of fairvalue when the volume or level of activity for an asset hassignificantly decreased.

BCA104 In paragraph B67(a) ‘the guidance on determining fair value wasexpanded, to clarify the following’ and in paragraph B67(f) ‘newdisclosure requirements include’ are footnoted as follows:

* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value and for disclosing information about fairvalue measurements. As a consequence paragraphs 37, 38, 45–47,49, 51 and 75(d) of IAS 40 have been deleted.

IAS 41 Agriculture

BCA105 In paragraph BC5 the first reference to ‘fair value’ is footnoted asfollows:





* IFRS 13, issued in May 2011, contains the requirements formeasuring fair value. As a consequence, paragraph 21 of IAS 41has been deleted.


* IFRS 13, issued in May 2011, describes how transport costs arefactored into a fair value measurement.



BCA109 The heading above paragraph B27 is footnoted as follows:

* IFRS 13, issued in May 2011, defines an active market andcontains a three-level fair value hierarchy for the inputs used inthe valuation techniques used to measure fair value.



IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

BCA111 In paragraph BC16 ‘measured on a present value basis’ is footnoted asfollows:

* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains the requirements for measuring fair value.IFRS 13 does not specify a particular valuation technique formeasuring the fair value of plan assets.

IFRIC 17 Distributions of Non-cash Assets to Owners

BCA112 In paragraph BC28(a) ‘a quoted market price in an active market’ isfootnoted as follows:

* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains the requirements for measuring fair value.IFRS 13 defines a Level 1 input as a quoted price in an activemarket for an identical asset or liability. Level 2 inputs includequoted prices for identical assets or liabilities in markets thatare not active. As a result IAS 39 refers to unquoted equityinstruments as ‘an equity instrument that does not have aquoted price in an active market for an identical instrument(ie a Level 1 input)’.

BCA113 In paragraph BC29 ‘a quoted market price in an active market’ isfootnoted as follows:

* IFRS 13, issued in May 2011, defines a Level 1 input as a quotedprice in an active market for an identical asset or liability.Level 2 inputs include quoted prices for identical assets orliabilities in markets that are not active. As a result IAS 39refers to unquoted equity instruments as ‘an equity instrument



that does not have a quoted price in an active market for anidentical instrument (ie a Level 1 input)’.

SIC-31 Revenue—Barter Transactions Involving Advertising Services

BCA114 In paragraph 8 the first sentence is footnoted as follows:


SIC-32 Intangible Assets—Web Site Costs

BCA115 In paragraph 18 the first reference to ‘an active market’ is footnoted asfollows:

* IFRS 13 Fair Value Measurement, issued in May 2011, defines fairvalue and contains the requirements for measuring fair value.IFRS 13 defines an active market.


May 2011

Illustrative Examples International Financial Reporting Standard®


Illustrative Examples

These illustrative examples accompany IFRS 13 Fair Value Measurement(see separate booklet) and are published by the International AccountingStandards Board (IASB), 30 Cannon Street, London EC4M 6XH, United Kingdom.

Tel: +44 (0)20 7246 6410Fax: +44 (0)20 7246 6411Email: [email protected]: www.ifrs.org






International Financial Reporting Standards (including InternationalAccounting Standards and SIC and IFRIC Interpretations), Exposure Drafts, andother IASB publications are copyright of the IFRS Foundation. The approved textof International Financial Reporting Standards and other IASB publications isthat published by the IASB in the English language. Copies may be obtainedfrom the IFRS Foundation. Please address publications and copyright matters to:






CONTENTSparagraphs

IFRS 13 FAIR VALUE MEASUREMENTILLUSTRATIVE EXAMPLES

HIGHEST AND BEST USE AND VALUATION PREMISE IE2–IE9

Example 1—Asset group IE3–IE6

Example 2—Land IE7–IE8

Example 3—Research and development project IE9

USE OF MULTIPLE VALUATION TECHNIQUES IE10–IE17

Example 4—Machine held and used IE11–IE14

Example 5—Software asset IE15–IE17

PRINCIPAL (OR MOST ADVANTAGEOUS) MARKET IE18–IE22

Example 6—Level 1 principal (or most advantageous) market IE19–IE22

TRANSACTION PRICES AND FAIR VALUE AT INITIAL RECOGNITION IE23–IE26

Example 7—Interest rate swap at initial recognition IE24–IE26

RESTRICTED ASSETS IE27–IE29

Example 8—Restriction on the sale of an equity instrument IE28

Example 9—Restrictions on the use of an asset IE29

MEASURING LIABILITIES IE30–IE47

Example 10—Structured note IE34

Example 11—Decommissioning liability IE35–IE39

Example 12—Debt obligation: quoted price IE40–IE42

Example 13—Debt obligation: present value technique IE43–IE47

MEASURING FAIR VALUE WHEN THE VOLUME OR LEVEL OF ACTIVITY FOR AN ASSET OR A LIABILITY HAS SIGNIFICANTLY DECREASED IE48–IE58

Example 14—Estimating a market rate of return when the volume or level of activity for an asset has significantly decreased IE49–IE58

FAIR VALUE DISCLOSURES IE59–IE66

Example 15—Assets measured at fair value IE60

Example 16—Reconciliation of fair value measurements categorised within Level 3 of the fair value hierarchy IE61–IE62

Example 17—Valuation techniques and inputs IE63–IE64

Example 18—Valuation processes IE65

IFRS 13 ILLUSTRATIVE EXAMPLES MAY 2011


Example 19—Information about sensitivity to changes in significant unobservable inputs IE66

APPENDIXAmendments to the 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 butare not intended to provide interpretative guidance.

IE1 These examples portray hypothetical situations illustrating thejudgements that might apply when an entity measures assets andliabilities at fair value in different valuation situations. Although someaspects of the examples may be present in actual fact patterns, allrelevant facts and circumstances of a particular fact pattern would needto 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 andvaluation premise concepts for non-financial assets.

Example 1—Asset group

IE3 An entity acquires assets and assumes liabilities in a businesscombination. One of the groups of assets acquired comprises Assets A, Band C. Asset C is billing software integral to the business developed by theacquired entity for its own use in conjunction with Assets A and B (ie therelated assets). The entity measures the fair value of each of the assetsindividually, consistently with the specified unit of account for the assets.The entity determines that the highest and best use of the assets is theircurrent use and that each asset would provide maximum value to marketparticipants principally through its use in combination with other assetsor with other assets and liabilities (ie its complementary assets and theassociated liabilities). There is no evidence to suggest that the current useof the assets is not their highest and best use.

IE4 In this situation, the entity would sell the assets in the market in whichit initially acquired the assets (ie the entry and exit markets from theperspective of the entity are the same). Market participant buyers withwhom the entity would enter into a transaction in that market havecharacteristics that are generally representative of both strategic buyers(such as competitors) and financial buyers (such as private equity orventure capital firms that do not have complementary investments) andinclude those buyers that initially bid for the assets. Although market



participant buyers might be broadly classified as strategic or financialbuyers, in many cases there will be differences among the marketparticipant 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 theindividual assets relate principally to the use of the assets by thosemarket participants within different asset groups:

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

(b) Financial buyer asset group. The entity determines that financialbuyers do not have related or substitute assets that would enhancethe 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 remainingeconomic life. The indicated fair values of Assets A, B and C withinthe financial buyer asset group are CU300, CU200 and CU100,respectively. The indicated fair value of the assets as a groupwithin the financial buyer asset group is CU600.

IE6 The fair values of Assets A, B and C would be determined on the basis ofthe use of the assets as a group within the strategic buyer group (CU360,CU260 and CU30). Although the use of the assets within the strategicbuyer group does not maximise the fair value of each of the assetsindividually, it maximises the fair value of the assets as a group (CU650).

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



Example 2—Land

IE7 An entity acquires land in a business combination. The land is currentlydeveloped for industrial use as a site for a factory. The current use of landis presumed to be its highest and best use unless market or other factorssuggest a different use. Nearby sites have recently been developed forresidential use as sites for high-rise apartment buildings. On the basis ofthat development and recent zoning and other changes to facilitate thatdevelopment, the entity determines that the land currently used as a sitefor a factory could be developed as a site for residential use (ie forhigh-rise apartment buildings) because market participants would takeinto account the potential to develop the site for residential use whenpricing the land.

IE8 The highest and best use of the land would be determined by comparingboth 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, suchas the factory, or with other assets and liabilities).

(b) the value of the land as a vacant site for residential use, taking intoaccount the costs of demolishing the factory and other costs(including the uncertainty about whether the entity would be ableto convert the asset to the alternative use) necessary to convert theland to a vacant site (ie the land is to be used by marketparticipants on a stand-alone basis).

The highest and best use of the land would be determined on the basis ofthe higher of those values. In situations involving real estate appraisal,the determination of highest and best use might take into account factorsrelating to the factory operations, including its assets and liabilities.

Example 3—Research and development project

IE9 An entity acquires a research and development (R&D) project in abusiness combination. The entity does not intend to complete theproject. If completed, the project would compete with one of its ownprojects (to provide the next generation of the entity’s commercialisedtechnology). Instead, the entity intends to hold (ie lock up) the project toprevent its competitors from obtaining access to the technology. In doingthis the project is expected to provide defensive value, principally by



improving the prospects for the entity’s own competing technology.To measure the fair value of the project at initial recognition, the highestand best use of the project would be determined on the basis of its use bymarket participants. For example:

(a) The highest and best use of the R&D project would be to continuedevelopment if market participants would continue to develop theproject and that use would maximise the value of the group ofassets or of assets and liabilities in which the project would be used(ie the asset would be used in combination with other assets orwith other assets and liabilities). That might be the case if marketparticipants do not have similar technology, either in developmentor commercialised. The fair value of the project would bemeasured on the basis of the price that would be received in acurrent transaction to sell the project, assuming that the R&Dwould be used with its complementary assets and the associatedliabilities and that those assets and liabilities would be available tomarket participants.

(b) The highest and best use of the R&D project would be to ceasedevelopment if, for competitive reasons, market participants wouldlock up the project and that use would maximise the value of thegroup of assets or of assets and liabilities in which the projectwould be used. That might be the case if market participants havetechnology in a more advanced stage of development that wouldcompete with the project if completed and the project would beexpected to improve the prospects for their own competingtechnology if locked up. The fair value of the project would bemeasured on the basis of the price that would be received in acurrent transaction to sell the project, assuming that the R&Dwould be used (ie locked up) with its complementary assets and theassociated liabilities and that those assets and liabilities would beavailable to market participants.

(c) The highest and best use of the R&D project would be to ceasedevelopment if market participants would discontinue itsdevelopment. That might be the case if the project is not expectedto provide a market rate of return if completed and would nototherwise provide defensive value if locked up. The fair value ofthe project would be measured on the basis of the price that wouldbe received in a current transaction to sell the project on its own(which might be zero).



Use of multiple valuation techniques

IE10 The IFRS notes that a single valuation technique will be appropriate insome cases. In other cases multiple valuation techniques will beappropriate. Examples 4 and 5 illustrate the use of multiple valuationtechniques.

Example 4—Machine held and used

IE11 An entity acquires a machine in a business combination. The machinewill be held and used in its operations. The machine was originallypurchased by the acquired entity from an outside vendor and, before thebusiness combination, was customised by the acquired entity for use inits operations. However, the customisation of the machine was notextensive. The acquiring entity determines that the asset would providemaximum value to market participants through its use in combinationwith other assets or with other assets and liabilities (as installed orotherwise configured for use). There is no evidence to suggest that thecurrent use of the machine is not its highest and best use. Therefore, thehighest and best use of the machine is its current use in combinationwith other assets or with other assets and liabilities.

IE12 The entity determines that sufficient data are available to apply the costapproach and, because the customisation of the machine was notextensive, the market approach. The income approach is not usedbecause the machine does not have a separately identifiable incomestream from which to develop reliable estimates of future cash flows.Furthermore, information about short-term and intermediate-term leaserates for similar used machinery that otherwise could be used to projectan income stream (ie lease payments over remaining service lives) is notavailable. The market and cost approaches are applied as follows:

(a) The market approach is applied using quoted prices for similarmachines adjusted for differences between the machine(as customised) and the similar machines. The measurementreflects the price that would be received for the machine in itscurrent condition (used) and location (installed and configured foruse). The fair value indicated by that approach ranges fromCU40,000 to CU48,000.

(b) The cost approach is applied by estimating the amount that wouldbe required currently to construct a substitute (customised)machine of comparable utility. The estimate takes into account thecondition of the machine and the environment in which it



operates, including physical wear and tear (ie physicaldeterioration), improvements in technology (ie functionalobsolescence), conditions external to the condition of the machinesuch as a decline in the market demand for similar machines(ie economic obsolescence) and installation costs. The fair valueindicated by that approach ranges from CU40,000 to CU52,000.

IE13 The entity determines that the higher end of the range indicated by themarket approach is most representative of fair value and, therefore,ascribes more weight to the results of the market approach. Thatdetermination is made on the basis of the relative subjectivity of theinputs, taking into account the degree of comparability between themachine and the similar machines. In particular:

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

(b) the range indicated by the market approach overlaps with, but isnarrower than, the range indicated by the cost approach.

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

Accordingly, the entity determines that the fair value of the machine isCU48,000.

IE14 If customisation of the machine was extensive or if there were notsufficient data available to apply the market approach (eg because marketdata reflect transactions for machines used on a stand-alone basis, suchas a scrap value for specialised assets, rather than machines used incombination with other assets or with other assets and liabilities), theentity would apply the cost approach. When an asset is used incombination with other assets or with other assets and liabilities, the costapproach assumes the sale of the machine to a market participant buyerwith the complementary assets and the associated liabilities. The pricereceived for the sale of the machine (ie an exit price) would not be morethan either of the following:

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

(b) the economic benefit that a market participant buyer would derivefrom the use of the machine.



Example 5—Software asset

IE15 An entity acquires a group of assets. The asset group includes an income-producing software asset internally developed for licensing to customersand its complementary assets (including a related database with whichthe software asset is used) and the associated liabilities. To allocate thecost of the group to the individual assets acquired, the entity measuresthe fair value of the software asset. The entity determines that thesoftware asset would provide maximum value to market participantsthrough its use in combination with other assets or with other assets andliabilities (ie its complementary assets and the associated liabilities).There is no evidence to suggest that the current use of the software assetis not its highest and best use. Therefore, the highest and best use of thesoftware asset is its current use. (In this case the licensing of the softwareasset, in and of itself, does not indicate that the fair value of the assetwould be maximised through its use by market participants on astand-alone basis.)

IE16 The entity determines that, in addition to the income approach,sufficient data might be available to apply the cost approach but not themarket approach. Information about market transactions forcomparable software assets is not available. The income and costapproaches are applied as follows:

(a) The income approach is applied using a present value technique.The cash flows used in that technique reflect the income streamexpected to result from the software asset (licence fees fromcustomers) over its economic life. The fair value indicated by thatapproach is CU15 million.

(b) The cost approach is applied by estimating the amount thatcurrently would be required to construct a substitute softwareasset of comparable utility (ie taking into account functional andeconomic obsolescence). The fair value indicated by that approachis CU10 million.

IE17 Through its application of the cost approach, the entity determines thatmarket participants would not be able to construct a substitute softwareasset of comparable utility. Some characteristics of the software asset areunique, having been developed using proprietary information, andcannot be readily replicated. The entity determines that the fair value ofthe software asset is CU15 million, as indicated by the income approach.



Principal (or most advantageous) market

IE18 Example 6 illustrates the use of Level 1 inputs to measure the fair valueof an asset that trades in different active markets at different prices.

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 and can access theprice in those markets for the asset at the measurement date. In Market A,the price that would be received is CU26, transaction costs in that marketare CU3 and the costs to transport the asset to that market are CU2 (ie thenet amount that would be received is CU21). In Market B, the price thatwould be received is CU25, transaction costs in that market are CU1 andthe costs to transport the asset to that market are CU2 (ie the net amountthat would be received in Market B is CU22).

IE20 If Market A is the principal market for the asset (ie the market with thegreatest volume and level of activity for the asset), the fair value of theasset would be measured using the price that would be received in thatmarket, after taking into account transport costs (CU24).

IE21 If neither market is the principal market for the asset, the fair value of theasset would be measured using the price in the most advantageousmarket. The most advantageous market is the market that maximises theamount that would be received to sell the asset, after taking into accounttransaction costs and transport costs (ie the net amount that would bereceived in the respective markets).

IE22 Because the entity would maximise the net amount that would bereceived for the asset in Market B (CU22), the fair value of the asset wouldbe measured using the price in that market (CU25), less transport costs(CU2), resulting in a fair value measurement of CU23. Althoughtransaction costs are taken into account when determining whichmarket is the most advantageous market, the price used to measure thefair value of the asset is not adjusted for those costs (although it isadjusted for transport costs).



Transaction prices and fair value at initial recognition

IE23 The IFRS clarifies that in many cases the transaction price, ie the pricepaid (received) for a particular asset (liability), will represent the fair valueof that asset (liability) at initial recognition, but not presumptively.Example 7 illustrates when the price in a transaction involving aderivative instrument might (and might not) equal the fair value of theinstrument at initial recognition.

Example 7—Interest rate swap at initial recognition

IE24 Entity A (a retail counterparty) enters into an interest rate swap in a retailmarket with Entity B (a dealer) for no initial consideration (ie thetransaction 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 initiallyentered into the swap is the principal market for the swap. If Entity Awere to transfer its rights and obligations under the swap, it would do sowith a dealer counterparty in that retail market. In that case thetransaction price (zero) would represent the fair value of the swap toEntity A at initial recognition, ie the price that Entity A would receive tosell or pay to transfer the swap in a transaction with a dealer counterpartyin the retail market (ie an exit price). That price would not be adjustedfor any incremental (transaction) costs that would be charged by thatdealer 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 rightsand obligations under the swap, it would do so with a dealer in thatmarket. Because the market in which Entity B initially entered into theswap is different from the principal market for the swap, the transactionprice (zero) would not necessarily represent the fair value of the swap toEntity B at initial recognition. If the fair value differs from thetransaction price (zero), Entity B applies IAS 39 Financial Instruments:Recognition and Measurement or IFRS 9 Financial Instruments to determinewhether 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 thesale or use of an asset by an entity will differ depending on whether therestriction would be taken into account by market participants whenpricing the asset. Examples 8 and 9 illustrate the effect of restrictionswhen measuring the fair value of an asset.

Example 8—Restriction on the sale of an equity instrument

IE28 An entity holds an equity instrument (a financial asset) for which sale islegally or contractually restricted for a specified period. (For example,such a restriction could limit sale to qualifying investors.) The restrictionis a characteristic of the instrument and, therefore, would be transferredto market participants. In that case the fair value of the instrumentwould be measured on the basis of the quoted price for an otherwiseidentical unrestricted equity instrument of the same issuer that trades ina public market, adjusted to reflect the effect of the restriction.The adjustment would reflect the amount market participants woulddemand because of the risk relating to the inability to access a publicmarket for the instrument for the specified period. The adjustment willvary 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 theremight be a large number of qualifying investors); and

(c) qualitative and quantitative factors specific to both the instrumentand the issuer.

Example 9—Restrictions on the use of an asset

IE29 A donor contributes land in an otherwise developed residential area to anot-for-profit neighbourhood association. The land is currently used as aplayground. The donor specifies that the land must continue to be usedby the association as a playground in perpetuity. Upon review of relevantdocumentation (eg legal and other), the association determines that thefiduciary responsibility to meet the donor’s restriction would not betransferred to market participants if the association sold the asset, ie thedonor 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 landis subject to an easement (ie a legal right that enables a utility to runpower lines across the land). Following is an analysis of the effect on thefair value measurement of the land arising from the restriction and theeasement:

(a) Donor restriction on use of land. Because in this situation the donorrestriction on the use of the land is specific to the association, therestriction would not be transferred to market participants.Therefore, the fair value of the land would be the higher of its fairvalue used as a playground (ie the fair value of the asset would bemaximised through its use by market participants in combinationwith other assets or with other assets and liabilities) and its fairvalue as a site for residential development (ie the fair value of theasset would be maximised through its use by market participantson a stand-alone basis), regardless of the restriction on the use ofthe land by the association.

(b) Easement for utility lines. Because the easement for utility lines isspecific to (ie a characteristic of) the land, it would be transferred tomarket participants with the land. Therefore, the fair valuemeasurement of the land would take into account the effect of theeasement, regardless of whether the highest and best use is as aplayground or as a site for residential development.

Measuring liabilities

IE30 A fair value measurement of a liability assumes that the liability, whetherit is a financial liability or a non-financial liability, is transferred to amarket participant at the measurement date (ie the liability wouldremain outstanding and the market participant transferee would berequired to fulfil the obligation; it would not be settled with thecounterparty or otherwise extinguished on the measurement date).

IE31 The fair value of a liability reflects the effect of non-performance risk.Non-performance risk relating to a liability includes, but may not belimited to, the entity’s own credit risk. An entity takes into account theeffect of its credit risk (credit standing) on the fair value of the liability inall periods in which the liability is measured at fair value because thosethat hold the entity’s obligations as assets would take into account theeffect of the entity’s credit standing when estimating the prices theywould be willing to pay.



IE32 For example, assume that Entity X and Entity Y each enter into acontractual 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 Yhas a BBB credit rating and can borrow at 12 per cent. Entity X will receiveabout CU374 in exchange for its promise (the present value of CU500 infive years at 6 per cent). Entity Y will receive about CU284 in exchange forits 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) incorporatesthat entity’s credit standing.

IE33 Examples 10–13 illustrate the measurement of liabilities and the effect ofnon-performance risk (including an entity’s own credit risk) on a fairvalue 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 principalamount to be paid by Entity A at maturity is linked to an equity index.No credit enhancements are issued in conjunction with or otherwiserelated to the contract (ie no collateral is posted and there is no third-partyguarantee). Entity A designated this note as at fair value through profit orloss. The fair value of the note (ie the obligation of Entity A) during 20X7 ismeasured using an expected present value technique. Changes in fairvalue are as follows:

(a) Fair value at 1 January 20X7. The expected cash flows used in theexpected present value technique are discounted at the risk-freerate using the government bond curve at 1 January 20X7, plus thecurrent market observable AA corporate bond spread togovernment bonds, if non-performance risk is not already reflectedin the cash flows, adjusted (either up or down) for Entity A’sspecific credit risk (ie resulting in a credit-adjusted risk-free rate).Therefore, the fair value of Entity A’s obligation at initialrecognition takes into account non-performance risk, includingthat entity’s credit risk, which presumably is reflected in theproceeds.

(b) Fair value at 31 March 20X7. During March 20X7 the credit spread forAA corporate bonds widens, with no changes to the specific creditrisk of Entity A. The expected cash flows used in the expectedpresent value technique are discounted at the risk-free rate usingthe government bond curve at 31 March 20X7, plus the currentmarket observable AA corporate bond spread to government bonds,



if non-performance risk is not already reflected in the cash flows,adjusted for Entity A’s specific credit risk (ie resulting in acredit-adjusted risk-free rate). Entity A’s specific credit risk isunchanged from initial recognition. Therefore, the fair value ofEntity A’s obligation changes as a result of changes in creditspreads generally. Changes in credit spreads reflect current marketparticipant assumptions about changes in non-performance riskgenerally, changes in liquidity risk and the compensation requiredfor assuming those risks.

(c) Fair value at 30 June 20X7. As of 30 June 20X7 there have been nochanges to the AA corporate bond spreads. However, on the basis ofstructured note issues corroborated with other qualitativeinformation, Entity A determines that its own specificcreditworthiness has strengthened within the AA credit spread.The expected cash flows used in the expected present valuetechnique are discounted at the risk-free rate using the governmentbond yield curve at 30 June 20X7, plus the current marketobservable AA corporate bond spread to government bonds(unchanged from 31 March 20X7), if non-performance risk is notalready reflected in the cash flows, adjusted for Entity A’s specificcredit risk (ie resulting in a credit-adjusted risk-free rate).Therefore, the fair value of the obligation of Entity A changes as aresult of the change in its own specific credit risk within theAA corporate bond spread.

Example 11—Decommissioning liability

IE35 On 1 January 20X1 Entity A assumes a decommissioning liability in abusiness combination. The entity is legally required to dismantle andremove an offshore oil platform at the end of its useful life, which isestimated to be 10 years.

IE36 On the basis of paragraphs B23–B30 of the IFRS, Entity A uses the expectedpresent value technique to measure the fair value of thedecommissioning liability.

IE37 If Entity A was contractually allowed to transfer its decommissioningliability to a market participant, Entity A concludes that a marketparticipant would use all the following inputs, probability-weighted asappropriate, 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 forundertaking the activity and for assuming the risk associated withthe obligation to dismantle and remove the asset. Suchcompensation includes both of the following:

(i) profit on labour and overhead costs; and

(ii) the risk that the actual cash outflows might differ from thoseexpected, 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 notfulfil the obligation, including Entity A’s own credit risk.

IE38 The significant assumptions used by Entity A to measure fair value are asfollows:

(a) Labour costs are developed on the basis of current marketplacewages, adjusted for expectations of future wage increases, requiredto hire contractors to dismantle and remove offshore oil platforms.Entity A assigns probability assessments to a range of cash flowestimates as follows:

The probability assessments are developed on the basis of Entity A’sexperience with fulfilling obligations of this type and itsknowledge of the market.

(b) Entity A estimates allocated overhead and equipment operatingcosts using the rate it applies to labour costs (80 per cent ofexpected labour costs). This is consistent with the cost structure ofmarket participants.

Cash flow estimate (CU)

Probability assessment

Expected cashflows (CU)

100,000 25% 25,000

125,000 50% 62,500

175,000 25% 43,750

CU131,250



(c) Entity A estimates the compensation that a market participantwould require for undertaking the activity and for assuming therisk associated with the obligation to dismantle and remove theasset as follows:

(i) A third-party contractor typically adds a mark-up on labourand allocated internal costs to provide a profit margin on thejob. The profit margin used (20 per cent) represents Entity A’sunderstanding of the operating profit that contractors in theindustry generally earn to dismantle and remove offshore oilplatforms. Entity A concludes that this rate is consistent withthe rate that a market participant would require ascompensation for undertaking the activity.

(ii) A contractor would typically require compensation for therisk that the actual cash outflows might differ from thoseexpected because of the uncertainty inherent in locking intoday’s price for a project that will not occur for 10 years.Entity A estimates the amount of that premium to be 5 percent of the expected cash flows, including the effect ofinflation.

(d) Entity A assumes a rate of inflation of 4 per cent over the 10-yearperiod on the basis of available market data.

(e) The risk-free rate of interest for a 10-year maturity on 1 January 20X1is 5 per cent. Entity A adjusts that rate by 3.5 per cent to reflect itsrisk of non-performance (ie the risk that it will not fulfil theobligation), including its credit risk. Therefore, the discount rateused 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 marketparticipants. In addition, Entity A does not adjust its fair valuemeasurement for the existence of a restriction preventing it fromtransferring the liability. As illustrated in the following table, Entity Ameasures the fair value of its decommissioning liability as CU194,879.

Example 12—Debt obligation: quoted price

IE40 On 1 January 20X1 Entity B issues at par a CU2 million BBB-ratedexchange-traded five-year fixed rate debt instrument with an annual10 per cent coupon. Entity B designated this financial liability as at fairvalue through profit or loss.

IE41 On 31 December 20X1 the instrument is trading as an asset in an activemarket at CU929 per CU1,000 of par value after payment of accruedinterest. Entity B uses the quoted price of the asset in an active market asits 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 marketrepresents the fair value of the liability, Entity B evaluates whether thequoted price of the asset includes the effect of factors not applicable tothe fair value measurement of a liability, for example, whether thequoted price of the asset includes the effect of a third-party creditenhancement if that credit enhancement would be separately accountedfor from the perspective of the issuer. Entity B determines that no

Expectedcash flows

(CU)

1 January20X1

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



adjustments are required to the quoted price of the asset. Accordingly,Entity B concludes that the fair value of its debt instrument at31 December 20X1 is CU1,858,000. Entity B categorises and discloses thefair value measurement of its debt instrument within Level 1 of the fairvalue hierarchy.

Example 13—Debt obligation: present value technique

IE43 On 1 January 20X1 Entity C issues at par in a private placement aCU2 million BBB-rated five-year fixed rate debt instrument with anannual 10 per cent coupon. Entity C designated this financial liability asat fair value through profit or loss.

IE44 At 31 December 20X1 Entity C still carries a BBB credit rating. Marketconditions, including available interest rates, credit spreads for aBBB-quality credit rating and liquidity, remain unchanged from the datethe debt instrument was issued. However, Entity C’s credit spread hasdeteriorated by 50 basis points because of a change in its risk ofnon-performance. After taking into account all market conditions,Entity C concludes that if it was to issue the instrument at themeasurement date, the instrument would bear a rate of interest of10.5 per cent or Entity C would receive less than par in proceeds from theissue of the instrument.

IE45 For the purpose of this example, the fair value of Entity C’s liability iscalculated using a present value technique. Entity C concludes that amarket participant would use all the following inputs (consistently withparagraphs B12–B30 of the IFRS) when estimating the price the marketparticipant 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 achange of 50 basis points in the risk of non-performance from thedate of issue).

IE46 On the basis of its present value technique, Entity C concludes that thefair value of its liability at 31 December 20X1 is CU1,968,641.



IE47 Entity C does not include any additional input into its present valuetechnique for risk or profit that a market participant might require forcompensation for assuming the liability. Because Entity C’s obligation isa financial liability, Entity C concludes that the interest rate alreadycaptures the risk or profit that a market participant would require ascompensation for assuming the liability. Furthermore, Entity C does notadjust its present value technique for the existence of a restrictionpreventing it from transferring the liability.


IE48 Example 14 illustrates the use of judgement when measuring the fairvalue of a financial asset when there has been a significant decrease in thevolume or level of activity for the asset when compared with normalmarket 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 residentialmortgage-backed security on 1 January 20X8 (the issue date of thesecurity). The junior tranche is the third most senior of a total of seventranches. The underlying collateral for the residential mortgage-backedsecurity is unguaranteed non-conforming residential mortgage loansthat were issued in the second half of 20X6.

IE50 At 31 March 20X9 (the measurement date) the junior tranche is nowA-rated. This tranche of the residential mortgage-backed security waspreviously traded through a brokered market. However, trading volumein that market was infrequent, with only a few transactions taking placeper month from 1 January 20X8 to 30 June 20X8 and little, if any, tradingactivity during the nine months before 31 March 20X9.

IE51 Entity A takes into account the factors in paragraph B37 of the IFRS todetermine whether there has been a significant decrease in the volume orlevel of activity for the junior tranche of the residential mortgage-backedsecurity in which it has invested. After evaluating the significance andrelevance of the factors, Entity A concludes that the volume and level ofactivity of the junior tranche of the residential mortgage-backed securityhave significantly decreased. Entity A supported its judgement primarilyon the basis that there was little, if any, trading activity for an extendedperiod before the measurement date.



IE52 Because there is little, if any, trading activity to support a valuationtechnique using a market approach, Entity A decides to use an incomeapproach using the discount rate adjustment technique described inparagraphs B18–B22 of the IFRS to measure the fair value of theresidential mortgage-backed security at the measurement date. Entity Auses the contractual cash flows from the residential mortgage-backedsecurity (see also paragraphs 67 and 68 of the IFRS).

IE53 Entity A then estimates a discount rate (ie a market rate of return) todiscount those contractual cash flows. The market rate of return isestimated using both of the following:

(a) the risk-free rate of interest.

(b) estimated adjustments for differences between the availablemarket data and the junior tranche of the residentialmortgage-backed security in which Entity A has invested. Thoseadjustments reflect available market data about expectednon-performance and other risks (eg default risk, collateral valuerisk and liquidity risk) that market participants would take intoaccount when pricing the asset in an orderly transaction at themeasurement date under current market conditions.

IE54 Entity A took into account the following information when estimatingthe adjustments in paragraph IE53(b):

(a) the credit spread for the junior tranche of the residentialmortgage-backed security at the issue date as implied by theoriginal transaction price.

(b) the change in the credit spread implied by any observedtransactions from the issue date to the measurement date forcomparable residential mortgage-backed securities or on the basisof relevant indices.

(c) the characteristics of the junior tranche of the residentialmortgage-backed security compared with comparable residentialmortgage-backed securities or indices, including all the following:

(i) the quality of the underlying assets, ie information about theperformance of the underlying mortgage loans such asdelinquency and foreclosure rates, loss experience andprepayment rates;

(ii) the seniority or subordination of the residentialmortgage-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 thatmarket participants would use when pricing the junior tranche of theresidential 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 interestat 31 March 20X9.

(b) Add 250 basis points for the credit spread over the risk-free ratewhen the junior tranche was issued in January 20X8.

(c) Add 700 basis points for the estimated change in the credit spreadover the risk-free rate of the junior tranche between 1 January 20X8and 31 March 20X9. This estimate was developed on the basis ofthe change in the most comparable index available for that timeperiod.

(d) Subtract 50 basis points (net) to adjust for differences between theindex used to estimate the change in credit spreads and the juniortranche. The referenced index consists of subprime mortgageloans, whereas Entity A’s residential mortgage-backed securityconsists of similar mortgage loans with a more favourable creditprofile (making it more attractive to market participants).However, the index does not reflect an appropriate liquidity riskpremium 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, whichwas estimated by comparing the implied yield from the mostrecent transactions for the residential mortgage-backedsecurity in June 20X8 with the implied yield in the indexprice on those same dates. There was no informationavailable that indicated that the relationship betweenEntity A’s security and the index has changed.

(ii) the second adjustment is a 300 basis point addition, which isEntity A’s best estimate of the additional liquidity riskinherent in its security (a cash position) when compared withthe index (a synthetic position). This estimate was derivedafter taking into account liquidity risk premiums implied inrecent cash transactions for a range of similar securities.



IE56 As an additional indication of the market rate of return, Entity A takesinto account two recent indicative quotes (ie non-binding quotes)provided by reputable brokers for the junior tranche of the residentialmortgage-backed security that imply yields of 15–17 per cent. Entity A isunable to evaluate the valuation technique(s) or inputs used to developthe quotes. However, Entity A is able to confirm that the quotes do notreflect the results of transactions.

IE57 Because Entity A has multiple indications of the market rate of returnthat market participants would take into account when measuring fairvalue, it evaluates and weights the respective indications of the rate ofreturn, considering the reasonableness of the range indicated by theresults.

IE58 Entity A concludes that 13 per cent is the point within the range ofindications that is most representative of fair value under current marketconditions. 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 appropriatelyincorporated the risks (eg default risk, collateral value risk andliquidity risk) that market participants would use when pricing theasset in an orderly transaction under current market conditions.

(b) The broker quotes were non-binding and did not reflect the resultsof transactions, and Entity A was unable to evaluate the valuationtechnique(s) or inputs used to develop the quotes.

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 reportingperiod, the IFRS requires quantitative disclosures about the fair valuemeasurements for each class of assets and liabilities. An entity mightdisclose the following for assets to comply with paragraph 93(a) and (b) ofthe IFRS:



(CU in millions)Fair value measurements at the end of the

reporting period using

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 23Oil and gas industry 45 45Other 15 15 Total trading equity securities 153 130 23

Other equity securities(a):Financial services industry 150 150Healthcare industry 163 110 53Energy industry 32 32Private equity fund investments(b) 25 25Other 15 15

Total other equity securities 385 275 110

Debt securities:Residential mortgage-backed securities 149 24 125Commercial mortgage-backed securities 50 50Collateralised debt obligations 35 35Risk-free government securities 85 85Corporate bonds 93 9 84

Total debt securities 412 94 108 210

Hedge fund investments:Equity long/short 55 55Global opportunities 35 35High-yield debt securities 90 90

Total hedge fund investments 180 90 90

Derivatives:Interest rate contracts 57 57Foreign exchange contracts 43 43Credit contracts 38 38Commodity futures contracts 78 78Commodity forward contracts 20 20

Total derivatives 236 78 120 38

.continued...



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 thefair value hierarchy, the IFRS requires a reconciliation from the openingbalances to the closing balances for each class of assets and liabilities.An entity might disclose the following for assets to comply withparagraph 93(e) and (f) of the IFRS:

...continued

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)

Investment properties:Commercial—Asia 31 31Commercial—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 hasdetermined 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 hasdetermined that presenting them as a single class is appropriate.

(c) In accordance with IFRS 5, assets held for sale with a carrying amount of CU35 million were written downto their fair value of CU26 million, less costs to sell of CU6 million (or CU20 million), resulting in a loss ofCU15 million, which was included in profit or loss for the period.

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



Fair

valu

e m

easu

rem

ents

usi

ng s

igni

fican

t uno

bser

vabl

e in

puts

(Lev

el 3

)(C

U in

mill

ions

)Ot

her e

quity

secu

ritie

s D

ebt s

ecur

ities

Hedg

e fu

nd

inve

stm

ents

Deriv

ativ

esIn

vest

men

t pr

oper

ties

Heal

thca

rein

dust

ry

Ener

gyin

dust

ry

Priv

ate

equi

tyfu

nd

Resi

dent

ial

mor

tgag

e-ba

cked

se

curit

ies

Com

mer

cial

m

ortg

age-

back

ed

secu

ritie

s

Colla

tera

lised

de

bt

oblig

atio

ns

High

-yie

ld

debt

se

curit

ies

Cred

it co

ntra

cts

Asia

Euro

peTo

tal

Ope

ning

bal

ance

4928

2010

539

2514

530

2826

495

Tran

sfer

s in

to L

evel

360

(a)(

b)60

Tran

sfer

s ou

t of L

evel

3(5

)(b

)(c)

(5)

Tota

l gai

ns o

r los

ses

for t

he

perio

d

Incl

uded

in p

rofit

or l

oss

5(2

3)(5

)(7

)7

53

1(1

4)In

clud

ed in

oth

er

com

preh

ensi

ve in

com

e3

14

Purc

hase

s, is

sues

, sal

es

and

settl

emen

tsPu

rcha

ses

13

1617

1855

Issu

esSa

les

(12)

(62)

(74)

Settl

emen

ts(1

5)(1

5)

Clos

ing

bala

nce

5332

2512

550

3590

3831

2750

6

Chan

ge in

unr

ealis

ed g

ains

or

loss

es fo

r the

per

iod

incl

uded

in

prof

it or

loss

for a

sset

s he

ld a

t the

en

d of

the

repo

rting

per

iod

5(3

)(5

)(7

)(5

)2

31

(9)

(a)

Tran

sfer

red

from

Lev

el 2

to L

evel

3 b

ecau

se o

f a la

ck o

f obs

erva

ble

mar

ket d

ata,

resu

lting

from

a d

ecre

ase

in m

arke

t act

ivity

for t

he s

ecur

ities

.(b

)Th

e en

tity'

s po

licy

is to

reco

gnis

e tra

nsfe

rs in

to a

nd tr

ansf

ers

out o

f Lev

el 3

as

of th

e da

te o

f the

eve

nt o

r cha

nge

in c

ircum

stan

ces

that

cau

sed

the

trans

fer.

(c)

Tran

sfer

red

from

Lev

el 3

to L

evel

2 b

ecau

se o

bser

vabl

e m

arke

t dat

a be

cam

e av

aila

ble

for t

he s

ecur

ities

.(N

ote:

A s

imila

r tab

le w

ould

be

pres

ente

d fo

r lia

bilit

ies

unle

ss a

noth

er fo

rmat

is d

eem

ed m

ore

appr

opria

te b

y th

e en

tity.

)



IE62 Gains and losses included in profit or loss for the period (above) arepresented in financial income and in non-financial income as follows:

Example 17—Valuation techniques and inputs

IE63 For fair value measurements categorised within Level 2 and Level 3 of thefair value hierarchy, the IFRS requires an entity to disclose a descriptionof the valuation technique(s) and the inputs used in the fair valuemeasurement. For fair value measurements categorised within Level 3 ofthe fair value hierarchy, information about the significant unobservableinputs used must be quantitative. An entity might disclose the followingfor assets to comply with the requirement to disclose the significantunobservable inputs used in the fair value measurement in accordancewith paragraph 93(d) of the IFRS:

(CU in millions) Financialincome

Non-financialincome

Total gains or losses for the period included in profit or loss (18) 4

Change in unrealised gains or losses for the 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.)



Quan

titat

ive

info

rmat

ion

abou

t fai

r val

ue m

easu

rem

ents

usi

ng s

igni

fican

t uno

bser

vabl

e in

puts

(Lev

el 3

)(C

U in

mill

ions

)

Desc

riptio

n F

air v

alue

at

31/

12/X

9Va

luat

ion

tech

niqu

e(s)

Unob

serv

able

inpu

tRa

nge

(wei

ghte

d av

erag

e)

Othe

r equ

ity s

ecur

ities

:He

alth

care

indu

stry

53Di

scou

nted

cas

h flo

ww

eigh

ted

aver

age

cost

of c

apita

l7%

–16%

(12.

1%)

long

-term

reve

nue

grow

th ra

te2%

–5%

(4.2

%)

long

-term

pre

-tax

oper

atin

g m

argi

n3%

–20%

(10.

3%)

disc

ount

for l

ack

of m

arke

tabi

lity(a

)5%

–20%

(17%

)co

ntro

l pre

miu

m(a

)10

%–3

0% (2

0%)

Mar

ket c

ompa

rabl

eco

mpa

nies

EBIT

DA m

ultip

le(b

)

reve

nue

mul

tiple

(b)

10–1

3 (1

1.3)

1.5–

2.0

(1.7

)di

scou

nt fo

r lac

k of

mar

keta

bilit

y(a)

5%–2

0% (1

7%)

cont

rol p

rem

ium

(a)

10%

–30%

(20%

)En

ergy

indu

stry

32Di

scou

nted

cas

h flo

ww

eigh

ted

aver

age

cost

of c

apita

l8%

–12%

(11.

1%)

long

-term

reve

nue

grow

th ra

te3%

–5.5

% (4

.2%

)lo

ng-te

rm p

re-ta

x op

erat

ing

mar

gin

7.5%

–13%

(9.2

%)

disc

ount

for l

ack

of m

arke

tabi

lity(a

)5%

–20%

(10%

)co

ntro

l pre

miu

m(a

)10

%–2

0% (1

2%)

Mar

ket c

ompa

rabl

eco

mpa

nies

EBIT

DA m

ultip

le(b

)

reve

nue

mul

tiple

(b)

6.5–

12 (9

.5)

1.0–

3.0

(2.0

)di

scou

nt fo

r lac

k of

mar

keta

bilit

y(a)

5%–2

0% (1

0%)

cont

rol p

rem

ium

(a)

10%

–20%

(12%

)Pr

ivat

e eq

uity

fund

inve

stm

ents

25Ne

t ass

et v

alue

(c)

n/a

n/a

Debt

sec

uriti

es:

Resi

dent

ial m

ortg

age-

back

ed

secu

ritie

s12

5Di

scou

nted

cas

h flo

w c

onst

ant p

repa

ymen

t rat

e3.

5%–5

.5%

(4.5

%)

prob

abili

ty o

f def

ault

5%–5

0% (1

0%)

loss

sev

erity

40%

–100

% (6

0%)

cont

inue

d...



...co

ntin

ued

Des

crip

tion

Fai

r val

ue a

t 3

1/12

/X9

Valu

atio

n te

chni

que(

s)Un

obse

rvab

le in

put

Rang

e (w

eigh

ted

aver

age)

Com

mer

cial

mor

tgag

e-ba

cked

se

curit

ies

50Di

scou

nted

cas

h flo

w c

onst

ant p

repa

ymen

t rat

epr

obab

ility

of d

efau

ltlo

ss s

ever

ity

3%–5

% (4

.1%

)2%

–25%

(5%

)10

%–5

0% (2

0%)

Colla

tera

lised

deb

t obl

igat

ions

35Co

nsen

sus

pric

ing

offe

red

quot

es20

–45

com

para

bilit

y ad

just

men

ts (%

)-1

0% –

+15

% (+

5%)

Hed

ge fu

nd in

vest

men

ts:

High

-yie

ld d

ebt s

ecur

ities

90Ne

t ass

et v

alue

(c)

n/a

n/a

Der

ivat

ives

:Cr

edit

cont

ract

s38

Optio

n m

odel

annu

alis

ed v

olat

ility

of c

redi

t(d)

10%

–20%

coun

terp

arty

cre

dit r

isk(e

)0.

5%–3

.5%

own

cred

it ris

k(e)

0.3%

–2.0

%In

vest

men

t pro

perti

es:

Com

mer

cial

—As

ia31

Disc

ount

ed c

ash

flow

long

-term

net

ope

ratin

g in

com

e m

argi

n18

%–3

2% (2

0%)

cap

rate

0.08

–0.1

2 (0

.10)

Mar

ket c

ompa

rabl

eap

proa

chpr

ice

per s

quar

e m

etre

(USD

)$3

,000

–$7,

000

($4,

500)

Com

mer

cial

—Eu

rope

27Di

scou

nted

cas

h flo

wlo

ng-te

rm n

et o

pera

ting

inco

me

mar

gin

15%

–25%

(18%

)ca

p ra

te0.

06–0

.10

(0.8

0)M

arke

t com

para

ble

appr

oach

pric

e pe

r squ

are

met

re (E

UR)

€4,0

00–€

12,0

00 (€

8,50

0)

(a)

Repr

esen

ts a

mou

nts

used

whe

n th

e en

tity

has

dete

rmin

ed th

at m

arke

t par

ticip

ants

wou

ld ta

ke in

to a

ccou

nt th

ese

prem

ium

s an

d di

scou

nts

whe

n pr

icin

g th

e in

vest

men

ts.

(b)

Repr

esen

ts a

mou

nts

used

whe

n th

e en

tity

has

dete

rmin

ed th

at m

arke

t par

ticip

ants

wou

ld u

se s

uch

mul

tiple

s w

hen

pric

ing

the

inve

stm

ents

.(c

)Th

e en

tity

has

dete

rmin

ed th

at th

e re

porte

d ne

t ass

et v

alue

repr

esen

ts fa

ir va

lue

at th

e en

d of

the

repo

rting

per

iod.

(d

)Re

pres

ents

the

rang

e of

the

vola

tility

cur

ves

used

in th

e va

luat

ion

anal

ysis

that

the

entit

y ha

s de

term

ined

mar

ket p

artic

ipan

ts w

ould

use

whe

n th

e pr

icin

g co

ntra

cts.

(e)

Repr

esen

ts th

e ra

nge

of th

e cr

edit

defa

ult s

wap

spr

ead

curv

es u

sed

in th

e va

luat

ion

anal

ysis

that

the

entit

y ha

s de

term

ined

mar

ket p

artic

ipan

ts w

ould

use

whe

n pr

icin

g th

e co

ntra

cts.

(Not

e: A

sim

ilar t

able

wou

ld b

e pr

esen

ted

for l

iabi

litie

s un

less

ano

ther

form

at is

dee

med

mor

e ap

prop

riate

by

the

entit

y.)



IE64 In addition, an entity should provide additional information that willhelp users of its financial statements to evaluate the quantitativeinformation disclosed. An entity might disclose some or all the followingto comply with paragraph 92 of the IFRS:

(a) the nature of the item being measured at fair value, including thecharacteristics of the item being measured that are taken intoaccount in the determination of relevant inputs. For example, forresidential mortgage-backed securities, an entity might disclosethe following:

(i) the types of underlying loans (eg prime loans or sub-primeloans)

(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 andthe securities

(vii) the weighted-average maturity of the underlying loans andthe securities

(viii) the geographical concentration of the underlying loans

(ix) information about the credit ratings of the securities.

(b) how third-party information such as broker quotes, pricingservices, net asset values and relevant market data was taken intoaccount when measuring fair value.

Example 18—Valuation processes

IE65 For fair value measurements categorised within Level 3 of the fair valuehierarchy, the IFRS requires an entity to disclose a description of thevaluation processes used by the entity. An entity might disclose thefollowing to comply with paragraph 93(g) of the IFRS:

(a) for the group within the entity that decides the entity’s valuationpolicies and procedures:

(i) its description;

(ii) to whom that group reports; and



(iii) the internal reporting procedures in place (eg whether and, ifso, how pricing, risk management or audit committeesdiscuss and assess the fair value measurements);

(b) the frequency and methods for calibration, back testing and othertesting procedures of pricing models;

(c) the process for analysing changes in fair value measurements fromperiod to period;

(d) how the entity determined that third-party information, such asbroker quotes or pricing services, used in the fair valuemeasurement was developed in accordance with the IFRS; and

(e) the methods used to develop and substantiate the unobservableinputs used in a fair value measurement.

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

IE66 For recurring fair value measurements categorised within Level 3 of thefair value hierarchy, the IFRS requires an entity to provide a narrativedescription of the sensitivity of the fair value measurement to changes insignificant unobservable inputs and a description of anyinterrelationships between those unobservable inputs. An entity mightdisclose the following about its residential mortgage-backed securities tocomply with paragraph 93(h)(i) of the IFRS:

The significant unobservable inputs used in the fair value measurement ofthe entity’s residential mortgage-backed securities are prepayment rates,probability of default and loss severity in the event of default. Significantincreases (decreases) in any of those inputs in isolation would result in asignificantly lower (higher) fair value measurement. Generally, a change inthe assumption used for the probability of default is accompanied by adirectionally similar change in the assumption used for the loss severity anda directionally opposite change in the assumption used for prepayment rates.



AppendixAmendments to guidance on other IFRSs

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


IGA1 In the illustrative examples paragraph IE5 is amended as follows:

IE5 The fair value of the consideration effectively transferred shouldbe based on the most reliable measure. In this example, thequoted market price of Entity A’s shares in the principal (or mostadvantageous) market for the shares provides a more reliablebasis for measuring the consideration effectively transferredthan the estimated fair value of the shares in Entity B, and theconsideration is measured using the market price of Entity A’sshares—100 shares with a fair value per share of CU16.

IGA2 The example in paragraph IE72 is amended as follows:

Footnote X: Acquisitions

Paragraphreference

…

B64(f)(iv) The fair value of the 100,000 ordinary shares issued as partof the consideration paid for TC (CU4,000) was determinedon the basis of measured using the closing market price ofAC’s ordinary shares on the acquisition date.

B64(f)(iii)B64(g)B67(b)

...

The fair value of the contingent considerationarrangement of CU1,000 was estimated by applying theincome approach. The fair value estimates aremeasurement is based on significant inputs that are notobservable in the market, which IFRS 13 Fair ValueMeasurement refers to as Level 3 inputs. Key assumptionsinclude a an assumed discount rate range of 20–25 per centand assumed probability-adjusted revenues in XC ofCU10,000–20,000.

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B64(o) The fair value of the non-controlling interest in TC, anunlisted company, was estimated by applying a marketapproach and an income approach. The fair valueestimates measurements are based on significant inputsthat are not observable in the market and thus represent afair value measurement categorised within Level 3 of thefair value hierarchy as described in IFRS 13. Keyassumptions include the following:

(a) an assumed a discount rate range of 20–25 per cent;

(b) an assumed a terminal value based on a range ofterminal EBITDA multiples between 3 and 5 times(or, if appropriate, based on long-term sustainablegrowth rates ranging from 3 to 6 per cent);

(c) assumed financial multiples of companies deemed tobe similar to TC; and

(d) assumed adjustments because of the lack of controlor lack of marketability that market participantswould consider when estimating measuring the fairvalue of the non-controlling interest in TC.

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IGA3 In the comparison of IFRS 3 (as revised in January 2008) and SFAS 141(R),in the table below paragraph 3 the definition of fair value and thedisclosures about a non-controlling interest in the acquiree are footnotedas follows:

* IFRS 13 Fair Value Measurement (issued in May 2011) defines fair valueand contains the requirements for measuring fair value and fordisclosing information about fair value measurements. As a resultthe definition of fair value in IFRSs is identical to the definition inUS GAAP (Topic 820 Fair Value Measurement in the FASB AccountingStandards Codification® codified FASB Statement No. 157).

** IFRS 13 (issued in May 2011) defines fair value and contains therequirements for measuring fair value and for disclosinginformation about fair value measurements. Although thedisclosures required by IFRS 13 are not required for IFRS 3, thewording for the disclosures in IFRS 3 has been aligned with thewording in US GAAP (Topic 805 Business Combinations in the FASBAccounting Standards Codification® codified FASB Statement No. 141(R)).

Guidance IFRS 3 (as revised in 2008)

SFAS 141(R)

Definition of fair value*

Fair value is defined as … Fair value is defined in paragraph 5 of FASB Statement No. 157 Fair Value Measurements as …

Guidance IFRS 3 (as revised in 2008)

SFAS 141(R)

Non-controlling interest in an acquiree**

Disclosures

Because an acquirer is permitted to choose …

Disclosures

SFAS 141(R) requires an acquirer to disclose …




IGA4 In the guidance on implementing IFRS 4 IG Example 3 is amended asfollows:


IGA5 In the guidance on implementing IFRS 5 Examples 10 and 13 areamended as follows:

Example 10

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The entity estimates that measures the fair value less costs to sell of thedisposal group amounts to as CU13,000. Because an entity measures adisposal group classified as held for sale at the lower of its carryingamount and fair value less costs to sell, the entity recognises animpairment loss of CU1,900 (CU14,900 – CU13,000) when the group isinitially classified as held for sale.

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IG Example 3: Unbundling a deposit component of a reinsurance contract

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If the reinsurer is required, or elects, to unbundle the contract, it doesso as follows. Each payment by the cedant has two components: a loanadvance (deposit component) and a payment for insurance cover(insurance component). Applying IAS 39 to the deposit component, thereinsurer is required to measure it initially at fair value. Fair valuecould be determined measured by discounting the future cash flowsfrom the deposit component using a valuation technique. Assume thatan appropriate discount rate is 10 per cent and that the insurance coveris equal in each year, so that the payment for insurance cover is thesame in every year. Each payment of CU10 by the cedant is then madeup of a loan advance of CU6.7 and an insurance premium of CU3.3.

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Example 13

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The estimated fair value less costs to sell of S2 is CU135. A accounts for S2as follows:

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IFRS 7 Financial Instruments: Disclosures (as amended at October 2009)

IGA6 In the guidance on implementing IFRS 7 paragraphs IG13A and IG13B,and their accompanying tables, are deleted.

IGA7 Paragraph IG14 is amended as follows:

IG14 The fair value at initial recognition of financial instruments thatare not traded in active markets is determined measured inaccordance with IFRS 13 Fair Value Measurement and paragraphAG76 of IAS 39. ... Such recognition reflects changes in factors(including time) that market participants would consider insetting a price take into account when pricing the asset orliability (see paragraph AG76A AG76(b) of IAS 39). Paragraph 28requires disclosures in these circumstances. An entity mightdisclose the following to comply with paragraph 28:



Background

On 1 January 20X1 an entity purchases for CU15 million financial assets that are not traded in an active market. The entity has only one class of such financial assets.

The transaction price of CU15 million is the fair value at initial recognition.

After initial recognition, the entity will apply a valuation technique to establish measure the financial assets’ fair value. This valuation technique includes variables uses inputs other than data from observable markets.

At initial recognition, the same valuation technique would have resulted in an amount of CU14 million, which differs from fair value by CU1 million.

The entity has existing differences of CU5 million at 1 January 20X1.

Application of requirements

The entity’s 20X2 disclosure would include the following:

Accounting policies

The entity uses the following valuation technique to determine measure the fair value of financial instruments that are not traded in an active market: [description of technique, not included in this example]. Differences may arise between the fair value at initial recognition (which, in accordance with IFRS 13 and IAS 39, is generally normally the transaction price) and the amount determined at initial recognition using the valuation technique. Any such differences are [description of the entity’s accounting policy].

In the notes to the financial statements

As discussed in note X, the entity uses [name of valuation technique] to measure the fair value of the following financial instruments that are not traded in an active market. However, in accordance with IFRS 13and IAS 39, the fair value of an instrument at inception is generally normally the transaction price. If the transaction price differs from the amount determined at inception using the valuation technique, that difference is [description of the entity’s accounting policy]. The differences yet to be recognised in profit or loss are as follows:

…




IGA8 In the amendments to guidance on other IFRSs, in paragraph IGA6 theamendment to the illustrative disclosure in paragraph IG14 of theImplementation Guidance accompanying IFRS 7 is amended as follows:

IG14 The fair value at initial recognition of financial instruments thatare not traded in active markets is determined measured inaccordance with IFRS 13 Fair Value Measurement and paragraph AG76of IAS 39. ... Such recognition reflects changes in factors (includingtime) that market participants would consider in setting a pricetake into account when pricing the asset or liability (see paragraphAG76A AG76(b) of IAS 39). Paragraph 28 requires disclosures inthese circumstances. An entity might disclose the following tocomply with paragraph 28:

Background









IGA9 In the amendments to the guidance on other IFRSs, in paragraph IGA14the amendment to paragraph IG14 in the implementation guidanceaccompanying IFRS 7 the illustrative disclosure is amended as follows:

IG14 The fair value at At initial recognition an entity measures the fairvalue of financial instruments that are not traded in activemarkets is determined in accordance with paragraph B5.4.8 ofIFRS 9. ... Such recognition reflects changes in factors (includingtime) that market participants would consider in setting a pricetake into account when pricing the asset or liability (seeparagraph B5.4.9 B5.1.2(b) of IFRS 9). Paragraph 28 requiresdisclosures in these circumstances. An entity might disclose thefollowing to comply with paragraph 28:



Accounting policies

The entity uses the following valuation technique to determine measure the fair value of financial instruments that are not traded in an active market: [description of technique, not included in this example]. Differences may arise between the fair value at initial recognition (which, in accordance with IFRS 13 and IAS 39, is generally normally the transaction price) and the amount determined at initial recognition using the valuation technique. Any such differences are [description of the entity’s accounting policy].


As discussed in note X, the entity uses [name of valuation technique] to measure the fair value of the following financial instruments that are not traded in an active market. However, in accordance with IFRS 13 and IAS 39, the fair value of an instrument at inception is generally normally the transaction price. If the transaction price differs from the amount determined at inception using the valuation technique, that difference is [description of the entity’s accounting policy]. The differences yet to be recognised in profit or loss are as follows:

…



Background








Accounting policies

The entity uses the following valuation technique to determine the fair value of financial instruments that are not traded in an active market: [description of technique, not included in this example]. Differences may arise between the fair value at initial recognition (which, in accordance with IFRS 13 and IAS 39, is generally normally the transaction price) and the amount determined at initial recognition using the valuation technique. Any such differences are [description of the entity’s accounting policy].


As discussed in note X, the entity uses [name of valuation technique] to measure the fair value of the following financial instruments that are not traded in an active market. However, in accordance with IFRS 13 and IAS 39, the fair value of an instrument at inception is generally normally the transaction price. If the transaction price differs from the amount determined at inception using the valuation technique, that difference is [description of the entity’s accounting policy]. The differences yet to be recognised in profit or loss are as follows:

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IAS 34 Interim Financial Reporting IGA10 Paragraphs C4 and C7 are amended as follows:

C4 Pensions: IAS 19 Employee Benefits requires that an entity todetermine the present value of defined benefit obligations andthe market fair value of plan assets at the end of each reportingperiod and encourages an entity to involve a professionallyqualified actuary in measurement of the obligations. For interimreporting purposes, reliable measurement is often obtainable byextrapolation of the latest actuarial valuation.

C7 Revaluations and fair value accounting: IAS 16 Property, Plant andEquipment allows an entity to choose as its accounting policy therevaluation model whereby items of property, plant andequipment are revalued to fair value. Similarly, IAS 40 InvestmentProperty requires an entity to determine measure the fair value ofinvestment property. For those measurements, an entity mayrely on professionally qualified valuers at annual reporting datesthough not at interim reporting dates.

IAS 36 Impairment of AssetsIGA11 In the illustrative examples all references to ‘fair value less costs to sell’

are replaced with ‘fair value less costs of disposal’.

IAS 39 Financial Instruments: Recognition and Measurement

IGA12 In the guidance on implementing IAS 39 Questions and answers E.2.1 andE.2.2 are deleted.

IAS 41 Agriculture IGA13 In the illustrative examples Example 1 is amended as follows:

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Notes1 Operations and principal activities

XYZ Dairy Ltd (‘the Company’) is engaged in milk production forsupply to various customers. At 31 December 20X1, theCompany held 419 cows able to produce milk (mature assets)and 137 heifers being raised to produce milk in the future(immature assets). The Company produced 157,584kg of milkwith a fair value less costs to sell of 518,240 (that is determinedat the time of milking) in the year ended 31 December 20X1.



IFRIC 12 Service Concession Arrangements

IGA14 Paragraphs IE15 and IE31 are amended as follows:

IE15 During the construction phase of the arrangement the operator’sasset (representing its accumulating right to be paid forproviding construction services) is classified as an intangibleasset (licence to charge users of the infrastructure). The operatorestimates measures the fair value of its consideration received tobe as equal to the forecast construction costs plus 5 per centmargin, which the operator concludes is consistent with the ratethat a market participant would require as compensation forproviding the construction services and for assuming the riskassociated with the construction costs. It is also assumed that, inaccordance with IAS 23 Borrowing Costs, the operator capitalisesthe borrowing costs, estimated at 6.7 per cent, during theconstruction phase of the arrangement:

...

IE31 During the construction phase of the arrangement the operator’sasset (representing its accumulating right to be paid forproviding construction services) is classified as a right to receive alicence to charge users of the infrastructure. The operatorestimates measures the fair value of its consideration received orreceivable as equal to the forecast construction costs plus 5 percent, which the operator concludes is consistent with the ratethat a market participant would require as compensation forproviding the construction services and for assuming the riskassociated with the construction costs. It is also assumed that, in

2 Accounting policiesLivestock and milkLivestock are measured at their fair value less costs to sell.The fair value of livestock is determined based on quotedmarket prices of livestock of similar age, breed, and geneticmerit in the principal (or most advantageous) market for thelivestock. Milk is initially measured at its fair value less costs tosell at the time of milking. The fair value of milk is determinedbased on quoted market prices in the local area in the principal(or most advantageous) market for the milk.

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accordance with IAS 23 Borrowing Costs, the operator capitalisesthe borrowing costs, estimated at 6.7 per cent, during theconstruction phase:

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IFRIC 13 Customer Loyalty Programmes

IGA15 Paragraphs IE1 and IE3 are amended as follows:

IE1 A grocery retailer operates a customer loyalty programme. It grantsprogramme members loyalty points when they spend a specifiedamount on groceries. Programme members can redeem the pointsfor further groceries. The points have no expiry date. In oneperiod, the entity grants 100 points. Management estimatesmeasures the fair value of groceries for which each loyalty pointcan be redeemed as 1.25 currency units (CU1.25). This amount takesinto account an management’s estimate of the discount thatmanagement market participants would assume when pricing theaward credits. That discount takes into account marketparticipants’ expectations of the discount that expects wouldotherwise be offered to customers who have not earned awardcredits from an initial sale. In addition, management estimatesthat market participants would expects only 80 of these points to beredeemed. Therefore, the fair value of each point is CU1, being thefair value of the award for each loyalty point granted of CU1.25reduced to take into account points not expected to be redeemed((80 points/100 points) × CU1.25 = CU1). Accordingly, managementdefers recognition of revenue of CU100. Throughout the example,management determines that non-performance risk has animmaterial effect on the measurement of its obligation under theprogramme.

IE3 In the second year, management revises its estimate of marketparticipants’ expectations. It now expects 90 points to beredeemed altogether.

IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

IGA16 In the illustrative examples all references to ‘market value’ of assets arereplaced with ‘fair value’.

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