IFRS / IVS UPDATE
IFRS 13 Fair Value Measurement
Learning objectives
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Fair Value Measurement – IFRS 13 and IVSC
Definitions –IFRS/ IVS
Concept of highest and best use/valuation premise
Valuation techniques
Fair value hierarchy
Required disclosures
Key Takeaways
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IFRS 13 Fair Value Measurement
Definition of Fair Value IFRS 13/ IVS
IFRS 13 Fair value definition
A single framework for
determining FV
► IAS 40 basis replaced
► Effective 1 January 2013, and
applied prospectively
► Introduces concepts of highest
and best use, valuation
premise , and application of
fair value hierarchy
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© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
IFRS 13 FV
Fair value: The price that would be received to
sell an asset or paid to transfer a liability in an
orderly transaction between market participants
at the measurement date (an exit price).
Hypothetical and orderly transaction
This differs from revised IVS Framework:
“Fair value is the estimated price for the transfer of an asset
or liability between identified knowledgeable and willing
parties that reflects the respective interests of those
parties.”
Respective advantages and disadvantages -IVS
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
IFRS 13 FAIR VALUE
Valuation uncertainty
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IFRS 13 – Fair value measurement Valuation
uncertainty
Properties sold within +/- 10% of valuation
Country
2007 2008 2009 2010
France
40% 49% 63% 40%
Germany
48% 60% 53% 50%
The Netherlands 50% 62% 65% 64%
UK
60% 60% 55% 57%
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
IFRS 13 (cont.)
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Properties sold within +/- 20% of valuation
Country
2007 2008 2009 2010
France
64% 79% 86% 52%
Germany
73% 77% 69% 75%
The Netherlands 82% 85% 88% 80%
UK
85% 83% 82% 82%
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Framework for non-financial assets
Source: RICS/IPD ‘Valuation and sale price
report’ - 2011
Sample sizes
Country
2007 2008 2009 2010
France
Germany
Netherlands
UK
527
483
318
903
519
190
197
1233
505
64
197
1042
557
107
222
652
Applying fair value in practice
Fair Value Measurement
IFRS 13 requires any advantages that
would not be available to market
participants generally to be
disregarded. Accordingly,
management needs to be aware of
this difference in concept in order to
ensure any values used for financial
reporting that are obtained from
appraisals, whether external or
internal, are consistent with the
objective of a fair valuemeasurement
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IFRS 13 Fair Value Measurement
Slide 10
© 2012 EYGM Limited
The Concept of highest and best use
Reconsider methods, assumptions , processes / procedures
Under IFRS 13, an entity’s current use of an asset is
generally taken to be its highest and best use, unless
market or other factors suggest that a different use of that
asset by market participants would maximise its value. If
such factors exist, management is required to consider all
relevant information in determining whether the highest
and best use of a property is different from its current use
at the measurement date.
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Highest and best use non financial assets
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“A fair value measurement of a non-financial asset takes
into account a market participant’s ability to generate
economic benefits by using the asset in its highest and
best use or by selling it to another market participant that
would use the asset in its highest and best use.
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Highest and best use for non-financial assets
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Fair value considers a market participant’s ability to
generate economic benefits by using the asset in its
highest and best use.
Highest and best use considers a use that is:
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Physically possible
Legally permissible –Town and Country Planning Act
Financially feasible
Highest and best use is always considered when
measuring fair value, even if the entity intends a different
use.
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Highest and best use for non-financial assets
(cont.)
Can be either:(valuation premise)
► On a stand-alone basis
► In combination with other assets
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Assumed the complementary assets are available to market
participants
Assumptions must be consistent for all assets of the relevant
group
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Example : highest and best use
Land acquired in a business combination is currently developed for
industrial use as a site for a manufacturing facility. Nearby sites were
recently developed for residential high-rise flats. It was determined that
the land could be used to develop residential high-rise flats.
How is highest and best used determined?
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In this case, the highest and best use is determined from the higher of:
a)
b)
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The value of the land used in the manufacturing operation
The value of the land as a vacant site for residential use
Note that transformation costs (e.g., costs to demolish the
manufacturing facility) would be considered in the value of land as a
vacant site.
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Valuation techniques
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Use valuation techniques that:
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IFRS 13 describes three valuation techniques
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Are appropriate in the circumstances
Have sufficient available data
Maximise use of relevant observable inputs
Minimise use of unobservable inputs
Market approach
Income approach
Cost approach
One or several valuation techniques might be used
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If a range of values are indicated, select the point within that range
most representative of fair value
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Valuation techniques (cont.)
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Apply valuation techniques consistently
Change in valuation technique needed if:
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New markets develop
New information becomes available
Information previously used is no longer available
Valuation techniques improve
Market conditions change
Change in valuation technique = change in estimate
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Fair value hierarchy
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IFRS 13 includes a fair value hierarchy for disclosure
purposes which prioritises the inputs in a fair value
measurement:
Level 1 – Quoted prices (unadjusted) in an active market
for identical assets that the entity can access at the
measurement date
Level 2 – Observable inputs other than quoted prices
Level 3 – Unobservable inputs
Amount of disclosures depends on Level Classification
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Disclosures
Disclosure principles
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Disclose information that helps users assess the following:
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For assets measured at fair value on a recurring or non-recurring
basis after initial recognition, valuation techniques and inputs used
to develop those measurements
For recurring fair value measurements using significant
unobservable inputs (Level 3), the effect of measurements on profit
or loss or other comprehensive income for the period
Fair value disclosures are required separately for each
class of assets
Quantitative disclosures are presented in a tabular format
unless another format is more appropriate.
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Fair value hierarchy and disclosures
Fair value at end of reporting
period
Level in fair value hierarchy
If highest and best use differs from
current use, that fact, and why
being used that way
© 2012 EYGM Limited
Slide 21
Recurring fair
value
measurement
Non-recurring
fair value
measurement
(after initial
recognition)
Fair value
disclosure (for
items not
measured at
fair value)
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IFRS 13 Fair Value Measurement
Fair value hierarchy and disclosures (cont.)
For Level 2 and 3, a
description of valuation
technique(s) and inputs used
For Level 2 and 3, any changes in
valuation technique(s), and
reasons for change
For Level 3, quantitative
information about significant
unobservable inputs
© 2012 EYGM Limited
Slide 22
Recurring fair
value
measurement
Non-recurring
fair value
measurement
(after initial
recognition)
Fair value
disclosure (for
items not
measured at
fair value)
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IFRS 13 Fair Value Measurement
For Level 3, description of
valuation processes
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Summary
Key takeaways
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IFRS 13 is effective 1 January 2013 and is applied
prospectively.
It introduces new concepts in valuation of non-current
assets
Basis of IFRS FV conceptually different from IVS
Management responsibility not reduced by appraisers
and will need to evaluate the impact of IFRS 13 on its
existing valuation processes , procedures and where
possible adjust the appraised values in line with IFRS 13
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement
Resources
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www.ey.com/ifrs
Applying IFRS in Real Estate
© 2012 EYGM Limited
Slide 25
IFRS 13 Fair Value Measurement
Questions?
© 2012 EYGM Limited
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IFRS 13 Fair Value Measurement