International Financial Reporting Standards
IFRS measurements:
cross-cutting issues
Joint World Bank and IFRS Foundation ‘train the
trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
K
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or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Myth 1
2
Everyone knows
what ‘best
estimate’ means
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What does ‘best estimate’ mean?
3
Median outcome?
Most likely
outcome?
< 50% chance of higher cash flows
< 50% chance of lower cash flows
Whatever amount
feels ‘best’?
Expected value?
Average (mean) of range
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Myth 2
4
The IASB
prefers fair value
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IASB does not always prefer fair value
• Provisions
• Impairment of property, plant, equipment, intangibles
• Revenue recognition
• Insurance contracts
• Leases
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
5
Myth 3
6
The IASB prefers
expected value
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Expected value might be best...
• if objective is to measure current value of asset or
liability
• if transactions recur frequently
• if users are concerned about extreme outcomes
(outliers)
• if expected value is as easy to estimate as other
measures
• if the timing of cash flows is uncertain
• you don’t know…
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
7
Most likely or median might be better...
• if objective is to predict future cash flows
• if transactions do not recur frequently
• if outliers are less important or more uncertain than
central outcomes
• if expected value is more difficult to measure
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
8
Myth 4
Expected value
needs accurate data
about all outcomes
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
9
Measuring expected value
10
• use any suitable technique for estimating average
(mean) of range
• if identifying range of possible outcomes:
– use same data as would use to identify most likely
or median outcome
– include everything you know
– but don’t make up what you don’t know...
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measuring expected value continued
We have evidence that...
Most likely outcome is 100 currency units (CU)
We have no evidence that...
Distribution is other than normal (bell-shaped)
We would estimate expected value to be...
CU 100
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
11
Measuring expected value continued
Outcome
Best case
Most likely outcome
Worst case
Estimated
outflows
CU 100
CU
200
CU
1,000
Estimate of expected value
100
CU 200
CU 1,000
CU
30%
X 60%
X 10%
X
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
30
CU 120
CU 100
CU 250
CU
12
Relative likelihood
About twice as likely as
best case
Unlikely, but possible
Myth 5
13
Expected values
take account of
risk
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Expected values may need risk adjustments
Asset 1
Asset 2
Probability
Inflows
100%
CU
500
Probability
Inflows
50%
50%
CU
250
CU 750
•
Expected value is CU 500 for each asset
•
But risk averse entity would put lower value on
asset 2
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
14
Myth 6
15
Risk always
increases
discount rates
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Risk adjustments for liabilities
16
• risk aversion typically increases transaction prices for
uncertain liabilities
• in which case, account for risk by:
1. increasing estimates of cash outflows, or
2. adjusting estimates of probabilities, or
3. reducing rates at which cash outflows are discounted to
present value, or
4. adjusting the expected present value
• adjusting discount rate doesn’t always work
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions or comments?
The IASB encourages its
members and staff to
express their individual
views.
The views expressed in this
presentation are those of the
presenters.
Official positions of the IASB
on accounting matters are
determined only after
extensive due process
and deliberation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
17
18
The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at 1
January 2012 with an effective date after 1 January 2012
but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the
publishers do not accept responsibility for loss caused to
any person who acts or refrains from acting in reliance on
the material in this PowerPoint presentation, whether such
loss is caused by negligence or otherwise.
© 2011
IFRS Foundation
| 30 Cannon
| London
6XH | EC4M
UK. www.ifrs.org
©
IFRS Foundation
| 30Street
Cannon
StreetEC4M
| London
6XH | UK | www.ifrs.org