One Stop Update on IFRS
May 2014
Your Presenters
Auckland:
David Pacey
Executive Director
David.pacey@nz.ey.com
+64 9 308 1084
Wellington:
Lara Truman
Executive Director
Lara.truman@nz.ey.com
+64 274 899 896
Christchurch:
David Bassett
Manager
David.bassett@nz.ey.com +64 274 899 883
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Agenda
NZ IFRS 13 Fair Value Measurement
Objectives and transition date
Scope
Fair value measurement approach
Fair value hierarchy
Disclosures
Update on other financial reporting developments
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One Stop Update on IFRS
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Objectives and transition date of NZ IFRS 13
Clarifies definition of fair value
Single source of guidance and improved consistency for
measuring fair value
Enhanced disclosures about fair value measurement
Effective for periods beginning on or after 1 January 2013
Applied prospectively as of beginning of annual period
Disclosures are not required for comparative periods
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Scope
Excluded from measurement and disclosure
requirements:
NZ IFRS 2 Share-based Payment
NZ IAS 17 Leases
Similar (but different) measurements – examples:
Net realisable value
Value in use
Excluded from disclosure requirements:
NZ IAS 19 Employee Benefits
NZ IAS 26 Accounting and Reporting by Retirement Benefit Plans
NZ IAS 36 Impairment of Assets (assets for which recoverable
amount is based on fair value less costs to sell)
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One Stop Update on IFRS
Fair value measurement approach
Definition and overview
Fair value: 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)
Does not change when to measure at fair value
Provides guidance on how to measure fair value, when
required or permitted by specific NZ IFRS standards
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Fair value measurement approach
What changed and who is affected?
What changed?
Clearly an exit price
Use principal market
Highest and best use for non-financial assets
CVA/DVA adjustments
No blockage discounts
More disclosures for non-financial assets
Who is affected?
Entities that use fair value model for investment property
Entities that revalue PP&E or intangible assets
Entities with biological assets or agricultural produce
Entities with financial instruments measured at FV
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One Stop Update on IFRS
Fair value measurement approach
Asset or liability being measured
Characteristics of asset or liability are considered if market
participants would consider those characteristics when
pricing the asset or liability at the measurement date
Examples:
Condition and location of the asset
Restrictions on the sale or use of the asset
Asset or liability measured at fair value might be:
A stand-alone asset or liability
A group of assets, a group of liabilities or a group of assets and
liabilities
Unit of account is determined in accordance with the NZ
IFRS that requires or permits fair value measurement
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Fair value measurement approach
Principal market and most advantageous market
A fair value measurement assumes that the transaction to
sell the asset or liability either:
Takes place in the principal market, for the item being
measured
Entity must have access to the principal market at the
measurement date
Principal market is the market with the greatest volume and level
of activity for the asset or liability
Rebuttable presumption that the principal market is the market in
which the entity normally transacts
Absent a principal market, the most advantageous market
Market that maximises amount that would be received to sell the
asset or minimises the amount that would be paid to transfer the
liability, after considering transaction costs and transport costs
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One Stop Update on IFRS
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Fair value measurement approach
Market participants
A fair value measurement uses assumptions that market
participants would use
Assumes that market participants act in their own economic best
interest
Market participants are buyers and sellers in principal (or
most advantageous) market, that are:
Independent of each other (not related parties)
Knowledgeable, assumed to have a reasonable understanding
about the asset or liability based on all available information
Able to enter into a transaction for the asset or liability
Willing to enter into a transaction for the asset or liability
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One Stop Update on IFRS
Fair value measurement approach
Transport costs and transaction costs
Transaction costs are:
Not included in a fair value measurement
Not a characteristic of an asset or a liability
Specific to a transaction and differ depending on how an entity
enters into a transaction for the asset or liability
Accounted for in accordance with other IFRS
Transport costs are not transaction costs
If location is a characteristic of the asset, the price in the principal
(or most advantageous) market is adjusted for the costs incurred
to transport the asset from its current location to that market
Relevant for commodities, agricultural produce, biological assets
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One Stop Update on IFRS
Fair value measurement approach
Highest and best use for non-financial assets
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 of considers a use that is:
Physically possible
Legally permissible
Financially feasible
Current use is presumed to be highest and best use, unless factors
suggest that a different use would maximise the value of the asset
Highest and best use is always considered when measuring fair
value, even if entity intends a different use
Disclose the reason(s) that the asset is being used in a manner
that differs from its highest and best use
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One Stop Update on IFRS
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Fair value measurement approach
CVA/DVA adjustments
When valuing financial assets and liabilities, you must
explicitly consider counter party credit risk
i.e. The risk that the counterparty will fail to perform under the
contract.
For financial assets measured at FV, this means the credit
risk of the counterparty you hold the contract with
(typically a bank)
This is commonly referred to as credit valuation adjustment (CVA)
For financial liabilities measured at FV, this means the
credit risk of the reporting entity
This is commonly referred to as a debit valuation adjustment (DVA)
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Fair value measurement approach
Financial instruments
Bid-ask spread
Price within bid-ask spread most representative of fair value is
used to measure fair value
Mid-market pricing or other pricing conventions are not precluded
Premiums and discounts
Blockage factors prohibited
Other premiums and discounts may be included if certain criteria is
meet
Examples of other premiums and discounts that might be
appropriate:
Control premiums
Lack of marketability discounts
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One Stop Update on IFRS
Fair value hierarchy
Valuation techniques
Use valuation techniques that:
Are appropriate in circumstances
Have sufficient data available to measure fair value
Maximise use of relevant observable inputs
Minimise use of unobservable inputs
Three widely used valuation techniques are:
Market approach
Cost approach
Income approach
Might use one or several valuation techniques
Change in valuation technique = change in estimate
Disclosures for change in accounting estimate are not required
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Fair value hierarchy
Definition
Example
Level 1
Level 2
Level 3
Quoted prices
(unadjusted) in active
markets for identical
assets or liabilities that
the entity can access at
the measurement date
Quoted prices for an
equity security that
trades on the NZX
Inputs other than
quoted prices included
within level 1 that are
observable for the asset
or liability, either directly
or indirectly
Interest rates and yield
curves observable at
commonly quoted
intervals, implied
volatilities, and credit
spreads
Unobservable inputs for
the asset or liability
Growth rate applied to
historical cash flows
used to value a
business in an entity
that is not publicly listed
Inputs used to measure fair value might be categorised
within different levels of hierarchy
Fair value measurement is categorised in hierarchy at lowest level input
that is significant to entire measurement
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Disclosures
Principles
Disclose information that helps users to assess:
For assets and liabilities that are 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 to be made separately
for each class of assets and liabilities
Present quantitative disclosures in a tabular format unless
another format is more appropriate
One Stop Update on IFRS
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Disclosures
Disclosure requirement
FV at reporting date
Recurring
L1, L2, L3
Reasons for FV measurement
Nonrecurring
FV
disclosed
L1, L2, L3
L1, L2, L3
Level within hierarchy
L1, L2, L3
Transfers within hierarchy, including reasons and
policy
L1, L2
L1, L2, L3
L1, L2, L3
L2, L3
Valuation technique, inputs, changes etc.
L2, L3
L2, L3
Quantify unobservable inputs
L3
L3
Reconciliation of opening & closing balance
L3
Unrealised gains/losses from remeasurement in P&L
L3
Valuation processes and policies
L3
Description of sensitivity to changes in
unobservable inputs
L3
Reasons if HBU differs from current actual use
L1, L2, L3
L3
L1, L2, L3
L1, L2, L3
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Update on other financial reporting
developments
Standards effective for year ending 31 December 2013
NZ IAS 19 Employee Benefits
NZ IFRS 10 Consolidated Financial Statements
NZ IFRS 11 Joint Arrangements
NZ IFRS 12 Disclosure of Interests in Other Entities
NZ IFRS 13 Fair Value Measurement
Recently issued NZ IFRSs
NZ IFRS 9 (2013) Financial Instruments
Hedge Accounting
“Fast tracks” applying the requirements for the presentation
of own credit risk-related fair value gains and losses
Moved effective date of NZ IFRS to 1 Jan 2017
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