IFRS 13 – FAIR VALUE MEASUREMENT

- Regularly examined
- Provides a guide on Fair Value
- Keeps Fair Value consistent
- Some standards not covered by IFRS 13:
 IFRS 2 – Share Based Payments
 IAS 16 - Leases
 IAS2 – Inventories
 IAS 36 - Impairment

ADVANTAGES OF IFRS 13

1. Standardized Definition (keeps it consistent)

2. US GAAP uses it too

DEFINITION OF FAIR VALUE

FV = MV = Price expected if the asset is sold

Or if a liability how much it would cost to get rid of it

- If the asset has multiple uses, market value will be the highest and best use
- Measurement should reflect the condition of the asset
- Willing market participants. Not forced, not a related party. Sold in Marketplace
- FV is not adjusted for admin costs. It is for transport and location costs
e.g., fish sold at the harbour, need to pay harbour for

- FV

= market value

= your exit price (to sell)

= doesn’t include transaction costs

= includes location transport costs

= Principle market or most advantageous market (advantageous looks at bottom line)

FAIR VALUE HEIRARCHY

LEVEL 1 – Inputs are observable, qupted prices on think which are identical. Most reliable evidence,
simple to see and understand. Bananas in Tesco/Asda and also fruit market. You can guess the rough
value from active market which can be observed. (also shares would be level 1)

LEVEL 2 – Observable For similar assets, not the same. Or not active market, not fluid and every day
sales. E.g. Land & Buildings flat prices roughly the same as another one in the same block. IAS16 PPE,
IAS40 Inves Property.
LEVEL 3 – Unobservable = no market for it. Must guess as no MV/FV. Develop our own estimates &
data & logic use best info for it. Present value, of future cash flow. (for exam) (deferred
consideration IFRS3) Could measure contingent liability and could measure brand. Buying a company
or subsidiary with no similar company.

THE 3 MV ESTIMATE TECHNIQUES

1. Observ ein the marketplace = Coke

2. Observe a similar asset traded recently = Flat/House
3. Reliable guestimate, often using NPV.

Q @ [16:40}

1. FV = MV
2. L2 = Flat/House
3. PV = 5% of $100m = $5m
4. Business combination

Q2 @ {21:40 to 26:00]

Definition, fair value is market value. The amount you expect from a normal transaction from
agreeing parties.

L2 = observable input, highest/best. Intention not relevant. FV is $10m

GOODWILL DEFINITION

 Goodwill arises in group accounts when the aggregate of fair value is more than NCI.
 If NCI > Net assets of the sub @ AQ
 = +ve goodwill figure

FV & GOODWILL formula

1. FV of Parents investment in Sub X

2. NCI X
3. FV of Net assets in Sub (X)
4. Goodwill at AQ X
5. Impairment Loss (X)
6. Goodwill at Reporting date X

1. Form of consideration Fair Value

Cash consideration No Adjustment
Shares issued by the parent Market Value (Level 1 in hierarchy)
Deferred consideration A promise, ill pay you in 12 months. = PV of
Future cash clow (level 3)
Contingent consideration (Earn out clause) I will pay you out if so and so happens.
Expected value basis (Level 3)

If investment in subsidiary then any transaction costs that you occur (broker fees etc) should be
expensed and not capitalised.
2. NCI

There is a choice as to how to measure NCI @ AQ done by AQ by AQ basis

1) NCI @ FV = based on subs share price

NCI % x No. Share in Sub x MV of subs shares = NCI @ AQ = NCI @ FV
2) NCI @ Proportion of net assets
NCI x FV Net Assets @ AQ = NCI @ Proportion of Net Assets

1) NCI @ FV = Goodwill in Full = Impairment loss is split parents RE and NCI

2) NCI @ Pro of NA = Goodwill is proportion only = I’m loss all be parents RE

3. NET ASSETS OF SUB {35:25]

 When buy a sub can’t take sub a NBV, need reviewed and adjusted to FV
 Can +VE provisional and be revised in 12 months
 The adjustments are positive revaluations. P&M/L&B worth more to the group than to the
market
 Brands (IAS38) prohibits company recognising its own brand as an intangible asset. In group
it can.

Q – RAMA ONE [38:10]