TOPIC 1

FAIR VALUE MEASUREMENT

MFRS 13
TOPIC OUTCOMES
Student should be able to:
 Explain the concepts and principles in the conceptual

framework,
 Explain and apply the relevant financial reporting standards,

and
 Explain the current developments at IASB and MASB pertaining

to property, plant and equipment, intangible assets and

investment property.
INTRODUCTION
 Fair value is the price that would be received to sell an asset
or paid to transfer a liability (exit price) in an orderly
transaction (not a force sale) between market participants
(market-based view not an entity view) at the measurement
date (current price)
INTRODUCTION
 Orderly transaction is a transaction with adequate market exposure and
frequent to provide the market participants to obtain knowledge and
awareness, and the market participant able and willing to enter into
transaction, not forced to do so.

 Fair value is a market-based measurement and it is not an entity-specific

measurement because entity-specific measurement could be bias due to
related party transaction, forced transaction or could be for any other reasons.

 Consequently, the entity’s intention to hold an asset or to settle or otherwise

fulfil a liability is not relevant when measuring fair value. But it should be from
market participants point of view
 THE PRICE
 The exit price that would be received to sell an asset or paid to transfer a
liability regardless whether that price is directly observable or estimated
using another valuation technique.
◦ Eg: If the entity hold Maybank shares and dispose the shares today, the
entity should get RM8.99 per share (exit price).

 The price used to measure the fair value of the assets or liabilities shall not
adjusted for transaction costs.
◦ Transaction cost (eg. Commission and other transaction cost to
sell/transfer) shall not be adjusted in determining the FV since transaction
cost is not the characteristic of the asset/liability but specific to the
transaction and will differ depending on how an entity enter into a
transaction for an asset or liability.

◦ For example, in determining fair value of a quoted shares, its fair value is
the current quoted price of the shares without deduction for
commissions to sell
 MARKET PARTICIPANTS
Buyers and sellers in the principal (or most advantageous) market for
the asset or liability that have all of the following characteristics:
a) They are independent of each other, that is, they are not related
parties.
b) They are knowledgeable, having an understanding about the asset
or liability.
c) They are able to enter into a transaction for the asset or liability.
d) They are willing to enter into transaction for the asset or liability,
that is, they are motivated but not forced to do so.
VALUATION TECHNIQUES AND INPUTS
 The objective of using a valuation technique is to estimate the
price at which an orderly transaction to sell the asset or to
transfer the liability would take place between market
participants and the measurement date under current market
conditions
VALUATION TECHNIQUES AND INPUTS
 Market price approach
◦ Uses prices and other relevant information generated by market
transaction involving identical or comparable (similar) assets,
liabilities, or a group of assets and liabilities
 Income approach
◦ Uses valuation techniques to convert estimated future amounts of cash
flows or income and expenses to a single present value (discounted
amount)
 Cost approach
◦ The amount that would currently be required to replace the service
capacity of and assets (current replacement cost)
INPUTS TO VALUATION TECHNIQUES
 Observable
◦ Inputs that are developed on the basis of available market data
◦ Reflect the assumptions that market participants would use
 Unobservable
◦ Inputs for which market data are not available
◦ Developed on the basis of the best information available about the
assumptions that market participant would use
 MEASUREMENT OF FAIR VALUE
FAIR VALUE HIERARCHY
An entity
must maximize the
use of Level 1 inputs Level 1
and minimize the
use of Level 3
inputs. Level 2

Level 3
 FAIR VALUE HIERARCHY
 3 three level of inputs to valuation techniques uses to measure FV:
1. Level 1 inputs
◦ Quoted prices (Unadjusted) in active markets for identical assets or liabilities that the
entity can access at the measurement date
◦ Examples: Prices quoted on a stock exchange, listed derivatives and Government securities
2. Level 2 inputs
◦ Inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly (ie prices) or indirectly (ie derived from prices).
◦ For example: quoted prices for similar assets in active markets or for identical or similar
assets in non-active markets or use of quoted interest rates for valuation purposes
3. Level 3 inputs
◦ Unobservable inputs for the asset or liability, eg discounting estimates of future cash flows
◦ Level 3 inputs are only used where relevant observable inputs are not available or where
the entity determines that transaction price or quoted price does not represent fair value.
◦ Example: In measuring fair value of palm oil trees (Biological asset under revaluation
model) using the discounted cash flow technique (income approach), the only observable
input might be the market price of fresh fruit bunches (FFB) whilst other inputs such as
cost, margins, growth, yield and so forth are developed internally. The resulting valuation
is a Level 3 measurement due significant of unobservable inputs
Active market
 A market in which transactions for the asset or liability take
place with sufficient frequency and volume to provide pricing
information on an ongoing basis.

 A fair value measurement assumes that the transaction takes

place either:
◦ (a) In the principal market for the asset or liability; or
◦ (b) In the most advantageous market (in the absence of a principal
market).
 FAIR VALUE FRAMEWORK
 A fair value measurement requires an entity to determine all of
the following:

13
PRINCIPAL (OR MOST ADVANTAGEOUS) MARKET
◦ Principal market
 Is the market with the greatest volume and level of activity for the asset or
liability
 The market in which the entity would normally enter into a transaction to
sell the asset or to transfer the liability
 Eg. Shares of Maybank traded on Bursa Malaysia. High volume
transactions (buy and sell the shares) on daily basis (on-going basis) that
influence the price of the shares (provide pricing information
◦ Most advantageous market
 the market that maximises the amount that would be received to sell the
asset, OR minimizes the amount that would be paid to transfer the
liability after taking into account the transaction costs and transport cost.
 Certain asset and liability can be traded in more than one market. E.g. Shares of
Maybank can be traded on Bursa Malaysia and Singapore Stock Exchange. In this
case, the entity hold Maybank shares should use price from the market where it
can maximizes amount to be received to sell the shares (most advantageous
market)
Example 1
 HIGHEST AND THE BEST USE
 the fair value measurement is the value for using the asset in its
highest and best use (the use that would maximise its value) or by
selling it to another market participant that would use it in its highest
and best use
 The highest and best use of a non-financial asset takes into account
the use that is physically possible, legally permissible and financially
feasible.
◦ Physically possible - takes into account the physical characteristics of the asset
when pricing the assets. Eg: location, size, topography
◦ Legally permissible - Takes into account any legal restrictions on the use of the
asset. Eg; freehold or leasehold title, agriculture land or commercial land
◦ Financially feasible
◦ Takes into account whether the current or potential use of the asset would
generates income or net cash flow to produce an investment to produce an
investment return that market participants would require from the investment
16
Example 2
 APPLICATION OF FV MEASUREMENT
 Need to determine:
1. The particular asset or liability being measured
2. For non-financial asset, the highest and best use of asset
and whether it is stand alone or used in combination with
other assets (CGU)
3. The market in which an orderly transaction would take place
4. The appropriate valuation techniques to use when
measuring FV
 ASSET / LIABILITY
 Stand alone/ a group of assets (a cash generating unit or a
business)
 The measurement should consider the characteristics of the

asset or liability:
1. Characteristics of the asset and liability (condition/ location/
restriction)
2. The price – observable or not
3. Economic benefit that will be generated by the asset
COMBINATION OR STAND-ALONE ASSET
 For non-financial assets
◦ E.g. the highest and best use of a railway line in oil
palm plantation would be the use of the railway line
together with other assets in the plantation estate.
Therefore, it fair value will be measured based on group
of assets.

◦ E.g. Agriculture land used in plantation operation may

have the highest and best use more on stand-alone
basis if the current price of similar stand-alone land
has a higher market value. Therefore, it fair value will
be measured based on stand-alone basis.

20
 APPLICATION TO LIABILITIES AND
OWN EQUITY INSTRUMENTS
 The fair value measurement assume that a liability or the
entity's own equity (The Instruments) is transferred to a
market participant on the measurement date. E.g. Bond issued
or shares issued as consideration in a business combination

 i.e. the fair value of the instrument is measured based on

the perspective of a market participant who holds the identical
instrument as an asset. i.e. based on quoted price of the
instruments, if available. If quoted price for identical
instrument not available, quoted price of similar instruments
need to be used. If quoted price for similar instrument not
available, an appropriate valuation technique is to be used.
21
 APPLICATION TO LIABILITIES AND
OWN EQUITY INSTRUMENTS
 Example: Entity A issued bond with nominal value of RM1,000
each at an issue price of RM880 per unit. Entity A’s borrowing
cost at the time of bond issue is 8%.

 Fair value at Year End 1 should be:

 If the bond is quoted bond, then its fair value is based on its market price at year
end.
 If the bond is unquoted, then its fair value is based on market price of similar
quoted bond (same credit rating and time period to maturity) held by investors in
the market place
 If the above not available, then fair value of the bond at year end should be based
on valuation techniques such as present value of the expected cash flow
associated with the bond.
22
 FV AT INITIAL RECOGNITION
 The entry price
◦ The price paid (transaction price) to acquire an asset or to assume a
liability
 In many cases transaction price = the FV of the asset/
liability (Exit price – price to sell an asset/ transfer a liability)
 Reasons for TP ≠ FV:

1. The transaction is between related parties

2. The transaction takes place under duress/ the seller is force to
accept the price
3. The unit of account (the level at which an asset or liability is
aggregated or disaggregated) represented by the transaction price
is different from the unit of account measured at FV
4. The market in which the transaction takes place is different from
the principal market (or the most advantageous market)
The fair value hierarchy
Is there a quoted price in an
active market for an identical
Yes No
asset or liability?
(Level 1 input)
Are there any observable
Use the Level 1 input = inputs* other than quoted
Level 1 measurement prices for an identical
Must use without asset or liability?
adjustment Yes No

* Maximise the use of relevant No use of significant

observable inputs. Observable
inputs include market data unobservable Use of significant
(prices and other information) (Level 3) inputs‡ = unobservable
that is publicly available
Level 2 (Level 3) inputs‡ =
‡
Unobservable inputs include measurement Level 3
the entity’s own data (eg measurement
budgets, forecasts), which
must be adjusted if market
participants would use
different assumptions
 DISCLOSURE
At the minimum, :
 The fair value measurement – the valuation technique and inputs

used to develop those measurement

 The hierarchy level into which fair value measurements fall
 Transfers between levels 1 and 2 and the reasons for those

transfers
 For level 2 and 3 – describe the methods and inputs to the fair

value measurements and changes in valuation techniques and the

reasons
 If used level 3 input, need to disclose the effect of the

measurements on profit or loss or comprehensive income that

include:
◦ a reconciliation of opening and closing balances, and quantitative
information about unobservable inputs and assumptions used.
 DISCLOSURES
Example FV measurement disclosure for non-financial assets

26
DISCLOSURES
Example FV measurement disclosure for financial assets

27
 DISCLOSURES
Example FV measurement disclosure for financial liabilities

28
Thank you