Intermediate

13 Accounting
Canadian Edition, Volume 2
th

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy

Chapter 16 Appendix C
Advanced Models for Measuring Fair
Value and Disclosure of Fair Value
Information
This slide deck contains animations. Please disable animations if they cause issues with your device.
Chapter 16C: Advanced Models for Measuring
Fair Value and Disclosure of Fair Value
Information
After studying this appendix, you should be able to:
7. Understand how options pricing models are used to
measure financial instruments.
8. Describe and analyze required fair value disclosures for
financial instruments.

Copyright ©2022 John Wiley & Sons, Canada, Ltd. 2

Options Pricing Models
• Fair value is more readily determinable if there is an
active market
• Where not available, a valuation technique is used
o Basic models include discounted cash flow calculations
o Complex techniques include options pricing models
• At minimum, option pricing model inputs incorporate
o Exercise price
o Expected life of the option
o Current market price of the underlying stock
o Volatility of the underlying stock
o Expected dividend during the option life
o Risk-free rate of interest for the option life

LO 7C Copyright ©2022 John Wiley & Sons, Canada, Ltd. 3

Options Pricing Models-–Inputs
• Valuation techniques should use external inputs to ensure
they are objective
• Still, significant judgement goes into determining fair
values using options pricing models
• The Black-Scholes options pricing model includes
calculations based on:
o Time value component: statistics that relate to the time
value and the potential for the value of the asset
underlying the option to change over time
o Intrinsic value component: ratio of the fair value of the
asset underlying the option to the PV of the option exercise
price

LO 7C Copyright ©2022 John Wiley & Sons, Canada, Ltd. 4

Fair Value Disclosure for Financial
Instruments
• Major requirement: both the cost and the fair value of all
financial instruments must be reported in the notes to the
financial statements
o Determine the fair value of the company’s financial
instruments
o Understand potential gains and losses that might occur as a
result of these instruments
o Determine the extent of usage of fair value
o Determine the inputs used to implement fair value
measurement

LO 8C Copyright ©2022 John Wiley & Sons, Canada, Ltd. 5

Additional Fair Value Disclosure for
Financial Instruments
• Disclosure provides a framework for addressing the
qualitative aspects related to risk and measurement
• Because changes in fair value are reported in different
ways, note disclosure provides an opportunity for more
precise explanations
• Note disclosures under IFRS require information about the
fair value amounts and reliability levels
Level 1: Level 2: Level 3:
most reliable; based on less reliable; based least reliable; uses
identical products in on similar assets unobservable inputs
the market and liabilities and assumed value

LO 8C Copyright ©2022 John Wiley & Sons, Canada, Ltd. 6

Fair Value Disclosures Related to the Fair
Value Hierarchy
Companies must provide the following:
• Quantitative information about unobservable inputs (L3)
• Qualitative discussion about sensitivity to changes in
unobservable inputs; interrelationships between them (L3)
• A description of the company’s valuation process
• Transfers between L1 and L2 of the fair value hierarchies
• Information about assets measured at fair values that differ
from the assets’ “highest and best use”
• Proper hierarchy classification for items not on the SFP but
disclosed in the notes
• Reconciliation and analysis of L3 changes and impacts

LO 8C Copyright ©2022 John Wiley & Sons, Canada, Ltd. 7

Copyright
Copyright © 2022 John Wiley & Sons, Canada, Ltd.
All rights reserved. Reproduction or translation of this work beyond that permitted by
Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for
further information should be addressed to the Permissions Department, John Wiley &
Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only
and not for distribution or resale. The author and the publisher assume no responsibility
for errors, omissions, or damages caused by the use of these programs or from the use of
the information contained herein.

Copyright ©2022 John Wiley & Sons, Canada, Ltd. 8