This summary provides a concise summary (with examples) of the pervasive topics within IFRS such as fair-value determination, events after reporting date, change in accounting policy and estimate.
- Conceptual Framework: Theoretical knowledge
& definitions and recognition criteria (know and
apply on a basic level)
- IFRS 13: Discuss and/or apply w.r.t. the
determination of fair value of assets
- IAS 1: Apply fully
- IAS 7: Covered later in FinAcc 378
- IAS 8: To correctly account for and disclose a
change in accounting policy / estimate and the
correction of prior period errors in financial
statements (without tax consequences).
- IAS 10: Evaluate whether financial statements
should be adjusted or not in terms of events
after the reporting date and be able to account
for adjusting and non-adjusting events
- IAS 12: Covered in detail later
- IAS 21: Recording of transactions in functional
currency of an entity.
Conceptual Framework: Chapters 1-8 – see textbook and highlight relevant sections (definitions and
recognition criteria)
1. Fair value measurement (IFRS 13)
Provides guidelines about “how” fair value must be measured rather than “when” to measure fair
value.
FV = MARKET BASED MEASUREMENT -> NOT entity specific
FV -> Price at which asset can be SOLD or liability can be TRANSERFERED -> an exit price
Definition:
The price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction (i.e. not forced) between market participants on the measurement date
Current exit price is:
- Directly observable OR
- Estimated using valuation techniques
➢ Market approach
➢ Income approach
➢ Cost approach
➢
➢ Transaction cost is not a characteristic of an asset/liability -> do not take into account with
calculation of FV.
➢ Location is a characteristic – transport cost to transport asset from current location to
principal market is taken into account with calculation of FV.
, Fair value hierarchy (72-90):
• LEVEL 1: Quoted prices in an active market for identical assets and liabilities on
measurement date.
• LEVEL 2: Inputs other than quoted prices included in level 1, which is observable for the
asset or liability, directly or indirectly
• LEVEL 3: Non-observable inputs
APPROACH (par. B2)
Step 1: Identify the asset/liability being measured.
Step 2: If it’s a non-financial asset – valuation premise based on the highest and best use (stand
alone or as a group)
Step 3: Determine the principal or most advantageous market for the asset or liability
Step 4: Determine the valuation technique (based on available inputs) that should be used to
determine FV.
IFRS 13: Example 1
(i) In which level of the fair value hierarchy should the fair value of a share investment in an
unlisted company be classified, if the following is applicable:
There is a similar listed company with a quoted share price which is an indicator of the
fair value of the unlisted company’s shares, but significant unobservable adjustments
must be made in order to reflect the differences between the two companies when the
fair value of the unlisted shares is determined.
Level 3, since significant unobservable adjustments were made
(ii) Bean Ltd. acquired a factory as a part of a business combination. A requirement of the
acquisition is that Bean Ltd. is not allowed to change the use of the property from
‘operated as factory’ (thus industrial use) for the next 10 years. The area was recently
rezoned and other properties in the area were redeveloped as residential properties.
Legal advice was obtained and it is clear that, in terms of the purchase agreement, Bean
Ltd. is prohibited to change the use, but the company can however sell the property to
a third party, who will not be bound by this limitation.
Should the constraint on Bean Ltd. (in terms of the change in use) be considered in the
calculation of the fair value of the factory?
No, because it is a characteristic of the entity.
or: no, because it is not a characteristic of the asset.
or: no, because a market participant is not subject to the same constraint
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