financed by a grant from Switzerland through the Swiss Contribution to the enlarged European Union Poland Financial Reporting Technical Assistance Program (FRTAP) IFRS Community of Practice in Warsaw Workshop 2, 2 December 2011 Fair Value Measurement How? David Cairns

What is the asset or liability? Which valuation technique is appropriate? What inputs should be used in valuation techniques? Putting IFRS 13 into Practice

Asset Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date Liability Fair value is the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date Fair Value - Definitions

Stand-alone asset or liability – for example  a financial asset  an intangible asset Group of assets or liabilities – for example  a cash generating unit  a business Depends on unit of account  level at which an asset or liability is aggregated or disaggregated for recognition purposes under other IFRS What is the Asset or Liability?

Objective  estimate price at which an orderly transaction to sell the asset or transfer a liability would take place between market participants at the measurement date under current market conditions Use valuation technique(s)  appropriate to the circumstances  sufficient data available to measure fair value  maximise use of relevant observable inputs  minimise use of unobservable inputs Which Valuation Technique(s)?

Market approach  prices and other relevant information generated by market transactions involving identical or comparable (similar) assets or liabilities Cost approach  amount required currently to replace the service capacity of an asset (current replacement cost) Income approach  converts future cash flows/income and expenses to a single current (discounted) amount (DCF, Black Scholes, multi-period excess earnings method, etc) Valuation Techniques

Inputs which are consistent with characteristics of the asset or liability that market participants would take into account in a transaction for the asset or liability, for example  condition, location etc of asset  restrictions on sale or use of asset  control premiums  non-controlling interest discounts  age, remaining economic life, etc. Which Inputs?

Observable inputs  developed using market data  reflect assumptions that market participants would use when pricing asset or liability Unobservable inputs  market data not available  best information available about the assumptions that market participants would use when pricing asset or liability Observable inputs in preference to unobservable inputs Which Inputs?

Level 1 inputs  unadjusted quoted prices in active markets for identical assets or liabilities (observable inputs) Level 2 inputs  other directly or indirectly observable inputs for the asset or liability  must be observable for substantially full term of asset or liability with specified (contractual) term Level 3 inputs  unobservable inputs for the asset or liability Which Inputs? Hierarchy

An active market is  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 Unadjusted quoted prices in active markets for identical assets or liabilities Level 1 Inputs

Quoted prices for similar assets or liabilities in active markets Quoted price for identical or similar assets or liabilities in markets that are not active Other observable inputs, for example:  interest rates/yield curves  implied volatilities  credit spreads Other inputs derived principally from, or corroborated by, observable market data by correlation or other means Other directly observable inputs for the asset or liability Level 2 Inputs

Make adjustments for  condition of asset  location of asset  extent to which inputs relate to items that are comparable to the asset or liability  volume or level of activity in markets within which inputs are observed Adjustments may result in level 3 inputs Other directly observable inputs for the asset or liability Level 2 Inputs

Use only to extent that relevant observable inputs are not available  use best information available in the circumstances Market participant assumptions about risk include risk inherent in the valuation technique Unobservable inputs for the asset or liability Level 3 Inputs

You have been asked to measure the fair value of the following assets at 31 December 2011:  10,000 ordinary shares in Nestlé (assume that the principal market is the Swiss stock exchange and that the market for Nestlé shares is active)?  an unlisted debt security with a nominal value of €10,000, a fixed interest rate of 5% payable on 31 December each year and repayment at par on 31 December 2015?  an office building built in 2005 in a major city which is currently let to tenants at rents set in 2006 under leases which expire in 2015? What valuation approach and valuation techniques would you use? What is the nature of the inputs that you would you use in those techniques? Fair Value Measurement Case Studies

financed by a grant from Switzerland through the Swiss Contribution to the enlarged European Union Poland Financial Reporting Technical Assistance Program (FRTAP) IFRS Community of Practice in Warsaw Workshop 2, 2 December 2011 Fair Value Measurement How? David Cairns