Fair value measurement for assets Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB 30 April to 4 May 2012

What is fair value? WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Definition 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 forced sale) between market participants (market-based view) at the measurement date (current price). Fair value is a market-based measurement (it is not an entity-specific measurement) Consequently, the entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. IFRS 13 Fair Value Measurement WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

When are assets measured at fair value? WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Assets Classification, recognition and measurement Assets 5 5 CM or RM Nil Cost Cost Nil Lower of C or NRV some FVM CM or FVM Cost PP&E Intangible Cost Inv Property Inventory Assets Etc Financial Defined Benefit Biological assets Fair value Various AmC or FVM Various FV plan assets less PUC plan obligation & arbitrary rules Fair value less costs to sell FV plan assets less PUC plan obligation & arbitrary rules Fair value less costs to sell © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 5 5

MEASUREMENT AT INITIAL RECOGNITION MODEL BASED ON FAIR VALUE ASSET TYPE MEASUREMENT AT INITIAL RECOGNITION MODEL BASED ON FAIR VALUE BASIS OF IMPAIRMENT TEST IFRS 9 Financial Instruments Fair value For specified financial assets and for particular business models: fair value IAS 16 Property, Plant and Equipment Purchase costs + construction costs + costs to bring to the location and condition necessary to be capable of operating in the manner intended by management. Accounting policy choice: revaluation model Compare carrying amount to recoverable amount. Recoverable amount is greater of value in use and fair value less disposal costs (IAS 36) IAS 38 Intangible Assets Purchase costs + development costs + costs to bring to the location and condition necessary to be capable of operating as intended by management IAS 40 Investment Property Cost including transaction costs Accounting policy choice: fair value IAS 41 Agriculture Fair value less costs to sell © 2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org

IAS 41 Agriculture WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement Biological assets (and agricultural produce at the point of harvest) are measured at fair value less costs to sell (initial and subsequent measurement) changes in fair value less costs to sell are presented in profit or loss. Biological assets that are attached to land (eg trees in a plantation forest) are measured separately from the land. If owner-occupied the land is accounted for in accordance with IAS 16. MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Why fair value measurement? The value accretion of agricultural assets is unique Fair value measurement provides relevant, reliable, comparable and understandable measurement of future economic benefits consider a plantation forest with a 30 year harvesting cycle: fair value measurement reflects the biological growth using current fair values Historical cost cannot accurately portray the value of an accreting asset consider the plantation forest: no income would be reported until harvest and sale (30 years) what is the cost of a fifth generation calf? MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Exceptions from fair value measurement Measure using cost-depreciation-impairment: IAS 41: only when on initial recognition of a biological asset for which quoted market prices are not available and other estimates of fair value are determined to be clearly unreliable IFRS for SMEs: only for those biological assets whose fair value is not readily determinable without undue cost or effort MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates When using the most recent market transaction price to measure fair value: identifying the most recent market transaction price and evaluating whether economic circumstances have changed significantly. When using market prices for similar assets: adjusting the prices to reflect differences. When using sector benchmarks (eg the value of cattle expressed per kilogram of meat): adjusting to reflect differences. When using DCF model: estimating the expected future net cash inflows and the discount rate. MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates continued A PwC study of standing timber valuation practices observed that when applying DCF- models management made several important assumptions including: expected income at harvest—variables included growth rate and price per unit of volume expected costs during growth—including silvicultural costs, eg maintenance and thinning expected point-of-sale-cost—including harvesting and transport to market determining the appropriate discount rate. MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IAS 16 Property, Plant and Equipment WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement at fair value After initial recognition, an entity chooses to measure PP&E either at: (i) cost less accumulated depreciation and accumulated impairment (cost model); or (ii) fair value less subsequent accumulated depreciation and accumulated impairment (revaluation model). Revaluations must occur with sufficient regularity to ensure that the carrying amount of an asset does not differ materiality from that which would be determined with a fair value at the end of the period. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement at fair value continued Revaluation increases are recognised in other comprehensive income and are accumulated in equity (Revaluation surplus) Revaluation decrease should first reduce the credit balance of revaluation surplus to zero and are then recognised in profit or loss Depreciation and impairment considerations are similar to those of the cost model WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Comparison to the IFRS for SMEs Section 17 Property, Plant and Equipment of the IFRS for SMEs does not permit the use of a revaluation model for property, plant and equipment Generally, there is less fair value measurement for SMEs WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates Revaluation model requires measuring fair value (see IFRS 13 for estimates and judgements) Impairment testing requires many estimates (see IAS 36). MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IAS 38 Intangible Assets WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement Intangible assets are usually measured using the cost model An entity may choose to revalue (measure the asset at fair value), only if fair value can be determined by reference to an active market. If an intangible asset is revalued, all assets within that class of intangible assets must be revalued. The principles of the revaluation model in IAS 16 apply to IAS 38. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement continued An intangible asset with a finite useful life is amortised. An intangible asset with an indefinite useful life is not amortised is tested annually for impairment. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Comparison to the IFRS for SMEs Section 18 Intangible Assets of the IFRS for SMEs does not permit the use of a revaluation model for intangible assets There are no indefinite useful life intangible asset in the IFRS for SMEs. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IAS 40 Investment Property WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Subsequent measurement For subsequent measurement an entity must adopt either the fair value model or the cost model for all investment property All entities must estimate the fair value of investment property, either for measurement (if the entity uses the fair value model) or for disclosure (if it uses the cost model) highly unlikely that an entity can change from fair value model to cost model because the change would not satisfy the IAS 8 criteria (more relevant information) for a voluntary change in accounting policy MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value model Investment property is remeasured to its fair value at the end of each reporting period Changes in fair value are recognised in profit or loss in the period they occur. In rare cases (exceptional circumstances) when fair value is not from inception reliably measurable on a continuing basis, the entity measures that property on the cost basis. this does not affect the measurement of other investment properties. MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Comparison to the IFRS for SMEs IFRS for SMEs does not have an accounting policy choice for measurement. The accounting for investment property is driven by circumstance If an entity can measure the fair value of an item without undue cost or effort on an ongoing basis, it must use the fair value model It uses the cost model for all other investment property MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IFRS 9 Financial Instruments WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Classification model: financial assets Business model test Amortised cost (one impairment method) FVO for accounting mismatch (option) Contractual cash flow characteristics Reclassification required when business model changes All other instruments: Equities Derivatives Some hybrid contracts … Fair Value (No impairment) Equities: OCI presentation available (alternative) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 27

Measurement If a financial asset is not measured at amortised cost, it is measured at fair value Gains or losses in financial assets are recognised in profit or loss unless: The financial asset is part of a cash-flow hedging relationship The financial asset is an equity instrument and the entity has elected to present its gains and losses in other comprehensive income (see paragraph 5.7.5) WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Comparison to the IFRS for SMEs The applicable sections of the IFRS for SMEs are significantly different from IFRS 9. MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Non-current assets held for sale Non-current assets held for sale are measured at the lower of fair value less costs to sell and carrying amount (on the date of classification as held for sale)—they are not depreciated If still on hand at the end of a reporting period, remeasured to fair value less cost to sell at that date. Changes are recognised in profit or loss (IFRS 5.21). WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IAS 2 Inventories WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Measurement exception Commodity broker-traders may measure inventories at fair value less costs to sell Changes in fair value less costs to sell are recognised in profit or loss MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IFRS 3 Business Combinations WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Principles The Standard includes recognition and measurement principles. Recognition (IFRS 3.10–17): Separate recognition of identifiable assets acquired and liabilities assumed (link to Conceptual Framework) Measurement (IFRS 3.18–20): Assets and liabilities that qualify for recognition are measured at their acquisition-date fair values MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Exceptions Exceptions to measurement principle Reacquired rights Measured at FV based on remaining contractual term ignoring the FV effect of renewal Share-based payment transactions Replacement awards: measured in accordance with IFRS 2 Assets held for sale Measured in accordance with IFRS 5 (ie FV less costs to sell) MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Exceptions continued Exceptions to both recognition and measurement Income taxes Deferred tax assets or liabilities arising from acquired assets or liabilities accounted for in accordance with IAS 12 Employee benefits Accounted for in accordance with IAS 19 Indemnification assets May not be recognised at FV if it relates to an item not recognised or measured in accordance with IFRS 3 MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Recognition and Measurement Goodwill (asset) is measured initially indirectly as the difference between: the consideration transferred (IFRS 3.37–40) not including transaction costs in exchange for the acquiree and the acquiree’s identifiable assets and liabilities MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Recognition and Measurement continued Consideration transferred Measured at fair value of sum of assets transferred and liabilities assumed Acquisition-related costs are not included Contingent consideration included at its fair value at acquisition date (changes are not included in the consideration transferred at acquisition-date) MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Other fair values IAS 19 Employee Benefits The plan assets associated with a funded defined benefit plan are measured at their fair value at reporting date IAS 20 Accounting for Government Grants and Disclosure of Government Assistance Grants (including some non-monetary grants) are recognised at fair value IAS 27 Separate Financial Statements Investments in subsidiaries, joint ventures and associates may be measured at fair value in accordance with IFRS 9. MW © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

When does IFRS 13 not apply? 41 Excluded from the scope IFRS 2 and IAS 17 Disclosures in IFRS 13 not required for Plan assets (IAS 19) Retirement benefit plan investments (IAS 26) Assets for which recoverable amount is fair value less cost of disposal (IAS 36) Not required for measurements similar to fair value IAS 2 (net realisable value) IAS 36 (value in use) © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

IFRS 13 Fair Value Measurement WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Introduction Sets out in a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. It does not introduce any new requirements to measure an asset or a liability at fair value, change what is measured at fair value in IFRSs or address how to present changes in fair value. IFRS 13 is effective from 1 January 2013. Early application is permitted. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The old definition of fair value Its weaknesses The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. It did not specify whether an entity is buying or selling the asset. It was unclear about what settling meant because it did not refer to the creditor. It was unclear about whether it was market-based. It did not state explicitly when the exchange or settlement takes place. ? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Definition 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 forced sale) between market participants (market-based view) at the measurement date (current price). Fair value is a market-based measurement (it is not an entity-specific measurement) Consequently, the entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Application guidance When measuring fair value use assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. Characteristics of a particular asset or liability that a market participant would take into account when pricing the item at the measurment date, include: age, condition and location of the asset restrictions on the sale or use. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Transaction and Price Measured using the price in the principal market for the asset or liability (ie the market with the greatest volume and level of activity for the asset or liability) or, in the absence of a principal market, the most advantageous market for the asset or liability. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Non-financial assets Must reflect the use of a non-financial asset by market participants that maximises the value of the asset physically possible legally permissible financially feasible Highest and best use is usually (but not always) the current use. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The fair value hierarchy 49 Is there a quoted price in an active market for an identical asset or liability? (Level 1 input) Yes No Are there any observable inputs* other than quoted prices for an identical asset or liability? Use the Level 1 input = Level 1 measurement Must use without adjustment Yes No * Maximise the use of relevant observable inputs. Observable inputs include market data (prices and other information) that is publicly available ‡ Unobservable inputs include the entity’s own data (eg budgets, forecasts), which must be adjusted if market participants would use different assumptions No use of significant unobservable (Level 3) inputs‡ = Level 2 measurement Use of significant unobservable (Level 3) inputs‡ = Level 3 measurement

Disclosure Information about an entity’s valuation processes is required for fair value measurements categorised within Level 3 of the fair value hierarchy. A narrative discussion is required about the sensitivity of a fair value measurement categorised within Level 3. Quantitative sensitivity analysis is required for financial instruments measured at fair value. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates An entity must take all information that is reasonably available to search for a principal market. determining fair value and the highest and best-use.for a non-financial asset. Assumptions that a market participant would use (including assumptions about risk). Determining the correct valuation technique to use and the inputs to the techniques, particularly on the income approach, require a wide range of estimates as: discount rates future cash flows risks and uncertainty WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates continued The inputs used in the valuation techniques should primarily be based on observable inputs (where possible) to minimise the use of unobservable inputs. WU © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org 53

54 54 The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 54