IFRS 13 Fair Value Measurement IFRS / IVS UPDATE IFRS 13 Fair Value Measurement

Learning objectives Fair Value Measurement – IFRS 13 and IVSC Definitions –IFRS/ IVS Concept of highest and best use/valuation premise Valuation techniques Fair value hierarchy Required disclosures Key Takeaways

Definition of Fair Value IFRS 13/ IVS

IFRS 13 Fair value definition A single framework for determining FV IAS 40 basis replaced Effective 1 January 2013, and applied prospectively Introduces concepts of highest and best use, valuation premise , and application of fair value hierarchy

IFRS 13 FV Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Hypothetical and orderly transaction This differs from revised IVS Framework: “Fair value is the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.” Respective advantages and disadvantages -IVS

IFRS 13 FAIR VALUE Valuation uncertainty IFRS 13 – Fair value measurement Valuation uncertainty Properties sold within +/- 10% of valuation Country 2007 2008 2009 2010 France 40% 49% 63% 40% Germany 48% 60% 53% 50% The Netherlands 50% 62% 65% 64% UK 60% 60% 55% 57%

IFRS 13 (cont.) Properties sold within +/- 20% of valuation Country 2007 2008 2009 2010 France 64% 79% 86% 52% Germany 73% 77% 69% 75% The Netherlands 82% 85% 88% 80% UK 85% 83% 82% 82%

Framework for non-financial assets Source: RICS/IPD ‘Valuation and sale price report’ - 2011 Sample sizes Country 2007 2008 2009 2010 France 527 519 505 557 Germany 483 190 64 107 Netherlands 318 197 197 222 UK 903 1233 1042 652

Applying fair value in practice

Fair Value Measurement IFRS 13 requires any advantages that would not be available to market participants generally to be disregarded. Accordingly, management needs to be aware of this difference in concept in order to ensure any values used for financial reporting that are obtained from appraisals, whether external or internal, are consistent with the objective of a fair valuemeasurement i

The Concept of highest and best use Reconsider methods, assumptions , processes / procedures Under IFRS 13, an entity’s current use of an asset is generally taken to be its highest and best use, unless market or other factors suggest that a different use of that asset by market participants would maximise its value. If such factors exist, management is required to consider all relevant information in determining whether the highest and best use of a property is different from its current use at the measurement date.

Highest and best use non financial assets “A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

Highest and best use for non-financial assets Fair value considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use. Highest and best use considers a use that is: Physically possible Legally permissible –Town and Country Planning Act Financially feasible Highest and best use is always considered when measuring fair value, even if the entity intends a different use.

Highest and best use for non-financial assets (cont.) Can be either:(valuation premise) On a stand-alone basis In combination with other assets Assumed the complementary assets are available to market participants Assumptions must be consistent for all assets of the relevant group

Example : highest and best use In this case, the highest and best use is determined from the higher of: The value of the land used in the manufacturing operation The value of the land as a vacant site for residential use Note that transformation costs (e.g., costs to demolish the manufacturing facility) would be considered in the value of land as a vacant site. Land acquired in a business combination is currently developed for industrial use as a site for a manufacturing facility. Nearby sites were recently developed for residential high-rise flats. It was determined that the land could be used to develop residential high-rise flats. How is highest and best used determined?

Valuation techniques Use valuation techniques that: Are appropriate in the circumstances Have sufficient available data Maximise use of relevant observable inputs Minimise use of unobservable inputs IFRS 13 describes three valuation techniques Market approach Income approach Cost approach One or several valuation techniques might be used If a range of values are indicated, select the point within that range most representative of fair value

Valuation techniques (cont.) Apply valuation techniques consistently Change in valuation technique needed if: New markets develop New information becomes available Information previously used is no longer available Valuation techniques improve Market conditions change Change in valuation technique = change in estimate

Fair value hierarchy IFRS 13 includes a fair value hierarchy for disclosure purposes which prioritises the inputs in a fair value measurement: Level 1 – Quoted prices (unadjusted) in an active market for identical assets that the entity can access at the measurement date Level 2 – Observable inputs other than quoted prices Level 3 – Unobservable inputs Amount of disclosures depends on Level Classification

Disclosures

Disclosure principles Disclose information that helps users assess the following: For assets measured at fair value on a recurring or non-recurring basis after initial recognition, valuation techniques and inputs used to develop those measurements For recurring fair value measurements using significant unobservable inputs (Level 3), the effect of measurements on profit or loss or other comprehensive income for the period Fair value disclosures are required separately for each class of assets Quantitative disclosures are presented in a tabular format unless another format is more appropriate.

Fair value hierarchy and disclosures Recurring fair value measurement Non-recurring fair value measurement (after initial recognition) Fair value disclosure (for items not measured at fair value) Fair value at end of reporting period  Level in fair value hierarchy If highest and best use differs from current use, that fact, and why being used that way

Fair value hierarchy and disclosures (cont.) Recurring fair value measurement Non-recurring fair value measurement (after initial recognition) Fair value disclosure (for items not measured at fair value) For Level 2 and 3, a description of valuation technique(s) and inputs used  For Level 2 and 3, any changes in valuation technique(s), and reasons for change For Level 3, quantitative information about significant unobservable inputs For Level 3, description of valuation processes

Summary

Key takeaways IFRS 13 is effective 1 January 2013 and is applied prospectively. It introduces new concepts in valuation of non-current assets Basis of IFRS FV conceptually different from IVS Management responsibility not reduced by appraisers and will need to evaluate the impact of IFRS 13 on its existing valuation processes , procedures and where possible adjust the appraised values in line with IFRS 13

Resources www.ey.com/ifrs Applying IFRS in Real Estate

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