1. Fair value accounting and business competitiveness

2. Richard Martin Head of Financial Reporting, ACCA

3. ACCA 320,000 members and students world-wide Examining in International Accounting Standards and International Standards on Auditing since 1996 Diploma in IFRS Own accounts using IFRS since 2002 richard.martin@accaglobal.com www.accaglobal.com/ifrs

4. Fair value accounting Fair values – what are they and where they are used in IFRS Fair value accounting – main applications in IFRS Implications for business competitiveness

5. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. Networking What are fair values and where are they used in IFRS

6. Measurement bases in IFRS Depreciated Cost Share of net assets (equity accounting) Value in use (VIU) Net realisable value (NRV) Fair value (FV) Lower of cost and NRV Recoverable amount (higher of VIU and NRV) Entity-specific or market values Exit or entry values

7. Where are fair values used in IFRS? Fair value as a means of estimating cost – initial measurement Revenue, swaps of non-monetary assets Business combinations (IFRS 3) – FV of consideration and of net assets acquired Share-based payments – value of options granted Allowed alternative for property, plant and equipment or intangible assets Pension schemes (IAS19) – assets less liabilities plus effect of corridor and spreading over service lives

8. Fair value accounting Where changes in fair values affect profit for the year Financial instruments (IAS39) Investment properties (IAS40) Agriculture (IAS41) Where holding the assets for trading/dealing/investment purposes Revaluations Property, plant and equipment (IAS16) Intangible assets (IAS38) Through equity, but recycled into P&L Financial instruments – available for sale and cash flow hedges

9. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. Global network Fair value accounting – main applications

10. Fair values in IAS39 Four way classification of assets Loans and receivables – at amortised cost Held to maturity – at amortised cost Trading – at fair value through P&L Available for sale – at fair value through equity Derivatives – at fair value through P&L Liabilities – at amortised cost for most Trading or derivatives – at fair value through P&L

11. Issues with fair values in IAS39 Mixed model – mixture of costs and fair values Hedge accounting Fair value hedges – both hedged item and hedging instrument (derivative) at FV through P&L Cash flow hedges – derivative at FV through equity Fair value option

12. Reliable fair values Hierarchy Active market Quoted price, bid price, unit price (no extra value for a big block) No active market – valuation model Maximise inputs from market transactions Use all factors – time value, credit risk, volatility, prepayment risk etc. No active markets – equities at cost as last resort

13. IAS40 - Investment property Initial measurement at cost plus transaction costs Add some subsequent expenditure Then at fair value through P&L or at depreciated cost Market value with no deduction for selling costs Use of professional external valuer Best evidence – market transactions in similar properties Next best – other market transactions adjusted for leases, location, time etc. or discounted cash flow analysis

14. IAS41 Agriculture No cost option Initial measurement at fair value Subsequently at fair value with changes through P&L Fair value less point-of-sale costs Maximise inputs from market transactions Discounted cash flows as alternative Specific issues – eg agricultural assets and the land they stand on

15. How far will FV accounting spread? Measurement project Insurance contracts - Part 2 Revenue recognition Full fair value model for financial instruments Comprehensive income project

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17. Fair value accounting: business competition issues Costs Valuations Models – understanding and applying them Systems – moving from transactions to value changes Reported results Measurements - Day 1 profits, transaction costs Prudence and realisation Reliability issues

18. Fair value accounting: business competition issues Earlier recognition of profits No need for a transaction Recognise selling gains Volatility of results as market changes Hedge accounting and natural hedges Liabilities – change in own credit risk Same as market/competitors Return on capital shifts from invested capital to market value

19. Fair value accounting: business competition issues Understanding the fair value accounts Presentation issues – profits from different sources, interest income Basis for taxation Limit to distributions

20. Use as section divider or to punch home a particular concept. Size and crop photo to fit entire slide frame. Right mouse click on photo and choose ‘order’ then ‘send to back’. The photo will then sit behind the pre-animated keylines and text block. Overwrite the text with a suitable title i.e. Global network Some conclusions

21. Mixed bases in IFRS Various ways of accounting for changes – revaluations, through equity + recycling, fair value through P&L Fair values used when costs fail – derivatives, agriculture Fair values used with hesitation – options in IAS39 and 40 – but likely to increase

22. Some conclusions Business implications More costs Reliability of fair values Reported results will change Earlier recognition of profits Volatility of the results as markets change Presentation issues to help understanding