IFRS-13

FAIR
VALUE
FRA
Project
Report
MEASUREMENT
Submitted by:

Group 5
NEHA PRASAD

PGP/18/090

SANJANA GARG
PGP/18/105
AMRITANSHU ROY
PGP/18/180

Table
Contents
INTRODUCTION

of

ALARK JAISWAL
PGP/18/283
ARKA BISWAS

PGP/18/289

FAIR VALUE MEASUREMENT PROCESS

FAIR VALUE HIERARCHY

VALUATION METHODOLOGIES

MARKET APPROACH
INCOME APPROACH
COST APPROACH

9
11
12

DISCLOSURES:

12

IFRS 13 DISCLOSURES: AN EXAMPLE

14

REFERENCES

16

Introduction
IFRS 13 was prepared to provide a single source of guidance for all fair value measurements, to
clarify the definition of fair value and to enhance disclosures about reported fair value estimates.

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Historically, fair value guidance was spread across various standards and it was incomplete in
certain places, while absent in other situations which created the room for inconsistency and
differences in interpretation when arriving at an estimate of fair value. In providing a single
source of guidance and a precise definition of fair value, the standard aims to assist in improving
consistency and comparability, help preparers and auditors in fulfilling their role, and contribute
to users understanding of what fair value represents. The standard addresses how to measure fair
value and not when to measure it.

Asset
The price that would
be received to sell
the asset

Fair Value is an
EXIT PRICE

In an orderly
transaction
Between market
participants
At measurement date

Liability
The price that would
be paid to transfer
the liability
Not based on how much
the reporting entity
has to pay to settle a
liability
Should be based on
how much the
reporting entity has to
pay a market
participant such that
the market participant

The objectives of IFRS 13 are to

Define fair value
Provide a single set of requirements for measuring fair value
Specify the disclosure requirements for fair value measurement.
IFRS 13 defines fair value as 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 i.e. the
objective is to estimate the exit price (eg. the price to sell an asset rather than the price to buy the
asset).
An exit price encompasses expectations about the future cash inflows and outflows associated
with an asset or liability from the perspective of a market participant. Fair value is a marketbased measurement and not an entity-specific measurement and is measured using the
assumptions that market participants would use in pricing the asset or liability, including
assumptions about risks. As a result, an entitys intention to hold an asset or to settle or otherwise
fulfil a liability is not relevant in measuring fair value.
Fair value is measured assuming a transaction in the principal market (the market with the
highest volume and level of activity) for the asset or liability. In the absence of a principal

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market, it is assumed that the transaction would occur in the most advantageous market that
would maximize the amount that would be received to sell an asset or minimize the amount that
would be paid to transfer a liability taking into account transaction and transportation costs. The
entity needs to have access to that market, although it may or may not be able to transact in that
market on the measurement date
The measurement is made up of one or more inputs which the market participants use in valuing
the asset or liability. The most reliable evidence of fair value is a quoted price in an active
market. In the absence of the quoted price, entities use a valuation technique to measure fair
value. These inputs form the basis for fair value hierarchy which is discussed in the next section.

Some key elements of the Fair value framework are as given below:
Elements
Definition/Meaning
Unit of account The determination of the unit of account must be established prior to determining
fair value
Defined as the level at which an asset or a liability is aggregated or disaggregated
in an IFRS for recognition purposes
The asset or liability measured at fair value might be either of the following:
a) A stand-alone asset or liability;
b) b) A group of assets, a group of liabilities, or a group of assets and liabilities
Principal market It is the market with the greatest volume and level of activity for the asset or
liability
Most
It is the market that maximizes the amount that would be received to sell the asset
advantageous
or minimizes the amount that would be paid to transfer the liability, after taking
market
into account transaction costs and transport costs
Market
Market participants are buyers and sellers in the principal (or most advantageous)
Participants
market who are
- independent
- knowledgeable about the asset or liability;
- able and willing to enter into a transaction
Fair value is determined using market participant assumptions, not entity-specific
assumptions. An entitys own intentions are not relevant when estimating fair
value
Requires an entity to consider the assumptions a market participant, acting in
Price

their economic best interest, would use when pricing the asset or a liability
In determining the price of an asset or liability in the principal market
Transaction costs are not included as a component of the price. Transaction costs
are considered to be entity specific
Transport costs are not considered to be entity specific. If the principal (or most

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advantageous) market requires the asset to be transported from its current

location, then the associated transport costs should be considered as component
of the price

Valuation
Techniques

A range of valuation techniques can be used when measuring the fair value of
unquoted equity instruments
Judgement is involved not only when applying a valuation technique, but also in

Active Market

the selection of the valuation technique

IFRS 13 discusses three widely used valuation techniques which are:
- The market approach
- The cost approach
- The income approach
A market in which transactions for the asset or liability take place with sufficient

Entry Price

frequency and volume to provide pricing information on an ongoing basis

When an asset is acquired or a liability is assumed in an exchange transaction, the

Exit Price

Highest and Best

use

transaction price is termed as entry price

The price that would be received to sell an asset or paid to transfer a liability
The highest and best use of a non-financial asset establishes its valuation premise
It determines whether the asset should be valued on a stand-alone basis or as a

group in combination with other assets.

If the assets highest and best use is determined to be in combination with of

Orderly
transaction

other assets (and potentially liabilities), it is assumed that the complementary

assets (and potentially associated liabilities) would be available to market
participants
A transaction that assumes exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets or liabilities
It is not a forced transaction

FAIR VALUE MEASUREMENT PROCESS

Determine whether the item is in scope

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 Identify the item being measured

Identify the unit of account and unit of valuation
Identify the market participants and the market

Select
Appropriate
valuation
approaches and
techniques

Market approach
Income approach
Cost approach
Level 1 (Quoted price for an identical asset in an active
market)
Level 2 (Quoted price for an isimilar asset in an active
market)
Level 3 (Discounted Cash Flows)
Fair Value at Initial Recognition
Highesh and Best use
Liabilities and own equity instruments
Portfolio measurement exception
Inactive markets

Determine
inputs to
measure fair
value

Measure Fair
Value

Establish
Parameters

Disclose information about fair value measurements

Fair Value Hierarchy

IFRS 13 defines a 'hierarchy' to increase the reliability and comparability of fair value
measurements and its related disclosures. This hierarchy categorizes the valuation inputs into
three levels. The hierarchy allots the highest priority to cited prices (unadjusted) in active
markets for identical liabilities/assets and unobservable inputs are given the lowest priority.

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Fair value measurements are categorized in their entirety based on the lowest level input that is
significant to the entire valuation.
The fair value hierarchy is made up of three levels, with Level 1 being the highest level.
Level 1
Level 1 inputs are cited prices in active markets for identical liabilities/assets that the
individual/firm has access to on the valuation date.
The most reliable evidence of fair value is provided through a cited market price in an active
market. This is used with limited exceptions but without adjustment to measure fair value
whenever available.
If an individual/firm holds a position in a single liability/asset and the liability/asset is traded in
an active market, then the fair value of the liability/asset is measured within Level 1 as the
product of the cited price for the individual liability/asset and the quantity held by the
individual/firm. This holds even if the market's normal daily trading volume is insufficient to
absorb the amount held and placing orders to sell the asset and the liability in a single operation
might affect the cited price.
Level 2
Level 2 inputs are those inputs other than cited market prices that are included within Level 1.
These are observable for the liability or asset, either directly (i.e. as prices) or indirectly (i.e.
derived from prices).
Level 2 inputs often include:
cited prices for comparable liabilities/assets in active markets
cited prices for identical or comparable liabilities/assets in markets that may not be active
interest rates and yield curves recognisable at frequently cited intervals
implicit volatilities
credit spreads
inputs that can be derived primarily from or validated by observable market data by
correlation or other means, also known as 'market-corroborated inputs'.
Level 3
Level 3 inputs are unobservable valuation inputs for the liability or asset.
These unobservable inputs are used to measure fair value to the degree that relevant observable
inputs are not present/available, thereby permitting for circumstances in which there is little, if
any, market activity for the liability/asset on the valuation date. An individual/firm cultivates
unobservable inputs using the best information available in the situations, which might include

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the individual/firm's own data, taking into account all facts about market participant assumptions
that is reasonably obtainable.
Fair Value Measurements Categorization

The fair value measurement objective remains the same irrespective of the level of the inputs to
the fair value measurement. Unobservable inputs also reflect the expectations that market
participants would use when pricing the liability/asset, including assumptions about risk.
A blockage factor is a discount that reflects the number of instruments (i.e. Q) as a characteristic
of the individual/firms holding relative to daily trading rather than a characteristic of the
liability/asset. An individual/firm is forbidden from applying a blockage factor for a fair value
measurement for all three levels of the fair value hierarchy. This is the case even in respect of
positions that comprise a large number of identical liabilities/assets, such as financial
instruments.
An individual/firm selects those inputs that are consistent with the characteristics of the unit of
valuation for the liability/asset that market participants would consider.
An individual/firm should not select inputs that reflect size as a representative of the
individual/firms holding even if the markets everyday trading volume is not adequate to absorb
the complete quantity held by the individual/firm without altering the market price.
If an individual/firm decides to enter into a transaction to sell a chunk of identical
liabilities/assets (e.g. financial instruments), the consequences of that choice should not be
recognized before the transaction occurs irrespective of the level of the hierarchy in which the
fair value measurement is regarded as. Selling a block as opposed to selling the underlying
liabilities/assets separately or in multiple, smaller pieces is an individual/firm-specific decision.
These variances are not relevant in a fair value measurement, and therefore they should not be
reflected in the fair value of a liability/asset.
When no Level 1 input is available, a premium or discount should be applied to fair value
measurement if:

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market participants would include the premium or discount when pricing the
liability/asset given its unit of valuation, which is specified in other guidance
a premium or discount reflects the outlook of market participants that act in their
economic best interest.

The application of a control premium would be appropriate in the absence of a

Level 1 input for the individual items if:

The unit of valuation is a controlling interest

The price to which a control premium is applied reflects the price of an interest without
control
A market participant would pay a premium above that price to obtain control

When a security is not traded in an active market and its fair value is based on a model-based
valuation (thus causing the valuation to be categorized in Level 2 or Level 3), the inclusion of a
liquidity adjustment may be suitable.
The amount of a liquidity adjustment should be determined based on the liquidity of the specific
liabilitys or assets unit of valuation in the individual/firms major (or most profitable) market
and not on the size of the individual/firms holding relative to the markets everyday trading
volume.
As a practical expedient, an individual/firm may measure the fair value of certain
liabilities/assets using a substitute method that does not rely exclusively on cited prices. This
practical expedient is suitable only when the following criteria are met:

The individual/firm holds a huge number of comparable (but not identical)

liabilities/assets
Quoted prices from an active market, while existing, are not readily reachable for these
liabilities/assets individually (i.e. given the huge number of comparable liabilities/assets
held by the individual/firm, it would be hard to obtain pricing information for each
individual liability/asset at the valuation date)

In our view, the use of such an alternate method as a practical expedient also is subject to the
condition that it results in a price that is illustrative of fair value. We believe that the application
of a practical expedient is not apt if it would lead to a valuation that is not representative of an
exit price on the valuation date.
In some cases, a quoted price in an active market might not represent fair value at the valuation
date, which might occur if a significant event takes place after the close of a market but before
the valuation date (such as the declaration of a business combination or trading activity in
comparable markets). In that case, an individual/firm chooses an accounting policy, to be applied
steadily, for recognizing those events that might affect fair value measurements.

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Valuation Methodologies
To measure the fair price of an asset or liability, an entity uses valuation approaches that are
appropriate in the circumstances and for which sufficient data is there, such that the use of
pertinent observable inputs can be maximized and the usage of unobservable inputs can be
minimized.
The main objective of using any valuation methodology is to estimate the fair value at which a
market transaction to sell an asset or to transfer a liability takes place between two market
participants, under current market settings.
There are three valuation approaches that are used to measure the fair value:
Market Approach: Measure fair value by using the market multiples derived using market
transactions involving a set of comparable assets and liabilities
Income Approach: Measure fair value by converting future amounts like cash flows or income
& expenses, to a single current amount, reflecting current market prospects
Cost Approach: Measure fair value using the current amount that would be required to replace
the service capacity of an asset i.e. an investor will pay no more for the asset than the cost to
construct substitute entity of comparable utility
In few cases, a single valuation technique can be used, whereas in other cases, multiple valuation
methodologies will be appropriate.

MARKET APPROACH
There are many commonly used techniques that are consistent with this valuation approach:
1) Using transaction price of a similar instrument in an investee
When an investor makes an investment in an tool which is similar to the unquoted equity
instrument that is being valued, the transaction price (also called an entry price) might be
a rational starting point for determining the fair value of that equity instrument at the
measurement date. However, an investor must use all information about the operation and
performance of an investee after the date of initial recognition up to that date. Because
such info might have an effect on price of that unquoted equity instrument of investee, it

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is only in the limited situations that cost price may be a suitable assessment of fair value
on that measurement date.
For Example:
In 2000, Entity A bought ten equity shares of Entity B, a private company, signifying 10
% of the outstanding shares of Entity B, for INR 1,000. Entity A is required to measure
the fair price of non-controlling equity interest in firm B as on 31 December 2002 (i.e. the
measurement date). During 2002, Entity B raised funds as it issued new equity capital (10
shares for INR 1,200) to the other investors. Entity A concluded that the transaction price
of the new equity shares issue for INR 1,200 represents the fair value at that date.
Considering the shares of both the entities had same rights and conditions and there were
no significant changes in the environment.
2) Transaction and Trading Multiples
To measure the fair value of any instruments of an investee, an investor can consider the
fair value of the similar entities (i.e. comparable peer companies) for which market prices
are available. There are 2 main sources of info about the pricing of comparable firms:
quoted prices in exchange markets (For Eg:, BSE, NSE) and an observable data from
transactions such as mergers and acquisitions recently happened. When such pertinent
information exists, an investor might be able to compute the fair price of an instrument by
deriving multiples from market prices of publicly traded comparable peer companies (i.e.
trading multiples) or by multiples derived from observable information from merger &
acquisition transactions involving the comparable firms (i.e. transaction multiples).
The valuation multiples are categorized as follows:
Earnings multiples: used when one has to value an established business which has

a recognizable stream of stable and continuing earnings.

Book value multiples: used by market participants in the industries where an

entity uses its equity capital to make earnings (for example, price/book value ratio
for financial institutions)
Revenue multiples: used for businesses which have not generated positive

earnings yet. However in these cases, judgement have to be exercised as there

might be variances between the profitability of investee and that of its comparable
peer companies. In this context, revenue multiples are used only for crosschecking.
In addition, few industries might have industry-specific benchmarks for performance that
can be used for comparison purposes (for example, revenue/bed for hotels or Enterprise
value/ton for cement companies or revenue/subscriber for telecommunications).
INCOME APPROACH
The valuation techniques under this approach are:

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1) Discounted Cash Flow Method

Under this method, it is required to estimate the expected cash flows from the entity. For
practical purposes, if an entity has indefinite life, constant growth model is used or use exit
multiple to determine the terminal value. One has to discount the expected cash flows to a
present value at a rate that accounts for time value of money and the related risks involved, to get
a fair value of the entity. Equity valuation is done using free cash flow to equity (FCFE), or by
calculating the enterprise value (EV) using free cash flow to firm (FCFF) and then subtracting
the net debt.
The commonly used discount rate (WACC)
WACC = D/(D + E) (1 t) kd + E/(D + E) ke
D = value of debt capital
E = value of equity capital
kd = cost of debt
ke = cost of equity
t = effective income tax rate

2) Dividend Discount Model (DDM)

The fair value of a firms equity instrument is the present value of all of its expected future
dividends in perpetuity. This model is often used when measuring the fair price of an equity
instruments for the firm that consistently pays dividends. If investors never expect any amount of
dividend to be paid, then DDM means that the entity would have no or zero value.

COST APPROACH
The most known valuation technique under this approach:
Depreciated Replacement Cost (DRC) method:
It considers how much it would cost to replace an asset with a substitutable one of an equivalent
utility, after taking into account functional, physical and economic obsolescence. It calculates the
replacement cost of the capacity which is required rather the actual asset.

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Disclosures:
Disclosure requirements of the assessment of fair value are divided into two categories:
Disclosure of financial assets and liabilities measured at fair value in the balance sheet after
initial recognition. This information is more extensive and distinguish between measures of
recurring and non-recurring fair value.
Disclosures about fair value measurements that are necessary or may be shared by other
codification topics/subtopics, but are not included in the balance sheet.
Recurrent evaluations of fair value This poses assets and liabilities measured at fair value at the
end of each reporting period (for example, trading securities).
Non-recurring fair value measurements Non-recurring fair value measurements are triggered
by particular circumstances (for example, an asset is classified as held for sale or a depreciated
asset Hence the need for measuring fair value under the applicable sub-themes of codification.).
The requirements for measurements of non-recurring fair value require disclosure of the amounts
of the closing date. However, a measure of the fair-time value may have occurred prior to the
closing date. In our opinion, the information in measuring the fair value should be based on the
fair value at which the asset is measured at the end of the reporting period, even if the fair value
was determined at an earlier date.
For example, if a loan is considered impaired at the end of November15 and the entity of the
year is December 31, the year-end financial statement disclosures apply to the fair value
determined on November 15.
Disclosure requirements, which are the largest for recurring Level 3 evaluations are summarized
in the following table:
R
X
Y

Mandatory disclosure for all entities in tabular format

Disclosure required only for public entities.
Disclosure required for public entities and financial instruments for non-public entities
with a total assets of more than $ 100 million or have instruments that are recognized as

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derivative instruments (other than originally commitments mortgage loans held for sale)

An entity is required to make an accounting policy choice, to be applied consistently, to

determine what value to use when transfers between levels of the fair value hierarchy have
occurred. The same accounting policy should be applied for transfers into or out of each level.
Here are three examples of policies that can be used to present the transfers into or out of
hierarchy levels of fair value:
At fair value at the date of the event causing the transfer occurs;
A measurement of the fair value at the beginning of the reporting period during which the
transfer took place; or
Use of fair value at the end of the reporting period in which the transfer took place.

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Instructions on how to measure fair value applies to assets and liabilities for which fair value is
shown, even if these assets and liabilities are not recognized at fair value in the financial
statements unless the article is specifically scoped on the subject of codification.

IFRS 13 DISCLOSURES: An example

We have analyzed the Annual Report for 2014 of Pandora A/S, a Danish Luxury Jewellery
manufacturer and retailer to observe how the company provides the disclosures mandated by
IFRS 13 under fair valuation.
Pandora measures all of its financial instruments like forward commodity contracts, forward
currency contracts and interest rate swaps at fair value.
Financial instruments are initially recognized at fair value at the date on which a contract is
entered into and are subsequently measured at fair value. For financial instruments not traded in
an active market, the fair value is determined using appropriate valuation methods. The methods
employed by the company are disclosed as recent arms length market transactions, taking
reference from the current fair value of another comparable instrument or by using DCF
methodology.
Pandora also provides the fair value disclosure for the business combination involving the takeover of the distributions rights from Bluebell Japan.
Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the aggregate of the consideration transferred, measured at acquisition date fair
value and the amount of any non-controlling interests in the acquiree. Business combinations are
accounted for using the acquisition method. The cost of an acquisition is measured as the
aggregate of the consideration transferred, measured at acquisition date fair value and the amount
of any non-controlling interests in the acquiree. If any part of the cost of an acquisition is
contingent on future events or achievements, this cost is recorded at fair value at the time of
acquisition.

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Pandora also discloses on the fact that it measures a part of its intangible assets; specifically the
distribution networks at fair value based on the estimation of costs the company avoids by
owning the assets and therefore not needing to rebuild it (the cost approach of valuation).
As shown here, the company also
provides a disclosure regarding the
fair value hierarchy. The financial
instruments are measured as per the
Level

hierarchy

based

on

observable but non-quoted prices.

References
1) Business Valuation Resources, International Glossary of Business Valuation Terms
(2001)
2) Citigroup Global Markets Inc, The Fundamentals: Equity Valuation, 17 March 2011
3) Damodaran Aswath, Investment Valuation, Third Edition, Wiley Finance
4) http://www.kpmg.com/FR/fr/IssuesAndInsights/ArticlesPublications/Documents/Converg
ence-US-GAAP-IFRS-Fair-Value-Measurement-QuestionsandAnswers-112013.pdf
5) http://www.ifrs.org/use-around-theworld/education/fvm/documents/educationfairvaluemeasurement.pdf
6) http://www2.deloitte.com/content/dam/Deloitte/ca/Documents/audit/ca-en-audit-clearlyifrs-fair-value-measurement-ifrs-13.pdf
7) http://www.duffandphelps.com/sitecollectiondocuments/articles/vFIN_DP111217_2011_I
CAEW_Article.pdf

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8) http://www.iasplus.com/en/standards/ifrs/ifrs13
9) http://www2.deloitte.com/content/dam/Deloitte/ca/Documents/audit/ca-en-audit-clearlyifrs-fair-value-measurement-ifrs-13.pdf
10) http://www.kpmg.com/FR/fr/IssuesAndInsights/ArticlesPublications/Documents/Converg
ence-US-GAAP-IFRS-Fair-Value-Measurement-QuestionsandAnswers-112013.pdf

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