‘Fair Value Measurement’ IFRS 13 enlightens how to measure fair value by providing clear classifications and presenting a single set of requirements for almost all fair value extents. It explains how to measure fair value when a market becomes less active. IFRS 13 applies to both non-financial and financial items but does not address or change the requirements on when the fair value should be used. Handlers of external and internal auditors should be knowledgeable about these measures.
IFRS 13 was delivered in MAY 2011 and applies to yearly periods beginning on or after 1 January 2013. By facilitating Audit firms in Dubai & UAE, firms can make IFRS 13 disclosures.
Objectives
IFRS 13;
- States fair value
- Entails disclosures about fair value measurement
- Sets out in a single IFRS a context for measuring fair value during the internal audit process
IFRS 13 applies when a new IFRS entails or permits fair value measurements or disclosures about fair value measurements. In IFRS, the determination is to illuminate how obsolete operations must be reported to audit firms in Dubai.
- leasing relations within the scope of IAS 17 Agreements
- share-based payment transactions within the latitude of IFRS 2 Share-based Payment
- measurements that have some parallels to fair value but that are not fair value, such as net realizable value in IAS 2 Accounts or value in use in IAS 36 Deficiency of Assets.
Further exclusions apply to the disclosures required by IFRS 13.
IFRS 13 Key classifications
1- Active market
A market in which transactions for the liability or asset take place with adequate volume and frequency to offer pricing information continuingly
2- Best use and Highest
The use of a non-financial asset by market contestants that would maximize the worth of the asset or the group of assets and liabilities (for instance; a business) within which the asset would be cast off.
3- Fair Value
The value that would be received to sell an asset or waged to transfer a liability in an arranged transaction between market contestants at the measurement period.
4- Exit price
The value that would be received to paid to transfer a liability or to sell an asset.
5- Principal market
The market with the highest volume and level of activity for the liability or asset.
6- Most beneficial market
The market maximizes the volume that would be received to sell the asset or minimizes the value that would be paid to transfer the liability, after taking into account transaction budgets and transference costs.
7- Income approach
It is a method that is used for assessment under which fair value is based on the projected future net cash arrivals of an asset and those projected future net cash arrivals are determined from the market contestant’s point of view.
8- Cost Approach
It is the method that is used for assessment and it imitates the amount which is desirable currently to substitute an asset with the same operating volume. It is generally termed as the current standby cost.
Application to liabilities and entity’s parity instruments
For purpose of the fair value of liability or own parity instrument of the entity, the entity should confirm the supreme use of market-based information and least use of unobservable inputs. As the fair value is determined from the market contestant’s point of view and is based on the values and other associated material reflected by transactions in the market.
Though, the entity should deliberate the following sides in the purpose of the fair value of liability or own parity instrument of the entity:
- The entity will mainly use the mentioned price of an equal item held by the other party as an asset attained from an active market.
- If such value is not determinable, the entity will use the other suitable market-based information such as the mentioned price of an alike item held by the other party as an asset attained from a non-active market
- If the costs mentioned above are not determinable, then the entity will use an income tactic for this determination.
For purpose of the fair value of the liability, the unit should also deliberate the effect of any predominant risk attached to it.
Fair value hierarchy
This standard establishes a fair value hierarchy to improve the comparability and reliability of the fair value determination. The hierarchy is divided into three levels. Level 1 in the fair value hierarchy is ranked by prices derived from active markets for similar assets or liabilities. However, unobservable inputs are ranked third in the fair value hierarchy due to their low importance.
Level 1
The strategies in level 1 oblige the entity to conclude the fair value as the parroted price (without any alteration) from the main active market or the most beneficial market if the principal market is not available. Parroted price from such a market is more consistent.
In spite of the fact that the entity may adjust the parroted price, it is unrealistic for it to determine the parroted price of a large number of like assets or liabilities on a discrete basis on the measurement date. The active market offers estimated prices for many parallel assets or liabilities (but not matching).
Level 2
Level 2 contains the determination of fair value using the following aspects:
- Parroted price of matching asset or liability determined from the principal market or the most beneficial market, if the principal market is not offered
- Parroted prices attained from non-market
- Value determined using other market-based information
Level 3
Level 3 involves the use of unobservable info to govern the fair value of the asset or liability. It contains the use of altered estimation techniques such as the cost approach, income approach, or other pertinent techniques. Though, the entity should confirm the determined use of market-based information and the least use of unobservable inputs, as the fair value is determined from the market contestant’s point of view and is based on the values and other associated information replicated by transactions in the market.
Disclosures
The entity is obligated to disclose the following in esteem of the fair value:
- Liabilities and assets which are measured at fair value
- The fair value of liabilities and assets at the end of the reportage period
- The root used for the determination of fair value
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