2. 11-2
2.1. Fair value measurement
2.1.1. Definition
Fair value is 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.
2.1.2. Measurement of fair value
The effect on the measurement arising from a particular
characteristic will differ depending on how that characteristic would
be taken into account by market participants.
3. 11-3
When measuring fair value an entity market participants shall take
into account: A) The condition and location of the asset; and
B) Restrictions, if any, on the sale or use of the asset.
The asset or liability measured at fair value might be either of
the following:
A) a Stand-alone asset or liability (eg a financial instrument or a
non-financial asset); or
B) a Group of assets, a group of liabilities or a group of assets and
liabilities (eg a cash-generating unit or a business.
4. 11-4
The unit of account for the asset or liability shall be
determined in accordance with the IFRS that requires or
permits the fair value measurement.
A fair value measurement assumes that the transaction
to sell the asset or transfer the liability takes place
either:
5. 11-5
2.1.3. Fair value at initial recognition
When an asset is acquired or a liability is assumed in an
exchange transaction for that asset or liability, the transaction
price is the price paid to acquire the asset or received to assume
the liability is called (an entry price).
In contrast, the fair value of the asset or liability is the price that
would be received to sell the asset or paid to transfer the liability is
called (an exit price).
6. 11-6
In many cases the transaction price will equal the fair value (eg
that might be the case when on the transaction date to buy an
asset takes place in the market in which the asset would be sold).
When determining whether fair value at initial recognition equals
the transaction price, an entity shall take into account factors
specific to the transaction and to the asset or liability.
2.1.4. Valuation methods
Three widely used valuation techniques are:
1. The market approach(use prices and other relevant info generated by market.
7. 11-7
2. The cost approach(reproduction or replacement cost) and
3. The income approach(based on past, current, or expected cash flow
In some cases a single valuation technique will be appropriate (eg
when valuing an asset or a liability using quoted prices in an active
market for identical assets or liabilities).
In other cases, multiple valuation techniques will be appropriate (eg
that might be the case when valuing a cash-generating unit).
If multiple valuation techniques are used to measure fair value, the
results (ie respective indications of fair value)
8. 11-8
Shall be evaluated considering the reasonableness of the range of
values indicated by those results.
Valuation techniques used to measure fair value shall be applied
consistently.
. However, a change in a valuation technique or its application (e.g
A change in its weighting when multiple valuation techniques are
used or a change in an adjustment applied to a valuation technique)
is appropriate if the change results in a measurement that is
equally or more presentative of fair value in the circumstances.
9. 11-9
That might be the case if, for example, any of the following events
take place:
A) New markets develop;
B) New information becomes available;
C) Information previously used is no longer available;
D) Valuation techniques improve; or
E) Market conditions change
10. 11-10
Inputs to Valuation Techniques
1. General Principles
Valuation techniques used to measure fair value shall maximize
the use of relevant observable inputs and minimize the use of
unobservable inputs.
an entity shall select inputs that are consistent with the
characteristics of the asset or liability that market participants
would take into account in a transaction for the asset or liability.
11. 11-11
However, a fair value measurement shall not incorporate a
premium or discount that is inconsistent with the unit of account in
the IFRS that requires or permits the fair value measurement.
Premium when measuring the fair value of a controlling interest)
are not permitted in a fair value measurement.
2. Inputs Based on Bid and Ask Prices
If an asset or a liability measured at fair value has a bid price and an
ask price (e.g an input from a dealer market),
12. 11-12
The price within the bid-ask spread that is most representative of
fair value in the circumstances shall be used to measure fair value
regardless of where the input is categorized within the fair value
hierarchy.
2.1.5. Fair value hierarchy
IFRS establishes a fair value hierarchy that categorizes into three
levels of inputs to valuation techniques used to measure fair
value.
13. 11-13
(Level 1 inputs)
(Level 2 inputs) and
(Level 3 inputs).
Level 1 input
Level one inputs are at the top of the hierarchy of in formation
source that ranges from level 1 to level 3 inputs.
Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities that the entity can access at the
measurement date.
A quoted price in an active market provides the most reliable
evidence of fair value and shall be used without adjustment to
measure fair value whenever available.
14. 11-14
Level 2 inputs:
Level 2 inputs are inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets.
b) Quoted prices for identical or similar assets or liabilities in markets that
are not active.
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C) inputs other than quoted prices that are observable for the
asset or liability, such as interest rates and yield, implied
volatilities; and credit spreads.
D) market-corroborated inputs.
level 3 inputs
level 3 inputs are unobservable inputs for the asset or liability.
but the fair value measurement objective remains the same
16. 11-16
2.1.6. Disclosure
An entity shall disclose information that helps users of its financial
statements assess both of the following:
A. For assets and liabilities that are measured at fair value on a
recurring or non-recurring basis in the statement of financial
position after initial recognition.
17. 11-17
B. For recurring fair value measurements using significant
unobservable inputs (Level 3), the effect of the measurements on
profit or loss or other comprehensive income for the period.
An entity shall consider all the following:
A. The level of detail necessary to satisfy the disclosure requirements;
B. How much emphasis to place on each of the various requirements;
C. How much aggregation or disaggregation to undertake; and
D. Whether users of financial statements need additional information to
evaluate the quantitative information disclosed.
18. 11-18
Events leading to an impairment:
a. Significant decrease in the fair value of an asset.
b. Significant change in the manner in which an asset is used.
c. Adverse change in legal factors or in the business climate that
affects the value of an asset.
d. An accumulation of costs in excess of the amount originally
expected to acquire or construct an asset.
e. A projection or forecast that demonstrates continuing losses
associated with an asset.
2.2 Impairments
When the carrying amount of an asset is not recoverable, a
company records a write-off referred to as an impairment.
19. 11-19
1. Review events for possible impairment.
2. If the review indicates impairment, apply the recoverability
test. If the sum of the expected future net cash flows from the
long-lived asset is less than the carrying amount of the asset, an
impairment has occurred.
3. Assuming an impairment, the impairment loss is the amount by
which the carrying amount of the asset exceeds the fair value
of the asset. The fair value is the market value or the present
value of expected future net cash flows.
Measuring Impairments
LO 5 Explain the accounting issues related to asset impairment.
20. 11-20
LO 5
Illustration 11-16
Graphic of Accounting
for Impairments
Impairments
Loss reported as part of
income from continuing
operations, in the “Other
expenses and losses”
section.
21. 11-21
Impairments
LO 5
Expected future cash flows $ 650,000
Carrying value of asset:
Cost $ 800,000
Accumulated depreciation -200,000 600,000
50,000
No
Impairment
Advance slide in
presentation mode to
reveal answer.
Illustration 1: M. Alou Inc. has equipment that, due to changes in its
use, it reviews for possible impairment. The equipment’s carrying
amount is $600,000 ($800,000 cost less $200,000 accumulated
depreciation). Alou determines the expected future net cash flows
(undiscounted) from the use of the equipment and its eventual disposal
to be $650,000. Determine whether an impairment has occurred.
Recoverability
Text
22. 11-22
Expected future cash flows $ 580,000
Carrying value of asset:
Cost $ 800,000
Accumulated depreciation -200,000 600,000
-20,000
Illustration 2: M. Alou Inc. has equipment that, due to changes in its
use, it reviews for possible impairment. The equipment’s carrying
amount is $600,000 ($800,000 cost less $200,000 accumulated
depreciation). Alou determines the expected future net cash flows
(undiscounted) from the use of the equipment and its eventual disposal
to be $580,000. Determine whether an impairment has occurred.
Impairments
LO 5
Advance slide in
presentation mode to
reveal answer.
Impairment
Recoverability
Text
23. 11-23
Fair value of equipment $ 525,000
Carrying value of asset:
Cost $ 800,000
Accumulated depreciation -200,000 600,000
-75,000
Illustration 2: The recoverability test indicates that the expected future net cash
flows of $580,000 from the use of the asset are less than its carrying amount of
$600,000. Therefore, an impairment has occurred. Assume this asset has a fair
value of $525,000. Determine the impairment loss, if any.
LO 5
Advance slide in
presentation mode to
reveal answer.
Impairment
Loss
Measurement of Loss
24. 11-24
Fair value of equipment $ 525,000
Carrying value of asset:
Cost $ 800,000
Accumulated depreciation -200,000 600,000
Impairment loss -75,000
Illustration 2:
Impairments
LO 5
Measurement
of Loss
Loss on Impairment 75,000
Accumulated Depreciation 75,000
M. Alou records the impairment loss as follows:
25. 11-25
After recording an impairment loss,
the reduced carrying amount becomes its new cost basis.
No change in the new cost basis except for depreciation or
amortization in future periods or for additional impairments.
No restoration of impairment loss for an asset held for use.
► Rationale is that the new cost basis puts the impaired
asset on an equal basis with other assets that are
unimpaired.
Restoration of Impairment Loss
LO 5 Explain the accounting issues related to asset impairment.
26. 11-26
Assets held for disposal are like inventory; companies
Should report them at the lower-of-cost-or-net realizable
value.
Can write up or down an asset held for disposal in future
periods, as long as the carrying value after the write-up never
exceeds the carrying amount of the asset before the
impairment.
Should report losses or gains related to these impaired assets
as part of income from continuing operations.
Impairment of Assets to Be Disposed Of
LO 5 Explain the accounting issues related to asset impairment.
