Ifrs 13 fair value measurement — where this standard does not apply

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IFRS 13 FAIR VALUE MEASUREMENT -- WHERE THIS STANDARD DOES NOT APPLY

Belousova Anna Sergeevna

Finance University under the Government of the Russian Federation

Master student

Abstract

The article considers the meaning of IFRS, the area of usage, adaptation in Russia, for which Russian accountants need IFRS. Introduction of IFRS 13, Fair value measurement how and where this standard does not apply.

Keywords: exit price, fair value, IFRS, inflating bubbles, lease contract, market participants, net realizable value, orderly transaction

Before the 2011, when IFRS (IFRS) 13 “Fair Value Measurement” was issued, in each of the standards (IAS 16, IAS 38, IAS 41, IAS 40, IFRS 5, and IFRS 3) was given the same definition of fair value and a brief guidance on its evaluation. IFRS 13 summarized and brought into one representations of the current IASB on measuring fair value, and set how you want to disclose it in the financial statements.

IFRS 13 applies when another standard requires or permits the measurement of fair value, except in the following situations:

a) share-based payment transactions in accordance with IFRS 2

b) lease contract (IAS 17 “Leases”)

c) measurements that are similar to fair value, but they are not fair value: net realizable value in accordance with IAS 2 “Inventories”, and the value in use in accordance with IAS 36 “Impairment of Assets”

Reserves in accordance with IAS 2 must be weighed / measured at the lower of the two values: at cost or net realizable value (sale).

Net realizable value (sale) - is the net amount that the company expects to gain from the sale of inventory in the ordinary course of business. Fair value reflects the price at which inventories can be sold in the market between market participants at the measurement date. The first is the amount specific to the company, the last - no. Therefore, the net selling price (selling) stocks may differ from the fair value less costs to sell (IAS 2).

What's new in the understanding of fair value appeared in IFRS 13?

First we need to understand what the term “fair value” is. In simple terms, the fair value - is the value (price) of the asset to which the seller and the buyer agree. That is, it is justified from the point of view of both sides of the bargain. Of course, it is too general definition, and therefore it can not be used in practice to measure fair value. Developers of the standards provide us with more precise definition of this concept.

“Informed” means that each party to the transaction must have full information about the product or service. If not, there is a possibility of deception (to put it mildly, the seller may mislead the buyer), and then the price of the transaction can not be considered fair. Most likely, it will be overpriced for the buyer.

“Wishes” - the transaction must take place without forcing one of the parties. If you are forced to buy something, most likely, the sale will be made for you at an inflated price.

“Independent” - parties must be independent of each other. Otherwise, the relying party can go on obviously disadvantageous deal.

The new definition of fair value in accordance with IFRS 13 is as follows:

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.

We can not say that the standard IFRS 13 completely changed the definition of fair value, but it significantly clarified and expanded.

The old definition does not give a precise definition of whether the fair value of the purchase or sale. Prior to the adoption of IFRS 13 in the preparation of IFRS 3 “Business Combinations”, it turned out that according to US GAAP fair value is defined as the exact price output (sales), whereas in the fair value of the IAS at the time - is the sum of the exchange, which in some situations can be interpreted as the entry price (purchase). Also, there was no obvious indication on what date the fair value is measured.

The new definition:

1) give a precise indication of the fact that fair value is the selling price,

2) clearly determined that the fair value - is the market-based measurement, rather than the an entity-specific measurement.

3) references to the date of measurement clearly indicates that the fair value reflects the current market situation, rather than presenting the company with respect to future market conditions.

According to IFRS 13 fair value is exit price, i.e. bid price, not ask price. This is the price that sellers can get, and not the price at which they would like to sell its assets. The same is true for commitments. Its fair value is the amount that the creditors will settle the obligation, and not the amount that the holder would like to pay for relief from liability. In an active market, the two prices may vary, especially when dealing with exchange-traded securities and other financial instruments.

Exit price is determined by expectations about future cash flows (inflows and outflows) related to an asset or liability in terms of market participants who own the asset or liability at the measurement date. Receive cash flows from the asset in two ways: either in use, or when it is sold. Even if the owner of the asset is going to use it (rather than sell) “exit price” is determined by the expected cash flows from the sale of the asset to market participants who are going after purchase to receive cash flows from its use. That is, any market participant with the purchase of an asset will pay only for the benefits it expects to receive in the future from the use or sale of the asset to someone else. Thus, the price is always a relevant determination of the fair value of the assets, regardless of whether the company is going to use the asset or sell it.

Market participants under IFRS 13

Market participants - the buyers and sellers on the main (or most advantageous) market for the asset or liability, which have the following characteristics:

a) they are independent of each other (for example, they are not related parties as defined in IAS 24). However, the price at the sale of the related party transactions may be used in the measurement of fair value, if the company has evidence that the operation was carried out in the market terms.

b) they are knowledgeable, i.e. have a reasonable understanding of assets and liabilities and the operation, using all available information, including information that can be obtained through a routine check of the financial status (due diligence).

c) they are able to enter into a transaction to conduct the operation of the asset exchange or transfer of liabilities (access to the market)

d) they are willing to enter into a transaction to conduct the operation of exchange (buy / sell) with the asset or liability; This means that they are motivated, but are not forced to do so.

In addition to the new definition of fair value IFRS 13 introduced the basic definitions and the most favorable markets, considered the accounting transaction and transportation costs when measuring fair value. Were in greater detail than previously prescribed methods for measuring fair value, and introduced the concept of a hierarchy of input data to measure fair value.

What is the economic meaning of the increasing use of fair value to measure assets?

Representatives of the accounting profession until recently insisted that the profits should be recognized in the financial statements only when it becomes realized. Realized gains - is the one that is obtained as a result of completed transactions, for example, the sales transaction. However, in the last 20-30 years there is a shift towards the “economic” understanding of profit as the difference in the net asset value. In this regard, the preparation of financial statements greatest importance now attached sheet (statement of financial position), rather than the profit and loss account. Economically justified valuation of assets and liabilities (and hence the net assets) - this is what is now being given increased attention because this depends directly on the definition of financial results for the period. Therefore, the valuation of assets and liabilities at fair value rather than historical cost required international standards for a growing number of accounting items.

The wide use of fair value for financial reporting can be described by the objective reasons. US Federal Reserve has long been launched printing press, flooding the world financial system with cheap dollars. As a result of this “abundance” of money is “inflating bubbles” in financial and commodity markets, which somehow leads to a substantial “non-realized” profits on the balance sheet. This non-realized gain arises as a result of impairment of monetary units in which these assets are measured. Naturally, the management of the companies has a desire to show unrealized profits to improve their financial performance. Investors also need information about the value, expressed in current monetary units. As they make the decisions in economic reality, and therefore can not rely on the value which is fixed in the previous periods. Currently, the reason is that assets account at fair value shall be submitted to the agenda to the accounting standards developers.

Time will tell, whether we come in the future to complete the transition to a record of all assets and liabilities at fair value. Everything comes down to this, so far.

value fair record asset

References

1. International Financial Reporting Standards: A Framework-Based Perspective, Greg F. Burton, Eva K., 2014.

2. Principles of Group Accounting under IFRS, Andreas Krimpmann, 2015.

3. IFRS 13: Fair Value Measurement; Project Summary and Feedback Statement, IFRS Foundation Publ. Department, 2011.

4. Fair Value Accounting and the Financial Market Crisis: To What Extent is Fair Valuation Responsible for the Financial Crisis?, Andreas Schmidt, 2014.

5. Fair Value Measurement: Practical Guidance and Implementation, Mark L. Zyla, 2012.

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