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November 2010

International Financial Reporting Standards

Mensurao de Valor Justo


Hilary Eastman, IASB Staff

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Agenda
Fair value in IFRSs Why an exit price?

What will change?


What will stay the same? IFRS Foundation educational material Next steps

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Fair value in IFRSs

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value measurements today


Requirements
IFRS IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 7 Financial Instruments: Disclosures IFRS 9 Financial Instruments Initial recognition

Subsequent measurement

(for some)

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value measurements today continued


Requirements
IFRS IAS 17 Leases IAS 19 Employee Benefits (plan assets) Initial recognition

Subsequent measurement

IAS 20 Government Grants


IAS 26 Accounting and Reporting by Retirement Benefit Plans (plan investments) IAS 28 Investments in Associates (investments held by venture capital firms)

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value measurements today continued


Requirements
IFRS IAS 36 Impairment of Assets Initial recognition

Subsequent measurement (recoverable amount)

IAS 39 Financial Instruments: Recognition and Measurement IAS 41 Biological Assets IFRIC 12 Service Concession Arrangements

(construction or upgrade services)

(for some) (financial asset)

IFRIC 13 Customer Loyalty Programmes

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value measurements today continued


Options
IFRS IFRS 1 First Time Adoption of IFRSs Initial recognition (deemed cost) (cost)

Subsequent measurement

IAS 16 Property, Plant and Equipment

IAS 27 Consolidated and Separate Financial Statements


IAS 38 Intangible Assets IAS 40 Investment Property (cost) (cost)

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The fair value measurement project


was initiated in 2005 to clarify the measurement objective

create a single source of guidance


improve and harmonise disclosures will not introduce new fair values change the measurement objective in another IFRS

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Why an exit price?

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Clarify the measurement objective


Current definition of fair value lacks clarity
The amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arms length transaction

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Is it the price to buy or to sell an asset? What is meant by settling a liability? When does the exchange (or settlement) take place?

Who are the knowledgeable, willing parties?


2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Clarify the measurement objective continued


Proposed definition of fair value

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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


Exit price notion A current price Market-based view

Not a liquidation price or a forced sale


2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Clarify the measurement objective continued

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An exit price reflects expectations about future cash inflows and outflows

Exit price does not mean a liquidation value, but the price that would be paid by a market participant who will also use the asset or fulfil the obligation
objective is to replicate a market-clearing price objective is the same in Level 3

What an entity intends to do with the asset or liability is not relevant in a fair value measurement

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

What will change?

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Differences between current guidance and new standard


Consistent exit market Explicit reference to highest and best use of an asset

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Explicit three-level fair value hierarchy


Change in bid-ask spread guidance Explicit guidance for measuring fair value in inactive markets Additional guidance for measuring liabilities

Some new disclosures about fair value measurements


2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

The exit transaction


IFRSs are inconsistent about the market in which market participants would transact

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Exit transaction takes place in the principal market


the market with the greatest volume and level of activity for the asset or liability (most liquid)

Or (if no principal market) in the most advantageous market


maximises the amount that would be received to sell the asset and minimises the amount that would be paid to transfer the liability
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Highest and best use

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Concept is implicit in IFRSs, new standard will make it explicit

Highest and best use is the use of an asset by market participants that would maximise the value of the asset
physically possible legally permissible financially feasible

Highest and best use is usually (but not always) the current use Does not apply to financial instruments or liabilities
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value hierarchy: Levels 1, 2 and 3


Yes

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Is there a quoted price for an identical asset or liability? (Level 1 input)

No

Use the Level 1 input = Level 1 measurement

Must use without adjustment


Yes

Are there any observable inputs other than quoted prices for an identical asset or liability?
No

Significant use of Level 2 inputs (observable inputs that are not Level 1) = Level 2 measurement

Significant use of unobservable inputs = Level 3 measurement

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Fair value when markets become inactive

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IFRSs are not explicit about how to measure fair value when markets become inactive, new standard will have explicit guidance Modeled after October 2008 Expert Advisory Panel report

Will include:
indications that market activity has declined factors for determining transactions that are not orderly

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Disclosures
Fair value hierarchy

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Disclosure by class (aggregate/disaggregate to provide meaningful information) Policy for transfers between levels (and Level 3 reconciliation)

Measurement uncertainty or sensitivity analysis


Level of hierarchy for items disclosed but not recognised at fair value

Difference between highest and best use and current use


2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

What will stay the same?

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What is being carried over to the new standard?


Fair value reflects characteristics of asset or liability Market participants vs knowledgeable, willing parties

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Determination of an active market


Effect of an entitys own credit risk Valuation techniques (market, income, cost) Financial instrumentsoffsetting of market risks Treatment of transaction costs Some existing disclosures are likely to remain (eg agriculture, asset impairments)
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

IFRS Foundation educational material

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What do we mean by how to?


Knowledge about valuation Measuring fair value for financial reporting
Principal market Market participants Highest and best use Valuation techniques Market participant assumptions

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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

How do you measure fair value?


The asset or liability (unit of account)

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Valuation premise

Highest and best use

Exit transaction Market participant assumptions Selection of and inputs to valuation techniques Fair value measurement Presentation and disclosure
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Attribute value to asset or liability at unit of account level

Indicated value for unit of valuation

Example: Selecting a valuation technique


Market approach
Market price is available Price is for an identical asset or liability and must be used No adjustment is necessary or allowed

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Level 1

Income approach (eg discounted cash flow)


Directly identifiable cash flows

Cost approach (eg replacement cost)


Not income producing No identical market price Price needs adjustment Observable inputs Rarely seen in practice

Level 2

Price needs adjustment Observable inputs

Observable inputs Rarely seen in practice

Level 3

Price needs adjustment Unobservable inputs

Unobservable inputs

Unobservable inputs

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

Next steps

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

What will happen next?


2010 2011

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Oct 2010 Jan 2011

Q1 2011

Joint redeliberations
Measurement uncertainty Portfolios of financial instruments Premiums and discounts Third party guarantees Scope of disclosures Effective date and transition

Final IFRS on fair value measurement


Q2 2011

IFRS Foundation educational material

2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Questions or comments?
Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

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2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org