IFRS / IVS UPDATE

IFRS 13 Fair Value Measurement

Learning objectives

Fair Value Measurement IFRS 13 and IVSC

Definitions IFRS/ IVS
Concept of highest and best use/valuation premise
Valuation techniques
Fair value hierarchy
Required disclosures
Key Takeaways

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Definition of Fair Value IFRS 13/ IVS

IFRS 13 Fair value definition

A single framework for
determining FV
IAS 40 basis replaced
Effective 1 January 2013, and
applied prospectively
Introduces concepts of highest
and best use, valuation
premise , and application of
fair value hierarchy

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

IFRS 13 FV
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 (an exit price).
Hypothetical and orderly transaction
This differs from revised IVS Framework:
Fair value is the estimated price for the transfer of an asset or
liability between identified knowledgeable and willing parties
that reflects the respective interests of those parties.
Respective advantages and disadvantages -IVS
2012 EYGM Limited

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IFRS 13 Fair Value Measurement

IFRS 13 FAIR VALUE

Valuation uncertainty

IFRS 13 Fair value measurement Valuation

uncertainty
Properties sold within +/- 10% of valuation
Country
2007 2008 2009 2010
France
40% 49% 63% 40%
Germany
48% 60% 53% 50%
The Netherlands 50% 62% 65% 64%
UK
60% 60% 55% 57%

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

IFRS 13 (cont.)

Properties sold within +/- 20% of valuation

Country
2007 2008 2009 2010
France
64% 79% 86% 52%
Germany
73% 77% 69% 75%
The Netherlands 82% 85% 88% 80%
UK
85% 83% 82% 82%

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Framework for non-financial assets

Source: RICS/IPD Valuation and sale price
report - 2011
Sample sizes
Country

2007 2008 2009 2010

France
Germany
Netherlands
UK

527
483
318
903

519
190
197
1233

505
64
197
1042

557
107
222
652

Applying fair value in practice

Fair Value Measurement

IFRS 13 requires any advantages that
would not be available to market
participants generally to be
disregarded. Accordingly,
management needs to be aware of
this difference in concept in order to
ensure any values used for financial
reporting that are obtained from
appraisals, whether external or
internal, are consistent with the
objective of a fair valuemeasurement i
2012 EYGM Limited

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IFRS 13 Fair Value Measurement

The Concept of highest and best use

Reconsider methods, assumptions , processes / procedures
Under IFRS 13, an entitys current use of an asset is generally
taken to be its highest and best use, unless market or other
factors suggest that a different use of that asset by market
participants would maximise its value. If such factors exist,
management is required to consider all relevant information in
determining whether the highest and best use of a property is
different from its current use at the measurement date.

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Highest and best use non financial assets

A fair value measurement of a non-financial asset takes

into account a market participants ability to generate
economic benefits by using the asset in its highest and
best use or by selling it to another market participant that
would use the asset in its highest and best use.

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Highest and best use for non-financial assets

Fair value considers a market participants ability to

generate economic benefits by using the asset in its
highest and best use.
Highest and best use considers a use that is:

Physically possible
Legally permissible Town and Country Planning Act
Financially feasible

Highest and best use is always considered when

measuring fair value, even if the entity intends a different
use.

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Highest and best use for non-financial assets

(cont.)
Can be either:(valuation premise)
On a stand-alone basis
In combination with other assets

Assumed the complementary assets are available to market

participants
Assumptions must be consistent for all assets of the relevant
group

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Example : highest and best use

Land acquired in a business combination is currently developed for
industrial use as a site for a manufacturing facility. Nearby sites were
recently developed for residential high-rise flats. It was determined that
the land could be used to develop residential high-rise flats.
How is highest and best used determined?

In this case, the highest and best use is determined from the higher of:
a)
b)

The value of the land used in the manufacturing operation

The value of the land as a vacant site for residential use

Note that transformation costs (e.g., costs to demolish the

manufacturing facility) would be considered in the value of land as a
vacant site.

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Valuation techniques

Use valuation techniques that:

IFRS 13 describes three valuation techniques

Are appropriate in the circumstances

Have sufficient available data
Maximise use of relevant observable inputs
Minimise use of unobservable inputs
Market approach
Income approach
Cost approach

One or several valuation techniques might be used

If a range of values are indicated, select the point within that range
most representative of fair value

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Valuation techniques (cont.)

Apply valuation techniques consistently

Change in valuation technique needed if:

New markets develop

New information becomes available
Information previously used is no longer available
Valuation techniques improve
Market conditions change

Change in valuation technique = change in estimate

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Fair value hierarchy

IFRS 13 includes a fair value hierarchy for disclosure

purposes which prioritises the inputs in a fair value
measurement:
Level 1 Quoted prices (unadjusted) in an active market
for identical assets that the entity can access at the
measurement date
Level 2 Observable inputs other than quoted prices
Level 3 Unobservable inputs
Amount of disclosures depends on Level Classification

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Disclosures

Disclosure principles

Disclose information that helps users assess the following:

For assets measured at fair value on a recurring or non-recurring

basis after initial recognition, valuation techniques and inputs used
to develop those measurements
For recurring fair value measurements using significant
unobservable inputs (Level 3), the effect of measurements on profit
or loss or other comprehensive income for the period

Fair value disclosures are required separately for each

class of assets
Quantitative disclosures are presented in a tabular format
unless another format is more appropriate.

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Fair value hierarchy and disclosures

Fair value at end of reporting

period
Level in fair value hierarchy
If highest and best use differs from
current use, that fact, and why
being used that way

2012 EYGM Limited

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Recurring fair
value
measurement

Non-recurring
fair value
measurement
(after initial
recognition)

Fair value
disclosure (for
items not
measured at
fair value)

IFRS 13 Fair Value Measurement

Fair value hierarchy and disclosures (cont.)

For Level 2 and 3, a

description of valuation
technique(s) and inputs used
For Level 2 and 3, any changes in
valuation technique(s), and
reasons for change
For Level 3, quantitative
information about significant
unobservable inputs
2012 EYGM Limited

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Recurring fair
value
measurement

Non-recurring
fair value
measurement
(after initial
recognition)

Fair value
disclosure (for
items not
measured at
fair value)

IFRS 13 Fair Value Measurement

For Level 3, description of

valuation processes

Summary

Key takeaways

IFRS 13 is effective 1 January 2013 and is applied

prospectively.
It introduces new concepts in valuation of non-current
assets
Basis of IFRS FV conceptually different from IVS
Management responsibility not reduced by appraisers
and will need to evaluate the impact of IFRS 13 on its
existing valuation processes , procedures and where
possible adjust the appraised values in line with IFRS 13

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Resources

www.ey.com/ifrs
Applying IFRS in Real Estate

2012 EYGM Limited

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IFRS 13 Fair Value Measurement

Questions?

2012 EYGM Limited

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IFRS 13 Fair Value Measurement