IFRS / IVS UPDATE

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IFRS / IVS UPDATE

• IFRS 13 Fair Value Measurement

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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

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Definition of Fair Value IFRS 13/ IVS
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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

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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

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IFRS 13 FAIR VALUEValuation 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

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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

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Framework for non-financial assets
Source RICS/IPD Valuation and sale price
report - 2011 Sample sizes Country
2007 2008 2009 2010 France 527
519 505 557 Germany 483 190 64 107
Netherlands 318 197 197 222 UK
903 1233 1042 652
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Applying fair value in practice
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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

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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.

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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.

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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.

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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

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Example highest and best use

• In this case, the highest and best use is
  determined from the higher of
• 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.

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?
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Valuation techniques

• Use valuation techniques that
• Are appropriate in the circumstances
• Have sufficient available data
• Maximise use of relevant observable inputs
• Minimise use of unobservable inputs
• IFRS 13 describes three valuation techniques
• 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

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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

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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

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Disclosures
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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.

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Fair value hierarchy and disclosures
Recurring fair value measurement Non-recurring fair value measurement (after initial recognition) Fair value disclosure (for items not measured at fair value)
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 ? ? ?


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Fair value hierarchy and disclosures (cont.)
Recurring fair value measurement Non-recurring fair value measurement (after initial recognition) Fair value disclosure (for items not measured at fair value)
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 ? ?
For Level 3, description of valuation processes ? ?
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Summary
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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

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Resources

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

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Questions?