IFRS 13 (FASB Topic 820) Fair Value Measurement and Required Disclosures – Such A Concept!
By issuing International Financial Reporting Standard #13 (IFRS 13), the International Accounting Standards Board (IASB) defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements.
The IASB says IFRS 13 applies when another Standard “requires or permits fair value measurements or disclosures about fair value measurements (and measurements based on fair value, such as fair value less costs to sell)”, except in specified circumstances in which other Standards govern.
For example, IFRS 13 does not specify the measurement and disclosure requirements for share-based payment transactions, leases or impairment of assets. Nor does it establish disclosure requirements for fair values related to employee benefits and retirement plans.
IFRS 13 defines fair value as 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).
When measuring fair value, an entity uses the assumptions that market participants would use when pricing the asset or the liability under current market conditions, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value.
The real problem lies in the level of certainty surrounding the number used as fair value. \the more objective the supporting evidence, the less explanations and disclosures required.
To make it a little easier (or so they say!), IFRS 13 sets out 3 basic levels of certainty for supporting evidence. Each level has a very imaginative name: Level 1, Level 2, and Level 3, with Level 1 being the most certain and Level 3 the least certain.
For each level of certainty, IFRS 13 requires a higher level of disclosure the more uncertain the supporting evidence. For example, Level 3 fair value requires the most disclosure in the hope the readers of the statement notes can decide for themselves if they can accept the number being used.
So…if you are not comfortable using a lot of judgment, you may not be comfortable with this one. It really comes down to the level of credibility you can generate for the readers of the financial statements. It can be tricky, but certainly manageable.
Stay tuned for next month’s update.
A Certified Public Accountant, business author of several books (including IFRS Simplified”) Mike Morley is an entertaining and informative speaker, a recognized authority in the field of finance, and offers various training programs, such as IFRS, SOX, and Financial Statement Analysis that focus on providing continuing education opportunities for finance and accounting professionals. His website (mikemorley.com) features an upcoming webinar about IFRS 13.