IFRS 13 FAIR VALUE MEASUREMENTAND COMMON PROPERTY VALUATION METHODOLOGIES

Transcription

1 IFRS 13 FAIR VALUE MEASUREMENTAND COMMON PROPERTY VALUATION METHODOLOGIES Presented for ZHONGHUI ANDA Professional Training Limited 30 October 2014

2 CONTENT Part I Introduction to IFRS 13 Part II Fair Value Definition and Principles Part III Valuation Approaches and Common Property Valuation Methods Part IV Valuation Techniques and Fair Value Hierarchy Part V Disclosure Framework Part VI Disclosure Case Study Part VII Summary 2 CBRE IFRS 13 FAIR VALUE MEASUREMENT

3 PART I Introduction to IFRS13

4 INTRODUCTION OF IFRS 13 Overview IFRS 13 Fair Value Measurement applies to IFRSs that require or permit fair value measurements or disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about fair value measurement. IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. Consistency in Financial Statements IFRS 13 Common Measurement Guidance Standard Measurement Method 4 CBRE IFRS 13 FAIR VALUE MEASUREMENT

5 INTRODUCTION OF IFRS 13 History IFRS 13 was originally issued in May 2011 and applies to annual periods beginning on or after 1 January Several versions of amendments have been made on it. In Sep 2005, project on fair value measurement added to IASB agenda. In Nov 2006, discussion paper Fair Value Measurement published In May 2009, exposure draft Fair Value Measurement published In Jun 2010, exposure draft measurement uncertainty analysis disclosure for fair value measurements published In Aug 2010, staff draft of a IFRS on fair value measurement released. In May 2011, IFRS 13 Fair Value Measurement published. In Jan 2013, effective date of IFRS 13 5 CBRE IFRS 13 FAIR VALUE MEASUREMENT

6 INTRODUCTION OF IFRS 13 Scope IFRS 13 applies whenever a fair value measurement or disclosure is required or permitted by IFRS (with limited exceptions), including those in IAS 32, IAS 38, IAS 39, IAS 40, IAS 41, IFRS 3, IFRIC 12, etc. IAS 32 Financial Instrument IFRS 3 Business Combination IAS 38 Intangible Assets IAS 39 Financial Instrument IFRS 13 Fair Value Measurement IFRIC 12 Service Concession Arrangements IAS 40 Investment Property IAS 41 Agriculture 6 CBRE IFRS 13 FAIR VALUE MEASUREMENT

7 INTRODUCTION OF IFRS 13 Exceptions IFRS 13 does not applied to: For both measurement and disclosure requirement IFRS 2 - Share-based payment transactions For Disclosure requirement IAS 19 - Employee Benefits (Plan assets) IAS 17 - Leases (leasing transactions) IAS 26 - Retirement benefit plan investments IAS 2 - Net realizable value (Inventories) IAS 36 - Value in use (impairment test) IAS 36 - Assets for which recoverable amount is fair value less costs of disposal 7 CBRE IFRS 13 FAIR VALUE MEASUREMENT

8 PART II Fair Value Definition and Principles

9 FAIR VALUE DEFINITIONS Definition from IFRS, IVS and RICS IFRS - 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 [IFRS 13.9] RICS - Market Value The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm s-length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. RICS - Fair Value In RICS, great care must be exercised in selecting and specifying between the two definition according to the valuation context 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 (adopt for valuation for inclusion in financial statements) 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. This does not apply to valuations for financial reporting - (IVS 2013) IVS - Fair Value 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. This does not apply to financial reporting. [IVS 300] 9 CBRE IFRS 13 FAIR VALUE MEASUREMENT

10 FAIR VALUE PRINCIPLES Relevant Factors IFRS 13 stipulates the following factors that should be considered in fair value measurement: (a) the market (b) market participants (c) the price (d) orderly market, and (e) highest and best use principle 10 CBRE IFRS 13 FAIR VALUE MEASUREMENT

11 FAIR VALUE PRINCIPLES The Market Under IFRS 13, management determines fair value based on a hypothetical transaction that would take place in the principal market or, in its absence, the most advantageous market. [IFRS 13.16] Principal market The principal market is the market with the greatest volume and level of activity for the asset or liability. [IFRS 13 Appendix A] Most advantageous market The most advantageous market is the market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs. [IFRS 13 Appendix A] 11 CBRE IFRS 13 FAIR VALUE MEASUREMENT

12 FAIR VALUE PRINCIPLES The Market (Cont ) Transaction costs IFRS 13 prohibits adjustment of fair value for transaction costs, but it does require such transaction costs to be considered in the determination of the most advantageous market. Market A Market B Market C Transaction volume 70,000 30,000 20,000 Trades per month 5,000 1,500 1,500 Price Transport costs Possible Fair Value Transaction costs Sum of above Market A is primary market, fair value should be 52 (exclude transaction costs) Market B is most advantageous market (considering transaction costs) 12 CBRE IFRS 13 FAIR VALUE MEASUREMENT

13 FAIR VALUE PRINCIPLES Market Participants Market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability [IFRS 13 Appendix A] In the absence of an observable market, fair value is determined considering the market participants who would enter into a hypothetical transaction for the asset or liability. Independent of each other Willing to enter into a transaction Market participants: Buyers and sellers in the principal (or most advantageous) market Able to enter into a transaction Knowledgeable and sufficiently informed about the subject 13 CBRE IFRS 13 FAIR VALUE MEASUREMENT

14 FAIR VALUE PRINCIPLES The Price and Orderly Transaction The Price Under IFRS 13, fair value is based on the exit price (the price that would be received to sell an asset or paid to transfer a liability), not the transaction price or entry price. The exit price concept is based on current expectations about the sale or transfer price from the perspective of market participants. Orderly Transaction A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities. CBRE Comment: It is not forced transaction (e.g.: a forced liquidation or distress sale). Though in practice, the difference between exit price and entry price maybe small, they are conceptually different 14 CBRE IFRS 13 FAIR VALUE MEASUREMENT

15 FAIR VALUE PRINCIPLES Highest and Best Use IFRS 13 requires the fair value of a non-financial asset to be measured based on its highest and best use from a market participant s perspective. [IFRS 13.27] Highest and best use principle takes into account the use of the asset that is Physically possible physical characteristics that market participants would consider (e.g.: property type) Legally permissible legal restrictions on use of the asset (e.g.: regulatory license) Financially feasible whether a use of assets generates adequate income or cash flows to produce a reasonable investment return Example: A set of cement production line is currently operating at 50% capacity, with DCF valuation result of 50m If it is determined that market participant would intend to use the production line at 90%- 100% capacity upon transaction, the fair value of the production line should therefore reflect this unutilised capacity. 15 CBRE IFRS 13 FAIR VALUE MEASUREMENT

16 PART III Valuation Approaches and Common Property Valuation Methods

17 VALUATION METHODOLOGIES 3 Common Methods used in Property Valuation Direct Comparison Method Property Valuation Discounted Cash Flow Method Income Capitalisation Method Valuation models should be adjusted to comply with the different local market practices 17 CBRE IFRS 13 FAIR VALUE MEASUREMENT

18 VALUATION METHODOLOGIES Direct Comparison Method The most fundamental valuation method Involves an analysis of sales/rental of comparable properties Adjustments are made to reflect the differences in various aspects including: Time Location Quality Floor Layout Ceiling Height Size Age, etc. that are considered to affect the property value 18 CBRE IFRS 13 FAIR VALUE MEASUREMENT

19 VALUATION METHODOLOGIES Direct Comparison Method Make reference to market transactions of comparable: Comparables Subject Comp 1 Comp 2 Comp 3 Comp 4 Comp 5 Comp 6 Units Sample Floor 6/F Building [*] Building [*] Building [*] Building [*] Building [*] Building [*] Building [*] Building Street [*] Road [*] Road [*] Road [*] Road [*] Road [*] Road [*] Road Tsim Sha Tsui Distance from - 1-min walk 1-min walk 1-min walk 1-min walk 1-min walk 1-min walk Subject Year Built Building Size (Saleable Area, sf) 18,510 20,210 20,286 10,351 33,524 16,552 30,345 View City City City City City City City Transaction Price (HK$) HK[*] HK[*] HK[*] HK[*] HK[*] HK[*] HK[*] Instrument Date 8 Apr Jan Jun Nov Dec May 2013 Unit Rate (HK$ psf) HK[*] HK[*] HK[*] HK[*] HK[*] HK[*] 19 CBRE IFRS 13 FAIR VALUE MEASUREMENT

20 VALUATION METHODOLOGIES Discounted Cash Flow Method Assess the long-term (10-year) return that is likely to be derived from the property within a combination of income and capital growth over an assumed investment horizon Discount rate = rate of return investor requires Includes a long-term growth element Reflect the quality of the rental payments from the existing tenants and the general return in the commercial property market All Risks Yield + Growth Comparable sales data Discount Rate WACC Risk-free borrowing rate + Risk Premium 20 CBRE IFRS 13 FAIR VALUE MEASUREMENT

21 VALUATION METHODOLOGIES Discounted Cash Flow Method Terminal Capitalisation Rate (cap rate) Assume that the Property will be sold at the end of year 10 at a price derived by capitalising the forecast year 11 income to perpetuity The cap rate takes into consideration of the perceived market condition Existing rentals of the subject property and rental of similar premises Derive market unit rental value upon making appropriate adjustments Market rental value for different units may vary on the characteristics of each floor and unit 21 CBRE IFRS 13 FAIR VALUE MEASUREMENT

22 VALUATION METHODOLOGIES Discounted Cash Flow Method 1 Assumptions/ Parameters 3 IRR and Value Major Assumptions: CPI Forecast Office Rent Growth Real Growth Other Income Growth Cash-flow Forecast Vacancy Allowance Cash Flow Stamp Duty 2 10-year Flow Internal Rate of Return Adopted Market Value 22 CBRE IFRS 13 FAIR VALUE MEASUREMENT

23 VALUATION METHODOLOGIES Income Capitalisation Method Estimate the rental income of the Property and capitalise it at an appropriate rate to produce a capital value The yield is the direct relationship between rental and capital value of the property (similar to the cap rate used in DCF) The adopted rates reflect the nature, location, and tenancy profile of the Property together with current market criteria, as supported by the market evidence Various adjustments on factors including rental shortfall and surplus in relation to existing tenancies in the process of the capital value assessment 23 CBRE IFRS 13 FAIR VALUE MEASUREMENT

24 VALUATION METHODOLOGIES Reconciliation and Conclusion of value Different weightings (%) will be assigned to each valuation approach based on its perceived accuracy The results of the three valuation methods should be reasonable close and therefore provide a certain degree of mutual support Market Value: $XXX,XXX 24 CBRE IFRS 13 FAIR VALUE MEASUREMENT

25 PART IV Fair Value Hierarchy

26 FAIR VALUE HIERARCHY Basic Principal If an entity has a single asset or liability that is in traded in an active market, the fair value of the asset or liability can be measured by the quoted price, even if the quantity cannot be wholly absorbed by the market. If an active market for the target does not exist, comparable cases shall be found indirectly. Any quoted price in an active market for an identical asset or liability? Yes No Fair value = Quoted price (Level 1) Replicate a market price using other valuation technique (Level 2 or Level 3) 26 CBRE IFRS 13 FAIR VALUE MEASUREMENT

27 FAIR VALUE HIERARCHY Valuation Input IFRS 13 contains a fair value hierarchy. The highest priority is given to Level 1 inputs, Level 3 inputs get the lowest priority. Level 1 Inputs Highest Priority Unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date [IFRS 13:76] The most reliable evidence of fair value Level 2 Inputs Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. [IFRS 13:81] Observable: inputs that are developed using market data, such as publicly available information about actual events or transactions; Including: - Quoted prices for similar assets or liabilities in markets; - Interest rate, yield, credit spread Level 3 Inputs Lowest Priority Inputs are unobservable inputs for the asset or liability. [IFRS 13:86] Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available. An entity develops unobservable inputs using the best information available. Valuation technique Adjustment to level 2 inputs 27 CBRE IFRS 13 FAIR VALUE MEASUREMENT

28 FAIR VALUE HIERARCHY Information from Vendors Many reporting entities obtain information from pricing services such as Bloomberg, Reutors, Capital IQ, etc. The information provided by these sources could be any level in the fair value hierarchy. Level 1 inputs For a input to qualify as Level 1 input, management should be able to obtain the price from multiple sources. Level 1 inputs relate to items traded on an exchange or an active market location Level 2 and Level 3 inputs In some cases, it may not clear if the prices provided can be transacted upon. Without additional supporting information, prices obtained from indicative broker quotes generally represents Level 3 inputs. Management should typically perform due diligence to support Level 2 classification. 28 CBRE IFRS 13 FAIR VALUE MEASUREMENT

29 PART V Disclosure

30 FAIR VALUE DISCLOSURE Objective [IFRS 13:91] IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both of the following: for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements for fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period. 30 CBRE IFRS 13 FAIR VALUE MEASUREMENT

31 FAIR VALUE DISCLOSURE General Requirement Disclosure requirements are different depends on whether the fair value measurement is recurring or non-recurring Recurring Arise from assets or liabilities measured on a fair value basis at each reporting basis Examples: revaluation model for land and building under IAS 16 Property, Plant and Equipment Non- Recurring Triggered by particular circumstances Example: an asset being classified as held for sales 31 CBRE IFRS 13 FAIR VALUE MEASUREMENT

32 FAIR VALUE DISCLOSURE Disclosure framework - Requirements Requirement (Y = disclosure requirements) Recurring Non-recurring L1 L2 L3 L1 L2 L3 Fair value at end of reporting period - IFRS 13.93(a) Y Y Y Y Y Y Reasons for the measurement - IFRS 13.93(a) Y Y Y Level within hierarchy - IFRS 13.93(b) Y Y Y Y Y Y Transfers within hierarchy - IFRS 13.93(c) Y Y Description of valuation technique and inputs used - IFRS 13.93(d) Y Y Y Y Changes in valuation technique and reasons - IFRS 13.93(d) Y Y Y Y Quantitative information about significant unobservable inputs - IFRS 13.93(d) Reconciliation of opening and closing balance - IFRS 13.93(e ) Unrealized gains/losses from re-measurement - IFRS 13.93(f) Description of valuation processes - IFRS 13.93(g) Y Y Narrative sensitivity to changes in unobservable inputs - IFRS 13.93(h)(i) Quantitative sensitivity to changes in unobservable inputs (for Financial assets or liabilities only) - IFRS 13.93(h)(ii) If highest and best use differs from actual use, explain the reasons - IFRS 13.93(i) 32 CBRE IFRS 13 FAIR VALUE MEASUREMENT Y Y Y Y Y Y Y Y Y Y Y Y

33 PART VI Case Study

34 FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS Examples: Items Require Fair Value Adjustment Non-current portion of pledged deposits Loans to associates Finance lease payables Interest-bearing bank Other borrowings Calculation Methods Discounting the expected future cash flows using rates currently available for instruments with similar terms, credit risk and remaining maturities Liability portion of the convertible bonds Discounting the expected future cash flows using an equivalent market interest rate for a similar convertible bond with consideration of the company s own non-performance risk Listed equity investments Adopting quoted market prices Source: Ernst & Young 34 CBRE IFRS 13 FAIR VALUE MEASUREMENT

35 CASE I HUI SHAN DAIRY Disclosure on Fair Value Hierarchy Source: Annual Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

36 CASE I HUI SHAN DAIRY Disclosure on Valuation Results Source: Annual Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

37 CASE I HUI SHAN DAIRY Disclosure on Valuation Results Source: Annual Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

38 CASE I HUI SHAN DAIRY Disclosure on Valuation Results Source: Annual Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

39 CASE I HUI SHAN DAIRY Disclosure on Valuation Results Source: Annual Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

40 CASE I HUI SHAN DAIRY Disclosure on Biological Assets Valuation Inputs Source: Annual Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

41 CASE I HUI SHAN DAIRY Disclosure on Financial Instrument Valuation Inputs Source: Annual Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

42 CASE II SUNSHINE 100 CHINA HOLDINGS Disclosure on Fair Value Hierarchy Source: Interim Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

43 CASE II SUNSHINE 100 CHINA HOLDINGS Disclosure on Investment Property Valuation Result Source: Interim Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

44 CASE II SUNSHINE 100 CHINA HOLDINGS Disclosure on Valuation Inputs Source: Interim Report CBRE IFRS 13 FAIR VALUE MEASUREMENT

45 PART VII Looking forward

46 LOOKING FORWARD HKFRS 13 Influence on Valuation Emphasize on market participants. Valuation technique(s) focus on maximizing the use of relevant observable inputs and minimize unobservable inputs. Fair Value hierarchy disclosures are required. More disclosures are required, especially in recurring fair value measurement using significant unobservable inputs (Level 3 inputs). Looking forward. The growing recognition of IAS leads to growing importance of fair value assessment. The need for independent verification of fair value estimates is expected to trend up. 46 CBRE IFRS 13 FAIR VALUE MEASUREMENT

47 SPEAKER Stella Law Director, Head of Business and Financial Instrument Valuation & Advisory Services, Greater China E. T. (852) M. (852) (86) F. (852) CBRE IFRS 13 FAIR VALUE MEASUREMENT