IFRS for banks. Benny Verhelst

Transcription

1 IFRS for banks Benny Verhelst Bangkok, July 2009

2 Agenda Topics start end Introduction to IFRS and categories of financial instruments 13h30 14h45 break 14h45 15h15 exposure draft on classification, revenue recognition and exposure draft on fair value 15h15 16h30 2

3 Introduction to IFRS/IAS

4 IASB Principle-based standards Standards Interpretation of standards IFRS IAS IFRIC SIC International Financial Reporting Standards International Accounting Standards International Financial Reporting Interpretations Committee Standards Interpretation Committee

5 Newest standards IFRS (newest standards) IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments

6 Older standards IAS (older standards) IAS 1 Presentation of Financial Statements IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 2 Inventories IAS 27 Consolidated and Separate Financial Statements IAS 7 Statement of Cash Flows IAS 28 Investments in Associates IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 29 Financial Reporting in Hyperinflationary Economies IAS 10 Events After the Balance Sheet Date IAS 31 Interests in Joint Ventures IAS 11 Construction Contracts IAS 32 Financial Instruments: Presentation IAS 12 Income Taxes IAS 33 Earnings per Share IAS 16 Property, Plant and Equipment IAS 34 Interim Financial Reporting IAS 17 Leases IAS 36 Impairment of Assets IAS 18 Revenue IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 19 Employee Benefits IAS 38 Intangible Assets IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 39 Financial Instruments: Recognition and Measurement IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 40 Investment Property IAS 23 Borrowing Costs IAS 41 Agriculture IAS 24 Related Party Disclosures

7 IFRS Framework notions Framework sets out concepts that underlie the preparation and presentation of financial statements Objective of financial statements = provide information on the financial position, performance and changes in financial position the IASB likes to achieve transparency through: 1.Fair Value 2.Disclosures 7

8 IFRS Framework notions Underlying assumptions Accrual basis: effects of transactions are recognised when they occur + reported in the periods to which they relate Going concern: Entity will continue operation in the foreseeable future Relevance Understandability Neutrality True and fair view Comparability Materiality Reliability Faithful representation Qualitative characteristics Completeness Prudence Timeliness Substance over form 8

9 Talk the talk Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants Resource controlled by the entity as a result of past events and from which future economic benefits are expected to RECOGNISE: incorporate in the balance sheet or income statement Comprehensive income (P&L) Expense Expenses Statement of financial position Assets Assets Income Income Liabilities Equity Liability Present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources Residual interest in the assets of the entity after deducting all its liabilities to DISCLOSE: give details on (text and/or figures) Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants to DERECOGNISE: removal of a previously recognised asset or liability from the statement of financial position (balance sheet)

10 USGaap rules-based standards FASB: issues United States Generally Accepted Accounting Principles (USGaap) Short-term/long-term convergence projects with IFRS e.g. IFRS 8 is almost copy/paste of SFAS 131 Memorandum of Understanding (2008) sets out priorities and milestones to be achieved on major joint projects by 2011

11 What to remember? IFRS/IAS notions Convergence with USGaap Where can I get more information?

12 Categories of financial instruments July, 2009

13 Scope Subsidiaries IAS 27 Associates IAS 28 Joint ventures IAS 31 IAS 39 all types of financial instruments: loans deposits bonds shares (except when you have significant influence) derivatives (except weather derivatives) Leases IAS 17 Employee benefits IAS 19 Insurance contracts IFRS 4 13

14 Agenda 1. Financial instruments 2. Financial assets 3. Financial liabilities 14

15 Financial instruments Statement of financial position Assets Assets Liabilities Equity Debt Financial instrument: Any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity examples: Cash (financial asset for holder/ financial liability for central bank) Shares/ baskets of shares (financial asset for owner/ equity for issuing company) Contractual right to receive cash or other financial asset; e.g. Loans, bonds (financial asset for owner/ debt for issuer) Contractual right to exchange financial assets/liabilities under conditions that are potentially unfavourable e.g. Derivatives (options, futures, swaps) (asset if positive fair value/ liability for counterparty, and vice versa) 15

16 Financial instruments Contract that may be settled in the entity s own instruments (financial asset for holder/ financial liability for central bank) Non- derivative for which the entity may be obliged to receive a variable number of the entity s own equity instruments Derivative (financial asset for holder/ financial liability for issuing bank) e.g. Convertible bonds (financial asset for owner of convertible bond/ financial liability for issuing company) e.g. Warrants (options where new shares are created) 16

17 Trade date/settlement date Trade date: Settlement date date an entity commits to purchase or sell an asset date an asset is delivered to or by the entity IAS 39 allows trade date or settlement date accounting for regular way purchase or sale of financial assets EXCEPT for DERIVATIVES: always trade date accounting! delivery of assets is required within the timeframe established by regulation or convention in the market place concerned 17

19 Categories Financial ASSETS Loans and receivables Held-to- Maturity Investments (HTM) Financial fair value Through P&L Available For Sale (AFS) Held for trading Fair value option 19

20 fair value at initial recognition = normally transaction price Mixed measurement INITIAL SUBSEQUENT Loans and receivables Held-to- Maturity Investments (HTM) Fair Value + Transaction costs Amortised cost Financial fair value Through P&L Fair Value Fair value Through P&L if you include transaction costs in this category they would disappear in P&L at the first revaluation Available For Sale (AFS) Fair Value + Transaction costs Fair value Through equity 20

21 Loans and receivables Loans and receivables Amortised cost Tempting to put things in there because no volatility in fair value is shown Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than: a.those that the entity intends to sell immediately or in the near term, which shall be classified as held for trading, and those that the entity upon initial designates at fair value through p&l; b.those that the entity upon initial designation designates available for sale; or No derivatives, no shares (because payments not determinable), no bonds listed in an active market, no loans that you intend to sell in the near future... What can I put in there? Mortgages, loans, unlisted bonds... c.those for which the holder may not recover substantially all of its initial investment, other than through credit deterioration, which shall be classified as available for sale 21

23 Held-to-maturity Held-to- Maturity Investments (HTM) Amortised cost Tempting to put things in there because no volatility in fair value is shown Non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intent and ability to hold to maturity other than: a.those that the entity upon initial designation designates as at fair value through p&l; b.those that the entity upon initial designation designates as available for sale; No derivatives, no shares (because payments not determinable + no maturity), no loans, no bonds you intend to sell before maturity What can I put in there? Treasury bills and bonds that the bank intends to hold until maturity (ALM might put part of its portfolio here) c.those that meet the definition of loans and receivables 23

24 Held-to-maturity Held-to- Maturity Investments (HTM) Tainting rules During year or 2 previous years, the entity sells, reclassifies, transfers or exercises put options on more than an insignificant portion of the HTM category Penalty 1.Reclassification of ALL HTM to available for sale 2.Cannot classify other assets as HTM during the year of disposal and next 2 years P&L impact could be significant 24

25 Held-to-maturity Held-to- Maturity Investments (HTM) No tainting when Sale close to maturity, with minimal effect on fair value Sale occurs after collection of substantially all original principal Isolated non-recurring event beyond the entity s control such as: o o o Sale right after significant unexpected deterioration of the issuer s creditworthiness Change in tax lax or regulatory environment Business combination that triggers the need for selling the HTM portfolio 25

26 How to calculate amortised cost Amortised cost Principal = initial - repayments +/- recognition Cumulative amortisation of difference between initial amount and maturity amount - write-down for impairment or uncollectability use effective interest rate method 26

27 How to calculate amortised cost Calculate the amortised cost: We buy a bond above par for 102 the bond will be repaid in 3 years at 100 the bond pays 6% interest = Fair value + transaction costs Debit bond 102 Credit current account 102 effective yield (IRR in excel)= 5,2620% 102 x 5,2620% = 5,3672 = revenue recognised in P&L for year 1 Debit current account 6 Credit bond 0,63 Credit interest income 5, ,37 = /- -0,

28 How to calculate amortised cost 1 101,37 effective yield (IRR in excel)= 5,2620% 101,37 x 5,2620% = 5,3340 = revenue recognised in P&L for year 2 Debit current account 6 Credit bond 0,67 Credit interest income 5, ,70 = 101,37-0 +/- -0,67-0 effective yield (IRR in excel)= 5,2620% 100,70 x 5,2620% = 5,2989 = revenue recognised in P&L for year 3 Debit current account 106 Credit bond 100,70 Credit interest income 5, = 100, /- -0,

29 What makes this complex? Full amount of debt drawn spread over a period Principal repayments (partial) prepayment Accordeonloans (changing maturities) Receipt of reinvestment fee from client Adjustments to contractual interest rate Step-up interest rates Floating interest rates Impairment Daycount conventions (360/365...) 29

31 Held for trading Held for trading Fair value Through P&L a. acquired principally for the purpose of selling or repurchasing in the near term What can I put in there? Derivatives, shares, bonds, even loans you intend to trade... (typically the trading portfolio of a bank, merchant bank/global markets) b. part of a portfolio managed together + evidence of pattern of short-term profit-taking c. derivative (except guarantee or hedging) 31

32 Fair value option Fair value option Fair value Through P&L designated upon initial recognition as at fair value through P&L The instrument contains significant embedded derivative(s) that would otherwise need to be separated (IAS 39.11a) If it results in more relevant information: Why would you want this? alternative to hedge accounting alternative to consolidation of certain private equity investments avoid bifurcation of embedded derivatives for unit-linked contracts (measurement matching for insurance) reduces accounting mismatch group of assets that are managed/evaluated on fair value basis 32

33 Fair value hierarchy Subject to change by new draft IFRS on fair value measurement Cost Valuation Techniques Quoted Prices in Active Market Fair Value = amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm s length transaction. Active Market 1.quoted prices are readily and regularly available 2.prices represent actual an regularly occurring market transactions on an arm s length basis

35 Available for sale Available For Sale (AFS) Fair value Through equity Impact of revaluations is shown in equity (other comprehensive income), and not in P&L (comprehensive income) Those non-derivative financial assets that are designated as available for sale or are not classified as No derivatives a.loans and receivables b.held-to-maturity investments c.financial assets at fair value through P&L SUNDRY What can I put in there? Shares, bonds,... (typically the ALM portfolio of a bank) 35

36 AFS Unquoted equity instruments Available For Sale (AFS) What if you should be revaluing something but you are unable to calculate a fair value? Cost Investments in equity instruments 1. that do not have a quoted market price in an active market and 2. whose fair value cannot be determined (+ derivatives linked to such unquoted instruments) Held for trading shall be measured at cost

37 reclassifications IN reclassifications OUT Loans and receivables Held-to- Maturity Investments (HTM) Available For Sale (AFS) Held for trading Fair value option From AFS or trading From AFS (or trading in rare circumstances only) From HTM but tainting rule applies (or trading in rare circumstances only) NOT ALLOWED NOT ALLOWED Tainting rule (all other HTM securities must be reclassified as AFS) To HTM or loans and receivables To AFS, HTM or loans and receivables NOT ALLOWED

39 Categories Financial LIABILITIES Financial fair value Through P&L Other liabilities Held for trading Fair value option 39

40 Measurement Financial fair value Through P&L Other liabilities INITIAL Fair Value Fair Value + Transaction costs SUBSEQUENT Fair value Through P&L Amortised cost 40

41 Fair value Financial fair value Through P&L idem as asset side Held for trading e.g. negative fair values of derivatives Fair value option e.g. bonds containing an embedded derivative that would otherwise need to be separated Changes in credit risk of the liability should be included in the fair value 1. you have issued convertible bonds and put them into fair value option 2. your credit rating deteriorates 3. this has a positive impact on the fair value of your convertible bonds (market value goes down which is an unrealised gain for you) 4. you need to disclose this 41

42 Other liabilities Other liabilities Amortised cost All non-derivative financial liabilities that are not classified as trading or at fair value through P&L Client deposits, savings accounts,... 42

43 Reclassifications reclassifications IN reclassifications OUT Held for trading Fair value option NOT ALLOWED NOT ALLOWED Other liabilities 43

44 What to remember? different categories your intentions matter + labels you give are very sticky classification has an impact on revenue recognition Where can I get more information? IAS 32 IAS 39 44

46 Exposure Draft: Financial Instruments: Classification and Measurement July, 2009

47 Replacing IAS 39 Two measurement categories (fair value and amortised cost) Characteristics of instrument drive measurement Elimination of tainting rules One impairment method (now same bond has more severe impairment if it is in AFS than if it is HTM) Single classification approach (simplified accounting for embedded derivatives ) All equity investments at fair value (through P&L or other comprehensive income/equity) 47

48 48

49 Implications Not mandatory before 2012, but early application permitted at the end of 2009; A lot more bonds will be classified at amortised cost Only shares can be revalued through equity (no more available for sale bonds) Clearer guidance on calculation methods for amortised cost or present value techniques Significant impact on disclosures to be expected 49

50 New classification Financial ASSETS Amortised cost Financial fair value through P&L Equity fair value through equity Held for trading Fair value option 50

51 Amortised cost Amortised cost instrument has only basic loan features contractual terms that give rise on specified dates to cash flows that are payments of principal and interest on the principal outstanding. managed on a contractual yield basis only if they are managed, and their performance evaluated on the basis of the contractual cash flows that are generated when held or issued held for trading acquired at a discount that reflects incurred credit losses. financial asset or financial liability that does not meet these conditions shall be measured at fair value (profit or loss or other comprehensive income) 51

53 Held for trading Held for trading Fair value Through P&L a. acquired principally for the purpose of selling or repurchasing in the near term What can I put in there? Derivatives, shares, bonds, even loans you intend to trade... (typically the trading portfolio of a bank, merchant bank/global markets) b. part of a portfolio managed together + evidence of pattern of short-term profit-taking c. derivative (except guarantee or hedging) 53

54 Fair value option Fair value option Fair value Through P&L designated upon initial recognition as at fair value through P&L Only if it eliminates or significantly reduces a measurement or recognition inconsistency ( accounting mismatch ) Why would you want this? alternative to hedge accounting alternative to consolidation of certain private equity investments for unit-linked contracts (measurement matching for insurance) 54

56 Equity fair value through equity irrevocable election to present in other comprehensive income subsequent changes in the fair value of investments in equity instruments (not held for trading) dividends from those investments recognise in other comprehensive income (when the entity s right to receive payment is established) No recycling of gains and losses to profit or loss is allowed No impairment requirements are necessary 56

57 Reclassifications reclassifications IN reclassifications OUT Amortised cost Financial fair value through P&L NOT ALLOWED NOT ALLOWED Equity fair value through equity 57

58 Categories Financial LIABILITIES Financial fair value Through P&L Other liabilities Held for trading Fair value option 58

59 Reclassifications reclassifications IN reclassifications OUT Held for trading Fair value option NOT ALLOWED NOT ALLOWED Other liabilities 59

60 What to remember? New categories Reclassifications possible in 2009 Where can I get more information? Exposure draft on Financial Instruments: Classification and measurement IAS 39 60

61 IAS 18 Revenue: interest July, 2009

62 Recognition in profit or loss Revenue shall be recognised when Risks and rewards have been transferred Seller retains no continuing managerial involvement or effective control over goods sold Amount can be measured reliably Economic benefits of transaction will flow to the entity Costs incurred for transaction can be measured reliably 62

63 Interests, royalties, dividends What? IFRS definition Revenue recognition interest charges for the use of cash or cash equivalents or amounts due recognised using effective interest method (IAS AG5-AG8) royalties charges for the longterm assets (e.g. patents, trademarks, copyrights, and computer software) recognised on accrual basis dividend distributions of profits to holders of equity investments in proportion to their holdings when shareholder s right to receive payment is established (different treatment for investment in associates IAS 28) 63

64 Financial service fees PURPOSE determines accounting: 1. Fees part of the effective interest rate 2. Fees earned as services are provided 3. Fees earned on the execution of a significant act In which period should I show this fee in P&L? SPREAD fee as adjustment to effective interest rate (except (held for) trading) Recognised in P&L as services are provided Recognised in P&L when significant act is completed 64

65 Fees part of effective interest rate ORIGINATION FEES received relating to creation of financial ASSET Deferred because they generate an involvement with the resulting financial instrument e.g. fee for evaluating borrower condition, for evaluating and recording guarantees, collateral and other security arrangements, negotiating terms of instrument, preparing and processing documents, and closing the transaction Fee for loan commitment FEE = compensation for ongoing involvement If the commitment expires (e.g. client decided not to draw on the credit line), the commitment fee can be taken into P&L on expiry COMMITMENT FEES received to originate a loan (loan commitment outside IAS 39) ORIGINATION FEES received on issuing financial LIABILITIES (at amortised cost) Generates involvement with the financial liability Commitment fee and related transaction costs included in the initial carrying amount of the financial liability 65

66 Fees EARNED as services are provided Fees for SERVICING a loan Recognised as revenue as services are provided When unlikely that lending arrangement will be entered into, fee recognised as revenue on a time proportion basis over commitment period COMMITMENT FEES received for unsucsessful originations (loan commitment outside IAS 39) Investment management fees Fees charged for managing investments recognised as revenue as services are provided (except if incremental costs can be identified seperately + measured reliably + probable that they will be recovered, then recognised as asset + amortised) 66

67 Fees EARNED on execution of SIGNIFICANT ACT Commision on allotment of shares Recognised as revenue when shares have been allotted Recognised as revenue when loan has been arranged Placement fees for arranging a loan between a borrower and an investor Loan syndication fees 1. arranging entity retains no part of loan: recognised as revenue when syndication is completed 2. arranging entity retains a part for itself: a. if same interest rate as other participants: recognise as revenue when syndication is completed b. if different interes rate: amortise as part of effective interest rate 67

68 What to remember? What to spread and what not Where can I get more information? IAS 18 IAS 39 68

69 Fair Value considerations July, 2009

70 Agenda 1. Current definitions 2. Future IFRS 3. Fair value hierarchy 4. Valuation techniques 5. Cost 70

71 Definition IFRS 2.A Statement of financial position Assets Assets Liabilities Equity Debt Fair Value amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm s length transaction.

72 Problems current standards Lack of guidance when to go from one level to another, and when to go back...?? Cost Valuation Techniques Quoted Prices in Active Market When is a market no longer active? Significant impact on what price to use for revaluing portfolios 72

74 Exposure draft for new IFRS Future IFRS on Fair Value Single source of guidance for all fair value measurements Clarification of definition of fair value Convergence with USGAAP standard SFAS 157 Enhanced disclosure: extent of use of Fair Value inputs used

75 new definition new IFRS on Fair Value Fair Value amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm s length transaction. Fair Value 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. PRICE

76 Transaction 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 it is not a forced transaction (e.g. a forced liquidation or distress sale). absence of an actual transaction assume a hypothetical transaction considered from the perspective of a participant who holds the asset or owes the liability 76

77 Transaction orderly transaction most advantageous market 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, takes place in most advantageous market = principal market market with the greatest volume and level of activity for the asset or liability. (provided entity can access that market) after considering transaction costs and transport costs. presumed to be the market in which the entity would normally enter into a transaction 77

78 market participants independent of each other, i.e. not related parties (IAS 24) knowledgeable, i.e. sufficiently informed to make an investment decision and are presumed to be as knowledgeable as the reporting entity about the asset or liability Buyers and sellers in the most advantageous market for the asset or liability that are: able to enter into a transaction for the asset or liability; and willing to enter into a transaction for the asset or liability, i.e. they are motivated but not forced or otherwise compelled to do so. 78

80 Fair Value Hierarchy valuation techniques for which any significant input is not based on observable market data. Cost Level 3 Level 2 quoted prices in active markets for similar assets or liabilities or other valuation techniques for which all significant inputs are based on observable market data Level 1 quoted prices in active markets for the same instrument (i.e. without modification or repackaging)

81 active market active market new 1.quoted prices are readily and regularly available 2.prices represent actual an regularly occurring market transactions on an arm s length basis A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. 81

82 NOT active markets indicators significant decline for new issues few recent transactions quotations vary substantially over time or among market makers wide bid-ask spread little information released publicly significant decrease in volume/ level of activity price quotations not based on current information previously highly correlated indices now uncorrelated if market is not active, a change in valuation technique may be appropriate significant increase in implied liquidity premiums, yields or performance indicators 82

83 NOT orderly Even if a market is not active, it is not appropriate to conclude that all transactions in that market are not orderly (i.e. are forced or distress sales) indicators not orderly there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant seller is in or near bankruptcy or receivership (i.e. distressed) or the seller was required to sell to meet regulatory or legal requirements (i.e. forced) transaction price is an outlier when compared with other recent transactions for the same or similar asset or liability 83

84 Initial recognition Transaction price = best evidence of fair value Unless... Transaction is between related parties Transaction under duress/ seller is forced to accept the price in the transaction Different unit of account Market is different than the most advantageous market But if transaction price differs from fair value, the entity recognises the resulting gain or loss in profit or loss unless IFRS requires otherwise

85 Day One Profit or Loss new IAS 39.AG76A Day one profit or loss: fair value at initial recognition differs from the transaction price Fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets fair value + transaction costs that are directly attributable (for financial instruments not held at fair value) Level 2 Level 1 According to the classification e.g. below market loans to employees: difference recognised in p&l as employee benefit

86 Day One Profit or Loss new IAS 39.AG76A Day one profit or loss: fair value at initial recognition differs from the transaction price Fair value is NOT evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets defer the difference between the fair value at initial recognition and the transaction price Level 3 recognise that deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would consider in setting a price.

87 Liabilities Fair value of a liability if no observable market price, use same methodology as corresponding asset adjust the observed price for the asset for features that are present in the asset but not present in the liability If no corresponding asset, use present value techniques to estimate price market participants would demand to assume liability Do not ignore information about market participants that is reasonably available Fair value reflects non-performance risk = risk that an entity will not fulfil an obligation (includes credit risk) Restrictions on ability to transfer do not affect fair value of a liability

88 Spread : amount by which the ask price exceeds the bid BID price a buyer is willing to pay for a security ASK price a seller is willing to accept for a security, also known as the offer price Level 1 price within the bid-ask spread that is most representative of fair value shall be used to measure fair value, regardless of where the input is categorised in the fair value hierarchy. New IFRS does not preclude the use of midmarket pricing as a practical expedient for fair value measurements within a bid-ask spread. If a bid-ask spread is not observable directly or indirectly (similar asset or liability), an entity need not undertake exhaustive efforts to estimate a bid-ask spread

90 Valuation Technique Level 3 Level 2 new Valuation Techniques Valuation Techniques establish what the transaction price would have been in an arm s length exchange motivated by normal business considerations estimate the price at which an orderly transaction would take place between market participants at the measurement date

91 highest and best use highest and best use use of an asset by market participants that would maximise the value of the asset or the group of assets and liabilities (eg a business) within which the asset would be used. Physically possible Legally permissible Financially feasible in-exchange valuation premise A basis used to determine the fair value of an asset that provides maximum value to market participants principally on a stand-alone basis. To be used for fair value of financial asset or in-use valuation premise A basis used to determine the fair value of an asset that provides maximum value to market participants principally through its use in combination with other assets and liabilities as a group.

92 Valuation Technique Valuation Techniques market approach income approach cost approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities uses valuation techniques to convert future amounts (e.g. cash flows or income and expenses) to a single present (discounted) amount. Value indicated by current market expectations about those future amounts. e.g. present value techniques, option pricing models (Black-Scholes-Merton) reflects the amount that would currently be required to replace the service capacity of an asset (current replacement cost)

93 inputs Level 3 Level 2 observable inputs unobservable inputs 1.Inputs that are developed on the basis of available market data and 2.reflect the assumptions that market participants would use when pricing the asset or liability. 1.Inputs for which market data are not available and 2.that are developed on the basis of the best information available about the assumptions that market participants would use when pricing the asset or liability. 93

95 Cost Unquoted equity instruments IAS39.AG80-81 Cost Investments in equity instruments 1. that do not have a quoted market price in an active market and 2. whose fair value cannot be determined (+ derivatives linked to such unquoted instruments) shall be measured at cost

96 What to remember? Fair value hierarchy Day one profit or loss draft new IFRS Where can I get more information? IAS 39 Exposure draft IFRS 7 Exposure draft new IFRS on Fair Value Measurement 96