Disclosing Fair Values in Annual Financial Statements Applying IFRS 13

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1 Disclosing Fair Values in Annual Financial Statements October, 2013 This newsletter is one of a series to illustrate and explain significant new IFRS disclosure requirements applicable for 2013 annual financial statements. Other newsletters in the series include: Disclosing Fair Values in Annual Financial Statements to Investment Properties (A supplement) Disclosing Employee Benefits in 2013 Annual Financial Statements Disclosing Interests in Other Entities in 2013 Annual Financial Statements Offsetting of Financial Instruments Disclosure in 2013 Annual Financial Statements For years starting in 2013, Canadian public companies must disclose enhanced information about fair value measurements used in their IFRS annual financial statements in accordance with IFRS 13, Fair value measurement. This includes information on both financial and non-financial assets regardless of whether they are recurring or non-recurring in nature. While the changes will affect the reporting for all companies, they will have the greatest impact on the disclosures of companies that will have instruments categorized as Level 3 in the hierarchy. Companies that use fair value measurements only for plain vanilla financial instruments that are categorized as Level 1 or Level 2 may not find significant incremental disclosures. Changes include: A stand back test to consider whether disclosure objectives are met. New criteria for grouping assets and liabilities into classes for fair value disclosure purposes. Expanded guidance on assigning measurements as Level 1, 2 or 3 in the fair value hierarchy, including measurements of non-financial assets and liabilities and disclosures of fair values in the notes. More focused and detailed disclosures of Level 3 measurements, including a description of a company s valuation processes. In this newsletter we illustrate the type of fair value disclosures that a hypothetical company, Sample Co., might provide in its 2013 annual financial statements. The illustrative disclosures are accompanied by explanatory notes that discuss the changes to all the requirements and the new judgements and other determinations that the company has made in applying them. The illustrative disclosures highlight those disclosures that are incremental to those required for 2012 annual financial statements. Sample Co. is a manufacturing company with a calendar year-end. These illustrations do not consider the special circumstances of financial institutions. We hope you will find this newsletter helpful. If you have any questions, please do not hesitate to contact your local PwC representative or office.

2 Note X. Fair Value Explanatory Notes (EN) EN1 EN2 Commentary This note illustrates the minimum disclosures required by IFRS 13 to be included in Sample Co. s December 31, 2013 annual financial statements. Items highlighted in yellow represent the effect of new or amended requirements for annual periods which are explained in the accompanying notes. For financial instruments, many of these incremental disclosures will already have been incorporated into 2013 interim financial statements, but preparers should note there are further new disclosures required only in annual financial statements. Entities will have to consider the impact of the adoption of IFRS 13 on their existing accounting policy note and description of significant judgements and estimation uncertainty. Such changes are beyond the scope of this illustrative disclosure note. This example illustrates one possible format for the disclosures; there may be others. PwC 2

3 The following tables summarize fair value measurements recognized in the statement of financial position or disclosed in the Company s financial statements by class of asset or liability and categorized by level according to the significance of the inputs used in making the measurements. Quoted prices in active markets for identical instruments Level 1 Significant other observable inputs Level 2 Significant unobservable inputs Level 3 EN3 EN4 Recurring measurements Financial assets Carrying amount as at December 31, 2013 Fair value as at December 31, 2013 Debt securities (Government bonds) $ 850 $ 348 $ 502 $ Equity securities (a): Financial services 1,244 1,244 Manufacturing 5,010 5,010 Total equity securities 6,254 1,244 5,010 Derivatives (Foreign exchange forwards) Total financial assets $ 7,674 $ 1,592 $ 1,072 $ 5,010 Financial liabilities Derivatives (Interest rate swap) $ (386) $ $ (386) $ Redeemable convertible debentures (Conversion option) (749) (749) Total financial liabilities $ (1,135) $ $ (386) $ (749) EN4 Non-recurring measurements Assets classified as held-for-sale (b) $ 12,201 $ $ 12,500 $ EN5 Fair values disclosed Mortgage payable $ ( 2,255) $ $ $ (2,442) Redeemable convertible debentures (Excluding conversion option) (13,982) (15,859) Investment in associates (XYZ Inc) $ 1,492 $ 1,978 $ $ Investment in associates (CCD Plc) 2,008 3,030 The fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying values due to their short-term nature. EN6 (a) On the basis of its analysis of the nature, characteristics and risks of equity securities, the Company has determined that presenting them by industry is appropriate. (b) In accordance with IFRS 5 Non-current assets held for sale and discontinued operations, the Company classified its Manitoba manufacturing plant as held-for-sale. The assets, consisting of land, buildings and plant machinery, previously carried at $14,500 were written down to their fair value of $12,500 less costs to sell of $299 (or $12,201) resulting in a loss of $2,299 that was included in net income for the period. PwC 3

4 Quoted prices in active markets for identical instruments Level 1 Significant other observable inputs Level 2 Significant unobservable inputs Level 3 EN7 Recurring measurements Financial assets Debt securities (Government bonds) Carrying amount as at December 31, 2012 Fair value as at December 31, 2012 $ 1,485 $ 652 $ 833 $ Equity securities (a): 5, ,873 Derivatives (Foreign exchange forwards) Total financial assets $ 7,872 $ 1,636 $ 1,363 $ 4,873 Financial liabilities Derivatives (Interest rate swap) Redeemable convertible debentures (Conversion option) $ (406) $ $ (406) $ (3,802) (3,802) Total financial liabilities $ (4,208) $ $ (406) $ (3,802) As at December 31, 2012, mortgage payable with a carrying value of $2,519 had a fair value of $2,653 and redeemable convertible debentures excluding conversion option with a carrying value of $13,465 had a fair value of $18,989. The fair values of cash equivalents, accounts receivable and accounts payable approximate their carrying values due to their shortterm nature. As at December 31, 2012 the Company s equity accounted investments in XYZ Ltd and CCD Plc had fair values of $1,587 and $2,530, respectively. EN8 The Company used the following techniques to determine the fair value measurements categorized in Level 2: The fair value of bonds was determined by obtaining quoted market prices or executable dealer quotes for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves. The fair value of forward foreign exchange contracts is determined using the forward exchange rates at the measurement date, with the resulting value discounted back to present values. The fair value of the Manitoba manufacturing plant, classified as held-for-sale, is based on the price agreed in the sale agreement of November 30, The Company used the following techniques to determine the fair value measurements categorized in Level 3: Equity securities The Company s equity investment in a private manufacturing company consists of 100,000 common shares, or ten per cent of the outstanding common shares. The fair value of the common shares held is derived using the comparable company valuation multiples approach. In applying this approach the Company has selected five comparable public company peers that have similar risk, growth and cash-generating potential profiles and concluded that an Enterprise Value (EV)/EBITDA valuation multiple of 9.0x is a relevant performance measure for its investment. Valuation multiples are derived from the reported earnings and the period end stock price of companies in the peer group, or if a company in the group is sold, the transaction price. If an observed transaction price represents the sale of a controlling interest, the Company deducts the amount of the control premium from the indicated fair value obtained using transaction multiples. The Company assesses the control premiums from which to derive the non-controlling interest by referring to data on empirical control premium studies that considered industry, pricing, deal size and timing of the observed premiums. The Company also adjusts the indicated fair value to give the effect of the lack of liquidity compared to the publicly traded peer group when it determines that the market participants would take this into account when pricing the investment. Liquidity discount is quantified on the basis of relevant restricted stock studies. PwC 4

5 EN9 EN13 The significant unobservable inputs used in the fair value measurement of equity securities are as follows: As at December 31, 2013 As at December 31, 2012 Indicated fair value of 100,000 common shares based on EV/EBITDA of 9.0x ( x) Non-controlling interest discount of 11% ( %) Discount for the lack of liquidity of 6% (2012 7%) $ 6,030 $ 5,864 (663) (581) (357) (410) Fair value as at December 31, 2013 $ 5,010 $ 4,873 EN14 EN5 EN8 If the valuation multiple would be changed to 8.5x or 9.5x, the fair value of the investment and other comprehensive income would decrease or increase by $279 ( $271), respectively. Generally, a change in the input used for the valuation multiple assumption is accompanied by a directionally similar change in the non-controlling interest and liquidity assumptions. Management believes that reasonably possible changes to other unobservable inputs would not result in a significant change in the estimated fair value Redeemable convertible debentures conversion option and host contract The redeemable convertible debentures have two components of value a conventional bond and a call on the equity of the Company through conversion. Based on its terms (see note Y) the conversion option is an embedded derivative and has been separated from the host contract and classified as a financial liability through profit and loss. The fair value of the convertible debentures was calculated based on the Tsiveriotis and Fernandes model for valuing convertible debt. To split the convertible bond into its components parts of the embedded conversion option and the host contract, a new hypothetical security is defined, sometimes called the "cash-only part of the convertible bond". This model uses the following inputs: market price of the Company s shares, strike price of the conversion option, risk-free rate, dividend yield, expected volatility, and the Company s credit spread. EN13 Significant unobservable used in the measurement of the conversion option as at December 31, 2013 are as follows: As at December 31, 2013 As at December 31, 2012 Expected volatility 25% 30% Credit spread 400 bps 400 bps EN14 A higher volatility will increase the value of the conversion option. A lower credit spread will decrease the value of the conversion option. The following table shows the changes in fair value of the conversion option from a 10% increase or decrease in volatility and a 100 bps increase or decrease in credit spread, all other inputs being constant. Impact of change to volatility Impact of change in credit spread Increase +10% Decrease -10% Increase 100 bps Decrease 100 bps Increase /(decrease) in fair value as at December 31, 2013 Increase /(decrease) in fair value as at December 31, 2012 $ 1,249 $ (275) $ 715 $ (783) $ 4,588 $ (3,054) $ 3,925 $ (2,674) PwC 5

6 EN5 EN8 EN11 The Company also used the following techniques in determining the fair values disclosed for the following financial liabilities classified as Level 3: Mortgage payable The fair value of the mortgage payable as at December 31, 2013 has been calculated by discounting the expected cash flows of each debt using a discount rate of 6%. This discount rate is determined using the Government of Canada benchmark bond yield for instruments of similar maturity adjusted for the Company s specific credit risk. In determining the adjustment for credit risk the Company considers market conditions, the value of the properties that the mortgage is secured by and other indicators of the Company s creditworthiness. Valuation processes The Company s finance department is responsible for performing the valuation of fair value measurements included in the financial statements, including Level 3 fair values. The valuation processes and results for recurring measurements are reviewed and approved by the Controller and the Chief Financial Officer (CFO) at least once every quarter, in line with the Company s quarterly reporting dates. The valuation processes and results for non-recurring measurements are reviewed and approved by the Controller and the CFO in the quarter in which the measurement occurs. All Level 3 valuation results are discussed with the Audit Committee as part of its quarterly review of the Company s financial statements. PwC 6

7 EN15 The following table presents the changes in recurring fair value measurements categorized as Level 3. Equity securities High-yield debt securities (a) Redeemable convertible debt conversion option EN7 Balance as at January 1, 2012 Transfer into Level 3 $ 4,745 $ $ (5,072) Transfers out of Level 3 Purchases, sales, issues and settlements Settlements 685 Total gains or losses for the period: Included in other income and expenses 585 Included in other comprehensive income 128 Balance as at December 31, 2012 $ 4,873 $ $ (3,802) Total gains or losses included in other income and expenses for assets and liabilities held at the end of the reporting period 498 Balance as at January 1, 2013 $ 4,873 $ $ (3,802) Transfer into Level 3 (a) 623 Transfers out of Level 3 Purchases, sales, issues and settlements: Sales (582) Total gains or losses for the period: Included in net income Investment gains (losses) (41) Change in fair value of conversion option 3,053 Included in other comprehensive income Available for sale investments 137 EN16 Balance as at December 31, 2013 $ 5,010 $ $ (749) Change in unrealized gains (losses) for the period included in net income at December 31, 2013 in: Investment gains (losses) $ $ $ Change in fair value of conversion option $ $ $ 3,053 EN10 (a) Transferred to Level 3 from Level 2 due to the deterioration of the credit standing of the issuer of the debt securities that resulted in a significant increase in the credit risk adjustment, which is not based on observable inputs. The debt securities have been sold in the secondary market during the reporting period. The Company s policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. During the year ended December 31, 2013, the Company transferred government bonds with a carrying value of $321 at the date of transfer (and $358 at December 31, 2013) from Level 1 into Level 2 due to the market for the identical bonds becoming inactive. There were no transfers from Level 2 into Level 1 in the period. PwC 7

8 Change 1. Overview and scope Discussion Effective for years beginning on or after January 1, 2013, entities must apply IFRS 13, Fair value measurement. IFRS 13 defines fair value and provides guidance on the how to measure fair value in financial statements and also sets out disclosures required when fair value measurements are used or disclosed. The scope of IFRS 13 is broad and made more complex by requiring the measurement requirements to be applied differently than the disclosure requirements. Specifically, IFRS 13 applies to the measurement of all fair values either recorded or disclosed in the financial statements except for: Share-based payments in scope of IFRS 2, Share-based payment; and Leasing transactions in scope of IAS 17, Leases. IFRS 13 also applies to fair value-based measurements, for example fair value less costs to sell, but does not apply to measures that are not fair value even though they may be similar, such as net realizable value or value in use. Measurements required by IAS 37, Provisions, contingent liabilities and contingent assets are generally not considered to be fair value or fair value-based measurements. In contrast, the minimum disclosure requirements (IFRS ) apply to all fair value measurements in scope of IFRS 13, except: Plan assets measured at fair value in accordance with IAS 19, Employee benefits (for more details on disclosures of employee benefits see PwC s illustrative newsletter Disclosing Employee Benefits in 2013 Annual Financial Statements); Assets measured at fair value less costs of disposal when measuring recoverable value in accordance with IAS 36, Impairment of assets (for more details on revised disclosure requirements under IAS 36 see PwC s newsletter Impairments amended understanding changes to IAS 36); Fair value measurements made on initial recognition of an asset or liability (e.g., identifiable assets or liabilities acquired or assumed in a business combination). Extensive disclosure on the fair values of financial assets and liabilities was already required by IFRS 7, Financial Instruments: Disclosures in annual financial statements for annual periods before These disclosure requirements, such as the use of the fair value hierarchy have now been moved to IFRS 13 but there are also new disclosures that have been added for Level 3 measurements. Many of these disclosures now also apply to: Recurring fair value measurements of non-financial assets including: o Investment property carried at fair value; o Biological assets and agricultural produce; o Property plant and equipment measured using the revaluation model. Non-recurring fair value measurements, including: o Assets or disposal groups classified as held-for-sale in accordance with IFRS 5. We have summarized the major changes from the 2012 annual requirements and their effect on Sample Co. s financial statements disclosures below. PwC 8

9 Change 2. Stand back assessment of the adequacy of disclosures (IFRS and.92) Discussion In 2012, entities had to provide only the minimum disclosures specified by individual IFRSs, subject to the fair presentation criteria set out in IAS 1, Presentation of financial statements. In 2013, the disclosure must be sufficient to help users of its financial statements assess the following: 1. The valuation techniques and inputs used to develop recurring fair value measurements, including those used to measure non-financial assets; and 2. For measurements involving the use of significant unobservable inputs, the effect of those measurements on profit or loss or other comprehensive income. Assessments of the sufficiency of disclosures involve considering the level of detail necessary, how much emphasis to place on each requirement, how much aggregation or disaggregation to undertake and whether the users of financial statements need additional information beyond the minimum required by IFRS. After considering its compliance with the requirements of IFRS , Sample Co. concluded that further disclosures were not necessary to meet the disclosure objectives of the standard. 3. Identifying classes of assets and liabilities (IFRS and.94) IFRS 13 requires disclosure of fair value information by class of asset and liability. In establishing the number and type of classes to present, entities have to consider the nature, characteristics and risks of the asset or liability and where its measurement is categorized in the fair value hierarchy table. Other IFRSs may specify the class for an asset or a liability these classes may be used only if they meet the requirements of IFRS 13 noted above. For example, IFRS 7.6 requires financial assets and financial liabilities to be grouped based on the characteristics of the instruments and the nature of the information being disclosed. For fair value information, this presentation must be reassessed using the guidance in IFRS 13 for those financial assets and liabilities measured at fair value in the statement of financial position to determine whether further subdivision is necessary by risk or measurement hierarchy. IFRS 13 states that for assets and liabilities included in Level 3, the number of classes may need to be greater because fair value measurements have a greater degree of uncertainty and subjectivity. After reviewing the new criteria, Sample Co. determined that changes to classifications were necessary for its investments in equity securities. In 2012, Sample Co. grouped these investments together as a single class. For 2013, the Company disaggregated fair value measurement information for these investments based on their different industries as those industries present significantly different risks. Had Sample Co. had more than one investment classified in Level 3, a further disaggregation of these investments into separate classes might have been necessary. If Sample Co. had more than one disposal group classified as held-for-sale, the Company would have had to consider whether each group constituted a separate class. PwC 9

10 Change 4. Separating recurring from non-recurring measurements in the fair value hierarchy (IFRS 13.93(a) and (b)) 5. Additional information for fair values disclosed in the notes to the financial statements (IFRS 13.97) Discussion Starting in 2013, certain of the disclosure requirements depend on whether fair value measurements included in the fair value hierarchy table are recurring or non-recurring. A recurring fair value measurement is one that IFRS requires or permits in the statement of financial position at the end of each reporting period. A non-recurring measurement is one that IFRS requires or permits in the statement of financial position in particular circumstances, such as measurement of assets classified as held-for-sale under IFRS 5. Disclosure of the level of the fair value hierarchy is required for both categories of fair value measurement. In its 2013 fair value disclosures, Sample Co. has clearly identified recurring measurements from non-recurring measurements. For each class of financial assets and liabilities not measured at fair value on the balance sheet, IFRS 7 continues to require disclosure of their fair value in the notes, except when the carrying amount is a reasonable approximation of fair value, or where the fair value of certain instruments cannot be determined reliably. (Specifically, equity instruments not quoted in an active market, derivatives linked to such instruments or contracts containing a discretionary participation feature. See IFRS 7.25 and.29). Other IFRSs may also require note disclosure of fair values. For example IAS 40, Investment properties, requires this for properties measured using the cost model. Where fair value is disclosed in the financial statements, IFRS 13 now requires additional information about those fair values as follows: 1. The level of the fair value hierarchy within which the fair value measurements are categorised in their entirety (Level 1, 2 or 3). 2. A description of the valuation technique(s) and the inputs used in the fair value measurement. If there has been a change in valuation technique (e.g., changing from a market approach to an income approach or the use of an additional valuation technique), the entity shall disclose that change and the reason(s) for making it. 3. If the highest and best use of a non-financial asset differs from its current use, an entity shall disclose that fact and why the non-financial asset is being used in a manner that differs from its highest and best use. Sample Co. discloses the fair value of its fixed rate mortgage payable and redeemable convertible debt component carried at amortized cost in accordance with IFRS 7 and therefore has provided the additional disclosures required by IFRS 13 in its annual financial statements. There was no change in valuation technique from previous years. As the convertible debt host contract is measured by reference to a valuation technique used also to measure the conversion option, the disclosures regarding the valuation technique are included in the discussion of the conversion option (Level 3 recurring measurement). Sample Co. has not disclosed the fair value of accounts receivable, accounts payable and cash and cash equivalent because the carrying values approximate fair value as permitted by IFRS 7.29, therefore no IFRS 13 disclosures are required. However, if Sample Co. had disclosed the fair value of these classes of instruments in a table or other format, the IFRS requirements above would apply. The fair value of investments in associates with a quoted market price is required by IFRS 12, Disclosure of interests in other entities. Sample Co. has included disclosures relating to these fair values in its fair value note. The same information could have been presented in the note on investments in associates. PwC 10

11 Change 6. Reasons for non-recurring measurements (IFRS (a)) 7. Comparative period disclosures (IFRS 13.C3) Discussion IFRS 13 requires disclosure of non-recurring fair value measurement at the end of the reporting period the reasons for the non-recurring fair value measurement. Details of non-recurring fair value measurements were not required in In accordance with IFRS 5, Sample Co. presented a manufacturing plant as assets held-for-sale at the end of the reporting period. The assets of land, building and plant machinery are to be disposed of in a single transaction and are considered to be a disposal group for measurement under IFRS 5. After impairment testing, the assets were measured at the lower of carrying amount and fair value less costs to sell. For the disposal group fair value less costs to sell was lower, and therefore Sample Co. has made the disclosures required by IFRS 13 for non-recurring fair value measurements in the statement of financial position at the end of the reporting period. Transitional provisions of IFRS 13 state the minimum disclosures are not required for comparative periods before the initial application period. Accordingly new disclosures that IFRS 13 requires do not need to be provided for prior years. Many of the requirements in IFRS 7 relating to fair values were brought forward into IFRS 13. Despite the requirements for prospective application of IFRS 13, we believe that to the extent such disclosures were previously made in respect of prior periods, for example the level of the fair value hierarchy for financial instruments measured at fair value, these disclosures should be brought forward to the 2013 annual financial statements as comparative information. In 2012, in compliance with IFRS 7, Sample Co. presented only one class of financial assets under equity securities (see EN 3) and did not disclose the level of the fair value hierarchy for disclosures of fair value for mortgage payable or redeemable convertible debt excluding conversion option. In 2013 these disclosures are made for the current year but not for the comparative period. Sample Co. has disclosed the fair value of its investments in publicly traded associates in accordance with IFRS 12, which requires prior year comparative disclosure of the fair value. However, the requirement to disclose the level of the fair value hierarchy is an IFRS 13 requirement and therefore Sample Co. has not disclosed this for comparative purposes. The fair value information could also have been presented in the note on investments in associates. In its 2012 annual financial statements Sample Co. had disclosed categorization by level of the fair value hierarchy for fair value measurements of financial assets and liabilities. This information is presented as comparative information in the 2013 annual financial statements to the extent it has been previously provided. However, IFRS 7 required certain disclosures in respect of the fair value of financial instruments that were not carried forward into the IFRS 13 fair value disclosure requirements. One example is the disclosure of the effects of changing one or more of the inputs to a Level 3 measurement to a reasonably possible alternative assumptions if this would change fair value significantly. (As noted in EN 14, IFRS 13 requires sensitivity analysis but only for significant unobservable inputs for Level 3 measurements). The application of IFRS 13 prospectively rather than retrospectively might suggest that these disclosures should still be included as comparative disclosures in 2013 annual financial statements as they were required by IFRS 7 for 2012 annual periods. However, providing these disclosures for the comparative period only may be confusing to users and as the IASB determined that these were not relevant disclosures regarding fair value going forward we believe these may be omitted. Sample Co. considered the level of disclosures made in the 2013 financial statements in respect of fair values in the current and comparative periods, including the standback test for adequacy of disclosures (EN 2). Sample Co. did not include disclosures for the prior period for requirements that were not carried forward into IFRS 13. PwC 11

12 Change 8. Valuation techniques and inputs (IFRS 13.93(d)) Discussion In 2012, entities had to disclose the methods used in determining the fair value of each class of financial assets and liability, and if a valuation technique was used, the related assumptions, including quantitative information such as interest rates or discount rates, and any changes in the valuation techniques in the period. In 2013, the valuation techniques used for measurements classified as Level 2 or Level 3 in the fair value hierarchy and the inputs used in those measurements (e.g., the fact that a entity discounted cash flows in estimating fair value) are disclosed. However the requirements have been extended to fair value measurements of non-financial assets and liabilities, non-recurring measurements and also to footnote disclosures of items carried on a cost basis but whose fair values are disclosed in the notes to the financial statements. Valuation techniques must be applied to the unit being measured. For investments in equity securities in scope of IAS 39, Financial instruments: Recognition and measurement this will be at the individual share level. IFRS 13 clarified that block discounts or similar adjustments that relate to the size of an investment position are not part of fair value as they are not a characteristic of the instrument being measured. Disclosure of the quantitative information about inputs (e.g., the actual discount rate used) is required only for Level 3 measurements (see Quantitative information about unobservable inputs below). Consistent with the new requirements, Sample Co. has included information on the valuation techniques used for non-recurring measurements and for their fair value disclosures of financial liabilities. In determining the fair value of the disposal group held for sale, Sample Co. assessed whether there would be any significant adjustments required to reflect changes in fair value between November 30 (the date of the sale agreement) and the balance sheet date and determined that none were necessary. Disclosures about quantitative information are limited to Level 3 measurements. There were no changes in the valuation techniques during the period. 9. Level 3 measurements 10. Transfers between levels in the fair value hierarchy and policies for transfers (IFRS 13.93(c) and (e)(iv), 13.95) Refer to the section starting with EN 14 for a summary of changes in disclosure requirements applicable to Level 3 measurements only. In 2012, entities had to disclose and discuss separately the amount and reasons for transfers in and out of the Level 3 category in the fair value hierarchy and any significant transfers between Level 1 and Level 2 for financial assets and liabilities. In 2013, disclosure and discussion is necessary for all transfers among classes regardless of their significance but, in the case of transfers between Level 1 and Level 2, only if the asset or liability is measured at fair value on recurring basis and is on hand at the end of the period. Further, it is now necessary for entities to disclose and consistently follow the same policy for determining when transfers between levels are deemed to have occurred (e.g., the date of the event or change in circumstance that caused the transfer, the beginning of the period or the end of the period). In 2013, Sample Co. disclosed its policy for transfers among levels and transfers occurring during the period in accordance with the revised requirements. Sample Co. also disclosed significant transfers occurring between Levels 1 and 2 for government bonds that were on hand at December 31, 2013 but not for any transfers for assets or liabilities that were not held on the balance sheet date. All transfers affecting Level 3 balances were disclosed by Sample Co. Its disclosure that no transfers occurred in a period is optional. PwC 12

13 Change 11. Valuation processes estimates (IFRS 13.93(g)) Discussion Beginning in 2013, entities are required to include a description of its valuation processes for items that are measured at fair value in the statement of financial position and classified as Level 3 in the fair value hierarchy. This includes, for example, how it decides its valuation policies and procedures and analyses changes in fair value measurements from period to period. A entity might disclose the following to comply with this requirement: Who decides the entity s valuation policies and procedures, to whom that individual or group reports, and the internal reporting procedures in place (e.g., whether and, if so, how audit and other relevant Board committees discuss and assess the fair value measurements); How the entity determined that third-party information, such as appraisers, broker quotes or pricing services, used in the fair value measurement was developed in accordance with IFRS; The methods used to develop and substantiate the unobservable inputs used in a fair value measurement; and The process for analyzing changes in fair value measurements from period to period. Depending on an entity s circumstances, and the nature of its Level 3 measurements, other disclosures might be appropriate as well; e.g., the frequency and methods for calibration, back testing and other testing procedures for pricing models. In 2013, Sample Co. provided an explanation of the valuation processes it followed in making Level 3 estimates. 12. Other changes not illustrated in this newsletter The following disclosures are not illustrated as not applicable to Sample Co.: 1. The existence of inseparable third-party credit enhancements. (IFRS 13.98) 2. If and why a non-financial asset is being used in a manner that differs from its highest and best use. (IFRS 13.93(i)) 3. The use of the portfolio exception for measuring a group of financial assets and financial liabilities on a net position basis. (IFRS 13.96) PwC 13

14 Disclosure requirements applicable to Level 3 measurements only Change 13. Quantitative information about unobservable inputs (IFRS 13.93(d)) Discussion In 2012, entities had to disclose significant assumptions about Level 3 financial instruments, including information about rates and other quantitative data used in fair value measurements. Starting in 2013, entities are instead required to provide quantitative information only in respect of significant unobservable inputs used in recurring or non-recurring fair value measurements. The entity does not have to create quantitative information for unobservable inputs that were not developed by the entity (e.g., an entity uses prices from prior transactions or third party pricing information without adjustment) but an entity cannot ignore information that is reasonably available to it. IFRS 13 does not provide specific guidance on what quantitative information is necessary but requires entities to provide, at a minimum, fair value disclosure for each class of assets and liabilities measured at fair value. Disclosure should contain sufficient detail to allow users to understand the unobservable inputs used and how those inputs vary over time. To be in accordance with IFRS 13.99, information generally should be provided in a tabular format. In 2013, Sample Co. provides quantitative information only about significant unobservable inputs used in fair value measurement of its private equity investment and redeemable convertible debt conversion option. Sample Co. does not make use of inputs that were not developed by the Company. (Note: The quantitative amounts in the accompanying note are arbitrary and have been used for illustrative purposes only. The applicable discounts and assumptions will depend on the specific facts and circumstances.) 14. Sensitivity analysis (IFRS (h)(i) and (ii)) In 2012, if changing one or more of the assumptions to reasonably possible alternative assumptions would change the fair value significantly, entities had to state that fact, disclose the effect of those changes and how the effect of the change was calculated. This requirement remains the same in 2013 except that it applies only for unobservable inputs in recurring valuations. Furthermore, starting in 2013, entities also must provide: (a) (b) A narrative description of the sensitivity of fair value measurements to changes in unobservable inputs that might result in a significantly higher or lower fair value; and If there are inter-relationships with other unobservable inputs, a description of the inter-relationships and how they might magnify or mitigate the effects of a change in an unobservable input. In 2013, Sample Co. added a description of significant unobservable inputs inter-relationships for the Level 3 recurring measurements of equity securities and redeemable convertible debentures conversion option. 15.Reconciliations (IFRS 93(e)) In 2012, entities had to reconcile the opening and closing balances reported for financial instruments classified as Level 3 in the fair value hierarchy disclosing separately changes attributable to: (i) (ii) (iii) (iv) Gains and losses recognized in profit or loss, and a description of where they are presented in the statement of comprehensive income or separate income statement. Total gains or losses recognized in other comprehensive income. Purchases, sales, issues and settlements, with each movement disclosed separately. Transfers into or out of Level 3 and the reasons for the transfers. PwC 14

15 Disclosure requirements applicable to Level 3 measurements only Change Discussion In 2013, these requirements are extended to all Level 3 recurring fair value measurements, including non-financial assets. The requirements for the reconciliation remain the same except that entities must identify the specific line items in profit or loss or comprehensive income in which gains and losses are recognized. In 2013, Sample Co. included in the reconciliation the description of the specific line item in the income statement where loss on sale of the Level 3 investment is recorded, the change in fair value on the conversion option and the category of other comprehensive income for fair value gains and losses on financial assets designated as available for sale. 16. Unrealized gains and losses for Level 3 estimates (IFRS 93(f)) In 2012, entities had to disclose the amount of gains and losses included in the statement of profit and loss for financial instruments held at the end of the reporting period and where in the statement those gains and losses are presented. Requirements in this area for 2013 remain the same with the clarification that disclosure is specifically for unrealized gains and losses relating assets and liabilities held at the end of the reporting period and the specific line item(s) where the gains and losses are recognized must be identified. The disclosures also apply to all recurring Level 3 fair value measurements, not only financial instruments. Sample Co. has elected to disclose that no unrealized gains and losses were recognized in profit and loss during the period in respect of investment income. This disclosure is optional. There were no redemptions or conversions of convertible debentures in 2013 so all the gain recognized in profit and loss for the conversion option on the redeemable convertible debentures is unrealized and relates to instruments held at year-end. Sample Co. has disclosed this amount as an unrealized gain that is included in profit and loss within the line item change in fair value of conversion option for Sample Co. does not have any non-financial assets measured on a recurring basis. PwC 15

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