Acr Fv

Dig. Def, inform, guidance

-clarify def of fv & related guidance in order to communicate the measurement objective more clearly

-enhance disclosures about fv to

enable users of fs to

assess the extent to which fv is used & to

inform them about the inputs used to derive those fv's

-establish a single source of guidance for all fv measurements rewuired by IFRS's to reduce complexity & improve consistency in their application

Amount for which an asset could be exchanged, or a liab to be settled, between knowledgeable, willing parties in an arms length transaction

The price that would be

receieved to sell an asset (sar) or

paid to transfer a liab (plt)

in an orderly transaction between market participants

at measurement date

Kem

Knowledgeable.

-'settling a liab with knowledgeable willing parties'

-willing=you cant force someone into a transaction

-new def suggests now all participants, not just creditors

Entry/exit prices

-was uncertain if fv was an exit (sp) price or entry (buying) price

-new def suggests exit price is required

-measurement date

-different because e.g exit price may be willing to discount if want to sell quicker

-measurement date-

no explicit statement of whether 'exchanged or settlement' took place at measurememt date (yr end)

-new def confirmed measurement date

-The price that would be receieved to sell an asset or paid to transfer a liab

-important feature of def of fv is that it is an exit price based on the perspective of the [HO] entity that Holds the asset or Owes the liab

-based on expectations about the future CF's that will be generated by the asset subsequent to the sale of the asset or transfer of liab to an acquiring entity

Observable: developed using market data.

Unobservable: developed from non-market data, however which is the best info available

Mic

Market approach

-market transactions involving identical or similar assets & liabs

Income approach

- future amounts

-e.g income/CFs/expenses (ice)

-that are discounted to a single present amount

Cost approach

-current replacement costs

-consideration of amount to be paid for new asset adjusted for deterioration & obsolescence

-more for unique assets

Observable inputs

Quoted prices in active markets for identical assets & liabs at measurement date.g shares, would look on SE and know vale

Observable inputs

-Other than quoted prices identified within level 1 that are observable

-Use when observable inputs includes quoted prices for similar assets in active markets or quoted prices from identical or similar prices in inactive markets

E.g valuing an unquoted share, could look at quoted price for similar & discount it because its not tradeable, so am taking a quoted price that isnt identical, its still observeable

Unobservable input

E.g model assumptions

E.g (cat) CGU's, AR's, trademark

A:arbitrary

-fv changes companys BV fot aebitrary issues.

-e.g if an asset experiences a reeuction in value for ST period, a company may need to make acc adjusts.

-when asset returns original value, would need to readjust the adjustments

-some investors trade commodities- using fv fluctuates their income/profits more volitile

-time...HCA would save time

E=exit

-exit price may not appropriately capture the value of an asset/liab to a firms SH's even if an active market exists for the asset

-this happens when there is a sig divergence between assets VIU & exit price

I=investors

-in volitile markets, items value can change frequently

fv)

-this means frequent changes in company's value (when using fv)-public companies find it difficult because investors will find it difficult to find the current value of the company - some financial instruments might not be measured with sufficient precision to help them assess adequately the firms financial position & earnings potential

H=HCA

-hca is considered more reliable as it is verifiable due to the costs because based upon past events (eml.g an invoice)

-more welcomed

U=unobservable

-e.g financial instruments for which active markets dont readily exist

-many assets dont have a market so level 2 or 3 inputs are used

-these are estimates, their subjective, subject to manipulation & difficult to verify (audit)

-or businesses with specialised assets - subjective judgement of their value

U=unrealised

-fv is based upon unrealised gains & losses as these dont crystalise until disposal or settlement

-as valuation increases & decreases, gains &losses are created through the IS or OCI, but their unrealised

-ideal to avoid unrealised items out of retained earnings, could accidently be used e.g for distrubuting dividends

SWIM,R

-sped: some say fv sped up FC process, but would have happened anyway. If using HCA the delivery of market info of distressed banks would have been delayed, whereas using FV it was just quicker. Also, using HCA wouldnt have accounted for inflation

-warning: FV provides early warning signs for an impending crisis & hence forces banks to take appropriate measures earlier, so FV reduces severity of FC

-investment: FV financial statements were telling banks they had to make disatrous investment decisions, but banks preferred to believe numbers were wrong & 'shot the messenger' rather than blaming investment decisions

-manipulate: fv limits firmd ability to manipulate its reported net income-because gains&losses from any price change in an asset/liab is reported in period they occur. E.g eliminates incentive to use asset securitisation as a means to recognise gains on sale of loans

-relevance: very few assets measured at FV during FC 2008. The relevance of fv on banks bal sheet & cap requirements was limited. If valued their positions & comittments earlier, would have been in better position to reduce exposures

-procyclical. Idea that MP when observable provide the best poss indication of value is flawed because

it boosts the apparent reobustness of banks bal sheet at the top of the cycle & reduces it by the same measure at the bottom.

(Markets being imperfect strengthens this argument, so paying too much relevance to markets

acc standards would thus be culprits of causing booms & busts

-asset write ups. Leverage. Allows banks to increase their LEVERAGE in booms, which makes financial system more vulnerable & therefore a FC more likely. HCA prohibits asset write ups in booms & creates hidden reserves which can be drawn upon during crisis

-asset write downwards. Fire. FV can provoke contagion in financial markets. If a bank has to write down its assets to distorted prices & sell assets at fire sale prices. This depletes the banks capital&reduces assets value.

-if fire sale prices from a stressed bank become relevant marks for other banks, FV can cause write downs®ulatory cap problems for sound banks

Illiquidity: focuses on complex products resulting from securitisation of assets such as mortgage loans which are at the core of the FC

Enron used FV

It collapsed due to acc standards

Enron extensively used level 2 and 3 inputs

Other causes of its failure were basing management compensation on FV measures

Trip

-techniques: MIC.

-must be appropriate circumstances

-must be sufficient data to apply technique (diff for Cost), also inactive markets are illiquid so not traded frequently enough to get arms length trans

-must maximise use of observable input & maximise use of unobservable input

-if multiple tech's used-must be weighted appropriately, e.g with CGU's

-must be consistently applied

-relevance v reliability

-inputs & priority: always max level 1, level 3=most risky (not arms length trans)

-deteemination of 'price' - post IFRS says exit, but why?