MFRS 13

MFRS 13FAIR VALUE MEASUREMENTSConceptual Framework4.55 A number of different measurement bases are employed to different degrees and in varying combinations in financial statements. They include the following: Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business. (b) Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently. (c) Realisable (settlement) value. Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at their settlement values; that is, the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business. (d) Present value. Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business.

4.56 The measurement basis most commonly adopted by entities in preparing their financial statements is historical cost. This is usually combined with other measurement bases. For example, inventories are usually carried at the lower of cost and net realisable value, marketable securities may be carried at market value and pension liabilities are carried at their present value. Furthermore, some entities use the current cost basis as a response to the inability of the historical cost accounting model to deal with the effects of changing prices of non-monetary assets.

Objectives(a) defines fair value;(b) sets out in a single MFRS a framework for measuring fair value; and(c) requires disclosures about fair value measurements.ScopeThe measurement and disclosure requirements of this MFRS donot apply to the following:(a) share-based payment transactions within the scope ofMFRS 2 Share-based Payment;(b) leasing transactions within the scope of MFRS 117 Leases;and(c) measurements that have some similarities to fair value but are not fair value, such as net realisable value in MFRS 102Inventories or value in use in MFRS 136 Impairment of Assets.The disclosures required by this MFRS are not required for thefollowing:(a) plan assets measured at fair value in accordance with MFRS119 Employee Benefits;(b) retirement benefit plan investments measured at fair value inaccordance with MFRS 126 Accounting and Reporting by Retirement Benefit Plans; and(c) assets for which recoverable amount is fair value less costs ofdisposal in accordance with MFRS 136.DefinitionFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.Valuation TechniquesMarket ApproachThe market approach uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business.Cost ApproachThe cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).Income approachThe income approach converts future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those future amounts.Those valuation techniques include, for example, the following:(a) present value techniques (see paragraphs B12B30);(b) option pricing models, such as the Black-Scholes-Mertonformula or a binomial model (ie a lattice model), that incorporate present value techniques and reflect both the timevalue and the intrinsic value of an option; and(c) the multi-period excess earnings method, which is used tomeasure the fair value of some intangible assets.Input to the valuation techniquesGeneral principleValuation techniques used to measure fair value shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs.Level 1 inputsLevel 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

A quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available, except as specified in paragraph 79.Level 2 inputs Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.If the asset or liability has a specified (contractual) term, a Level 2input must be observable for substantially the full term of the assetor liability. Level 2 inputs include the following:(a) quoted prices for similar assets or liabilities in activemarkets.(b) quoted prices for identical or similar assets or liabilities inmarkets that are not active.(c) inputs other than quoted prices that are observable for theasset or liability, for example:(i) interest rates and yield curves observable at commonlyquoted intervals;(ii) implied volatilities; and(iii) credit spreads.(d) market-corroborated inputs.Level 3 inputsLevel 3 inputs are unobservable inputs for the asset or liability.

Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.