Ifrs 13 and Ifrs 9

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Lecture on IFRS 9 and 13
02/11/2011 – Wednesday
IFRS 13
Reasons for Issuing IFRS 13:
* To reduce complexity and improve consistency in application when measuring fair value. Previously, there was limited and sometimes conflicting guidance on how to measure fair value. * To enhance disclosures for fair value. IFRS 13 was issued as part of the response to global financial crisis. * Also it is part of the convergence project to reduce differences between IFRS and US GAAP. Introduction:

IFRS 13 will:
* Reduce differences between US GAAP and IFRS
* Unify the measurement of fair value
Issue of fairvalue accounting started after the financial crisis during which many companies failed to measure fairvalue of assets and liabilities. After the financial crisis, inability to measure fairvalues was blamed as one of the reasons for it. Therefore it was decided to simplify IAS 39 which had many complications and new standards like IFRS 9 and IFRS 13 were issued. IFRS 13 provides no further information on disclosures of financial instruments (in this area IFRS 7 is still applicable). The major contribution of IFRS 13 was guidance on how to measure non-financial assets/liabilities and what disclosures are required on them. The criteria used to value financial instruments (the fair value hierarchy) were adopted by IFRS 13 to be applicable to Non-Financial assets and liabilities as well. History:

May 2009 the project was undertaken. The standard was issued on 12 may 2011 and is effective from 1 Jan 2013. Objectives:
* Clarify the definition of fair value for readers
* Enhance the disclosure of fair value
* Source of guidance for fair value measurements
In brief the objective is to establish single source of guidance for all fair value measurements by NOT focusing on when to measure items at fair value but focusing on how to determine fair value and what disclosures are required. Fair value:

Definition - 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 The fair value is not an entity specific measurement, but rather is focused on the market participant assumption and the price that would have to be paid, i.e. the exit price. This method is consistent with both financial and non-financial assets and liabilities. Key Considerations:

1. Asset/liability to be measured at fair value
2. Principal market
3. Highest and best use of asset (for Non-Financial)
4. Valuation techniques used and inputs

1. Asset/Liability determination:
When measuring fair value an entity considers the characteristics of the asset or liability that market participants would consider, such as: * Condition of an asset
* Location of an asset
* Restrictions on the sale or use of an asset (that would transfer with the asset) Unit of account:
* Standalone asset or liability
* Group of assets/liabilities (such as cash generating units)

2. Principal market:
A fair value measurement assumes that the sale of asset or transfer of liability takes place either in the principal market or, if there is no principal market, the most advantageous market. Principal Market – the market with greatest volume or level of activity for the asset or liability and one that is accessible to the entity (market where the entity usually transacts). Most advantageous market – the market that would render the highest price for selling the asset or minimize the amount to be paid to transfer the liability, after considering transaction and transport costs. Characteristics of market participants:

* Independent of each other
* Knowledgeable – having a reasonable understanding of the asset or liability * Able to enter into a transaction for the asset/liability * Willing to enter into a transaction for the asset/liability Example 1 illustrates the use of Level 1 inputs to measure the fair value of an...
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