The problem of choosing the correct valuation of the organization's assets on present stage is very sharp. Unfortunately, at present, there are still discrepancies between RAP and IFRS, and therefore the category “fair value” is very uncertain and vague.
Currently, there are various cost estimates. The rules for valuation of each of the individual assets and liabilities are established by the relevant regulatory enactments.
Each valuation characterizes different objects of accounting in different ways. However, in modern conditions, they do not allow obtaining reliable information about the value of the assets and liabilities of the organization at the current time, which is in demand by interested users. In this regard, and also due to the fact that the economic conditions are characterized by increased dynamism, the solution may be to use the assessment of assets at fair value, which requires a special approach.
The concept of "fair value" first appeared in the early 1990s. in the United States in generally accepted accounting principles - US GAAP (US GAAP). Currently in American standards financial accounting official guidance on determining fair value for accounting purposes and financial reporting is SFAS No. 157 Fair Value Measurement, issued in September 2006.
Initially, fair value was used as a revaluation tool. It changed only the balance currency and did not affect the result. The transfer of assets to a permanent assessment at fair value implied not only a constant revaluation of assets, but also associated it with the value financial result. From now on, fair value accounting has come to mean that a change in the valuation of assets due to a change in the market automatically means that the enterprise will receive a profit or loss, unrelated to its operations similar to foreign exchange differences.
The objective of fair value measurement is to provide the user of financial statements with the most reliable information about the fair value of assets and liabilities. This information, of course, increases the significance and reliability of the generated reports. The concept of fair value is a fundamental principle of IFRS.
In modern economic conditions the application of fair value is driven by the following factors:
The concept of “fair value”, which is presented in IFRS, means the amount Money, for which you can exchange an asset or fulfill a liability in a transaction between well-informed, mutually independent and interested parties in the transaction. This means that the buyer wants to make a deal, while he is ready to pay a reasonable (market) value of the asset and does not seek to acquire it in any way and at any price, and the seller does not aim to make a deal, while he wants to sell the asset at the most favorable price and is not ready to sell the asset in any way and at any price.
However, fair value is usually not the amount that an entity would receive or pay as a result of a forced transaction, forced liquidation or sale in unfavorable conditions.
The most reliable evidence of fair value is the prices (including depreciation) of similar assets in a comparable condition located in the same territory. The exception may be transactions that occur infrequently (not at all) and the absence of an alternative fair value measurement.
Fair value can be used:
To determine the fair value of assets, according to IFRS, organizations are required to conduct an annual review of these assets for impairment, while in RAS revaluation of assets is a right, not an obligation. In Russian conditions, the best indicator of fair value is the market price. However, it is still impossible to put an equal sign between the concepts of "fair value" and "market value", and for certain assets, the preferred method of estimating fair value may be the assessment of independent experts.
The undoubted advantage of fair value valuation is the receipt of reliable information about the planned cash flows and formation of a base of comparable information.
The advantages of assessing objects at fair value include increased transparency, informativeness and completeness of information. In addition, there are conditions for a more reasonable comparative analysis of the results of the organization's activities - both in dynamics over a number of years, and in comparison with other business entities for the same period. However, this method is not without drawbacks, which are most clearly manifested in a destabilized economic environment - the recognition of large losses during the crisis (overestimation of assets during growth), the difficulty of determining the price, non-compliance with the principle of caution.
Summarizing the above, the following conclusions can be drawn:
Thus, fair value measurement shows the real financial position of the organization, however, methodically, cases should be prescribed when its use is not permissible due to the fact that it does not reflect all the risks and misleads users.
After all, the correctness of the chosen method of assessing assets and liabilities can have a significant impact on the future activities of the enterprise, its viability and liquidity.
Sincerely, Young Analyst
The article explores the problems of using one of the most controversial types of estimates in accounting - fair value. The author analyzes the objects and situations of applying fair value in Russian and international accounting. Based on the research, the article makes proposals for expanding the scope of this type of assessment and making appropriate changes to domestic and international accounting standards. The author critically examines the regulations of international standards in relation to the definition and methodology for calculating fair value. Based on the analysis, the article identifies problematic issues in this area and provides recommendations for their solution in order to form reliable values of fair value, both in international and Russian accounting.
Despite the rather long history of its existence, this type of assessment, such as fair value, still causes heated discussions among domestic and foreign experts. At the same time, this type of assessment continues to be actively used both in international and in foreign national accounting standards. A study of the history of accounting development allows us to conclude that the scope of fair value in the above standards is steadily expanding. in Russian accounting normative documents fair value is not yet available. However, as noted by the author earlier, the study of the regulations of these documents, as well as projects of new domestic accounting standards suggests that they contain indirect indications of the use of this type of assessment. In addition, draft federal accounting standards for the sector government controlled contain a direct indication of the use of fair value to measure most of the reported indicators. The main situations for the application of this type of assessment in the current international and Russian accounting standards, as well as in draft new domestic standards, are systematized in the table.
|
Type or group of accounting standards (regulatory documents) |
Number and name of the standard |
Regulation of the standard on the use of fair value |
|
International Standards financial statements: IFRS |
IAS 16 Property, Plant and Equipment |
Initial valuation of property, plant and equipment acquired in exchange for non-monetary assets; subsequent valuation of fixed assets during revaluation |
|
IAS 17 Leases |
Valuation of assets at initial recognition by a lessee |
|
|
IAS 18 Revenue |
Revenue estimate |
|
|
IAS 19 Employee Benefits |
Valuation of plan assets |
|
|
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance |
Initial value of assets received as a government grant |
|
|
IAS 26 Accounting and Reporting for Pension Plans |
Valuation of plan assets |
|
|
IAS 36 Impairment of Assets |
||
|
IAS 38 Intangible Assets |
Initial assessment intangible assets acquired in exchange for non-monetary assets; subsequent valuation of intangible assets during revaluation |
|
|
IAS 40 Investment Property |
Initial valuation of investment property acquired in exchange for non-monetary assets; subsequent measurement of the property using the fair value model |
|
|
IAS 41 " Agriculture" |
||
|
IFRS 1 First-time Adoption of IFRSs |
Cost of property, plant and equipment, investment property, intangible assets |
|
|
IFRS 2 Share Based Payment |
Evaluation of the goods or services received and the corresponding increase in capital in relation to transactions with payments in equity instruments; valuation of goods or services purchased and liability incurred for cash-settled equity transactions |
|
|
IFRS 9 Financial Instruments |
Initial and subsequent valuation of financial instruments |
|
|
IFRS 13 Fair Value Measurement |
Initial and subsequent valuation of assets and liabilities |
|
|
International Financial Reporting Standards for the Public Sector: IPSAS |
IPSAS 9 Exchange Revenue |
Revenue estimate |
|
IPSAS 12 Inventories |
Valuation of inventories acquired through non-exchange transactions |
|
|
IPSAS 13 Leases |
||
|
IPSAS 16 Investment Property |
The cost of investment property acquired through a non-exchange transaction; subsequent measurement of the property using the fair value model |
|
|
IPSAS 17 Property, Plant and Equipment |
The initial cost of fixed assets acquired through a non-exchange transaction; subsequent valuation of property, plant and equipment when applying the revaluation model |
|
|
IPSAS 21 Impairment of Non-Cash Generating Assets and IPSAS 26 Impairment of Cash Generating Assets |
One of two values in determining the amount to be reimbursed |
|
|
IPSAS 25 Employee Benefits |
Valuation of plan assets |
|
|
IPSAS 27 Agriculture |
Valuation of biological assets and agricultural products |
|
|
IPSAS 28 Financial Instruments: Presentation, IPSAS 29 Financial Instruments: Recognition and Measurement and IPSAS 30 Financial Instruments: Disclosures |
Valuation of financial instruments |
|
|
IPSAS 31 Intangible Assets |
The cost of intangible assets acquired through non-exchange transactions and by exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets; subsequent valuation of intangible assets when applying the revalued cost accounting model |
|
|
Russian Accounting Standards: Current Regulatory Documents |
Federal Law No. 208-FZ of July 27, 2010 "On Consolidated Financial Statements" and Order of the Russian Ministry of Finance No. 160n of November 25, 2011 "On Enacting IFRS and IFRS Interpretations in the Russian Federation" |
The consolidated financial statements of Russian organizations are prepared in accordance with IFRS, in which, as noted earlier, fair value is widely used to assess reporting indicators |
|
Regulation on accounting"Accounting for intangible assets" (PBU 14/2007) |
Indirect permission to use fair value for the subsequent measurement of intangible assets (permission to record the impairment of intangible assets in accordance with IFRS, which require fair value to be used to determine the impairment of assets. Thus, Russian organizations reflecting the impairment of intangible assets under RAS 14/2007 should use fair value) |
|
|
Draft Russian Accounting Standards for the Private Sector |
PBU project "Fixed assets" |
Similar to RAS 14/2007: Allowing impairment of property, plant and equipment to be recognized in accordance with IFRS, which results in the use of fair value in the subsequent measurement of these assets |
|
Draft Russian Accounting Standards for the Public Administration Sector |
Draft document "Conceptual Framework for Accounting and Reporting in the Public Administration Sector" |
The historical cost of assets received in non-exchange transactions, i.e., free of charge or for a nominal fee |
|
Draft standard "Fixed assets" |
The cost of property, plant and equipment and investment property acquired through a non-exchange transaction, as well as in exchange for a combination of financial and non-financial assets; subsequent measurement of these assets when applying the fair value model |
|
|
Draft standard "Rent" |
Measurement of assets and liabilities on initial recognition by a lessee |
|
|
Draft standard "Impairment of Assets" |
One of two values in determining the amount to be reimbursed |
As can be seen from the analysis of the data in the table, almost every international standard contains regulations on the use of fair value. Appears this species estimates and in draft Russian accounting standards for the public administration sector. Domestic regulations of the private sector and draft new documents for this sector so far provide only indirect use of fair value. At the same time, we believe that the new federal standards of the private sector, by analogy with the standards of the public administration sector, will introduce regulations on the use of this type of assessment.
As the author argued earlier, by now the conditions for using fair value in Russian accounting standards have already taken shape. Thus, today one of the most important tasks of reforming domestic accounting is the development of an appropriate regulatory framework application of this type of assessment. It is necessary to define a list of situations where fair value is used, introduce appropriate regulations into domestic accounting standards that establish the rules for accounting for individual items, and develop a special standard containing the definition and methodology for calculating fair value. In this case, International Financial Reporting Standards (IFRS) will serve as the basis.
At the same time, as noted earlier, the requirements of IFRS themselves are not ideal and in some cases require significant improvement. We critically examine the main regulations of international standards in relation to fair value and, based on the analysis, determine in which situations and for which accounting objects it is advisable to use this type of assessment, and which international rules the calculation of this assessment must be changed to form reliable information in the accounting and reporting of organizations.
First of all, let's turn to the objects and situations of applying fair value. The main situations of using this type of assessment in international and Russian accounting standards are listed in the table. It seems appropriate to correct this list, both in IFRS and in the development of the relevant regulations of domestic standards.
As can be seen from the analysis of the data in the table, IFRS provides only certain situations of using fair value to evaluate accounting items. For property, plant and equipment in IAS 16 Property, Plant and Equipment, investment property in IAS 40 Investment Property and intangible assets in IAS 38 Intangible Assets, this type of valuation is used only to determine the cost of listed items acquired in exchange for non-monetary assets, and for their revaluation. Fair value is not actually used to measure inventories in IAS 2 Share-based Payment.
According to the author, the list of situations for applying this assessment for these objects can be much wider. For example, such an assessment should be used to form the initial value of the above assets received free of charge, as a contribution to the authorized capital, identified during the inventory, transferred upon the participant's exit from the organization as payment for his share in the authorized capital of this organization. It makes sense to apply fair value to the initial measurement of inventories received in exchange for non-cash assets and received as a balance from the disposal of property, plant and equipment and other assets.
In IAS 17 Leases, fair value is used only to measure assets on initial recognition by a lessee. Based on this type of valuation, it also makes sense to determine the valuation of assets returned to the lessor by the lessee under a finance lease.
According to the author, the lack of regulations in international standards on the formation of the valuation of the above assets in practice can lead to discrepancies and, as a result, to incomparability of information in financial statements. different organizations. Based on this, it is advisable to include in the above IFRS regulations, according to which the initial cost of fixed assets, investment property, intangible assets and inventories received free of charge, as a contribution to the authorized capital, identified during the inventory and transferred upon the participant’s exit from the organization as payment for its share in the authorized capital is determined on the basis of fair value. IAS 2 should also state that the initial measurement of inventories received in exchange for non-cash assets and received as a balance from the disposal of property, plant and equipment and other assets is based on fair value. And in IAS 17, it is appropriate to specify that the valuation of assets returned to the lessor by the lessee under a finance lease is determined using fair value.
It makes sense to introduce similar regulations into the new federal accounting standards "Fixed Assets", "Intangible Assets", "Inventory", "Investment Property" and "Rent", some of which are currently under development, some are under discussion. In the author's opinion, it is expedient to include in these standards the requirements for the use of fair value for the valuation of these assets, which exist in IFRS. In the above-mentioned domestic standards, according to the author, it makes sense to establish requirements according to which the initial cost of fixed assets, intangible assets, inventories and investment property received free of charge during inventory, in exchange for non-monetary assets, on account of a contribution to the authorized capital, transferred during withdrawal of a participant from an organization as payment for its share in the authorized capital of this organization, is determined on the basis of fair value. In the federal standard "Inventories" being developed, it is also advisable to indicate that the initial assessment of inventories received as a balance from the disposal of fixed assets and other assets is formed using fair value. The author proposes to include into the developed federal standard "Lease" the regulations according to which the valuation of assets received under a leasing agreement (in IFRS terminology - lease), as well as assets that were on the balance sheet of the lessee and returned to the lessor (in IFRS terminology - returned to the lessor by the lessee upon finance lease) is determined on a fair value basis.
With regard to the use of this type of assessment in Russian accounting standards for other accounting objects, it seems appropriate to use regulations identical to international ones. In other words, the author proposes to develop domestic federal standards "Impairment of assets", "Employee benefits", "Accounting and reporting on pension plans", "Payments based on equity instruments", "Income of the organization", "Financial instruments", "Accounting for state subsidies and disclosure of information on government assistance" and "Agriculture" and include in these standards the requirements for the use of fair value, similar to the regulations of the corresponding IFRS.
In order to reliably determine the fair value of the above accounting items, it is necessary to include a standard in the system of Russian accounting standards that contains the definition and rules for calculating this type of assessment. It is advisable to form this document on the basis of IFRS 13 "Fair Value Measurement". At the same time, as it was justified earlier, the regulations of this standard contain a lot of open and debatable questions and need to be improved. This circumstance, of course, should be taken into account when creating a domestic standard. Let us examine in detail which IFRS regulations need to be changed in order to form reliable values of fair value both in international and in Russian accounting.
Let's start with determining fair value. According to the author, the definition of this type of assessment, enshrined in IFRS 13, seems to be controversial. Under that standard, fair value is 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. This definition is incomplete as it does not make it clear who the market participants are and what is meant by the valuation date. Of course, IFRS 13 Appendix A contains the concept of “market participants”, but there is no reference to it in the definition of fair value itself. The concept of "assessment date" in the list of terms used is not disclosed at all.
The very interpretation of the concept of "market participants" in IFRS 13 is debatable. According to Appendix A of this standard, only buyers and sellers are understood as the specified participants. At the same time, the parties to a transaction with an object, the assessment of which is determined on the basis of fair value, can be not only buyers and sellers, but also creditors, lenders, employees and other persons. Of course, we can assume that the terms "buyers" and "sellers" are used in a broad sense - as persons providing and consuming certain services. However, one cannot but agree that these terms are not used in such a broad sense in the financial statements.
Following further in paragraphs. "a", "b", "c" and "d" of Appendix A IFRS (IFRS) 13 characteristics of market participants are similar, in fact, to the characteristics that were contained in the definition of fair value given earlier in the IFRS system: good knowledge, willingness to deal and independence. Thus, the previous definition of fair value in relation to the characteristics of the participants in the transaction was more precise and concise.
Analyzing the interpretation of the concept of "fair value" in IFRS (IFRS) 13, it is necessary to pay attention to the contradictions contained in this standard regarding the correlation between fair and market values. In the interpretation of fair value in paragraph 2 of this document, emphasis is placed on the fact that fair value is a market estimate. This formulation leads, as a result, to the identification of fair and market values. However, in accordance with paragraphs. 62, B5-B11 of IFRS 13, market, replacement and present value can be used to calculate fair value. These requirements, in contrast to the regulations of clause 2 of IFRS 13, indicate that fair and market values are not synonymous.
The question of the relationship between the categories "fair value" and "market value" still does not have an unambiguous answer in the educational and scientific literature. Some authors identify these categories, others distinguish them. According to the author, fair and market values are two different types ratings. In this case, the fair value may be equal to the market value, but only if there is an active market. In the absence of an active market, market value cannot be measured reliably, but fair value can be estimated under certain conditions.
Thus, the above-mentioned regulations of clause 2 of IFRS 13, according to the author, need to be changed. The requirements of this paragraph (“fair value is a market estimate”) should be understood not as an identification of fair and market values, but as an indication of the objectivity (and not subjectivity) of fair value. In order to avoid inconsistencies in the wording of paragraph 2 of IFRS 13, it is advisable to replace the term "market valuation" with the term "objective valuation".
Concluding the study of the interpretation of the concept of "fair value" in international standards, one should pay attention to the lack of a single definition of this type of assessment in the IFRS system. For example, IFRS 13, IAS 16, IAS 38, IAS 2 and many other standards apply a new definition of fair value, while IAS 17 and IFRS 2 old (the amount for which an asset could be exchanged or a liability settled in a transaction between knowledgeable, willing, unrelated parties). Given this fact, it is necessary to establish a single definition in the IFRS system.
The methodology for calculating fair value, in the author's opinion, is presented in IFRS 13 rather generally. The document only states that the fair value measurement methods are the market approach, the cost approach and the income approach. However, IFRS 13 does not provide a detailed description of the listed approaches and the specifics of their application in certain situations. This standard does not provide references to sources from which you can get the necessary detailed information. So, for example, paragraph 63 of IFRS 13 states that one or multiple valuation methods can be used to calculate fair value. However, the criteria for choosing methods for determining fair value are not presented in the above-mentioned standard. When characterizing multiple fair value measurement methods, IFRS 13 indicates that the relevant fair value measures should be measured by considering the appropriateness of the range of values indicated by these indicators. And the fair value measurement should be that value within that range that most accurately represents fair value in the circumstances. Such regulation raises the question: how to calculate the required range used in multiple valuation methods, based on the most accurate value of the desired value of fair value - after all, it is the last value that is unknown.
Another example of the lack of comprehensive guidance on the methods for calculating fair value is the regulation of paragraphs. B6 and B7 of IFRS 13 on the use of market multiples and matrix pricing when using a market approach to measure fair value. Paragraph B6 provides rather general guidance on the possibility of using market multiples that arise from a set of comparables, but does not provide specific guidance on how those multiples can be used to calculate fair value. Paragraph B7 refers to the possibility of using such a method as matrix pricing. At the same time, matrix pricing is a mathematical method, the application of which requires additional knowledge and skills. However, IFRS 13 does not provide guidance on the use of this method, nor does it indicate where the mathematical method used can be found.
Examples to support the conclusion that the fair value methodology is set out in IFRS 13 in a sufficiently generalized form can be given further. All of them indicate that the application of the regulations of this standard in practice can raise many questions. Obviously, the IFRS 13 regulations need to be specified. Particularly close attention to this problem should be paid when creating a Russian analogue of this international standard, since domestic organizations are much less ready to make independent decisions within the framework of these issues compared to foreign ones. At the same time, it seems expedient to develop not only the Russian federal standard dedicated to the methodology for calculating fair value, but also recommendations on the formation of this type of assessment, containing enough detailed description and examples of methods for determining said score. Such recommendations would be in line with the accounting regulations provided for by federal law dated 06.12.2011 N 402-FZ "On Accounting", namely, they will be classified as recommendations in the field of accounting.
Analyzing the methodology for calculating fair value, the author also draws attention to a number of debatable issues arising from the requirements of IFRS 13. Paragraph 17 of this standard allows an organization not to conduct an exhausting search for all possible markets to identify the market, according to which fair value should be determined. However, in doing so, the organization should take into account all information that is reasonably available. In the absence of evidence to the contrary, the market in which an entity would enter into a transaction to sell an asset or transfer a liability is considered to be the market from which fair value is calculated. Of course, the listed regulations are due to the need for rational accounting. At the same time, such rules, from the author's point of view, lead to subjectivity in determining fair value, since different organizations can enter into a transaction in different markets. Consequently, the fair value of the same accounting item, formed by these organizations, may differ significantly.
In addition, it is not clear from the above IFRS requirements how exactly to strike a balance between using all reasonably available information and conducting an exhaustive search of all possible markets to calculate fair value. As a result, entities may not take into account all available data, which will not allow a reliable assessment of fair value. Given the desire of entities to reduce the costs of maintaining records, it can be assumed that there will be a deliberate omission of all reasonably available information, which will lead to a misstatement of fair value. Moreover, the listed rules of IFRS 13 open the possibility for entities to use only the information that is beneficial to them. As a result, fair value may be deliberately misrepresented in order to achieve the intended result.
Another controversial issue in IFRS 13 is the regulation on determining the fair value of non-financial assets. Paragraph 30 of this Standard requires an entity to measure the fair value of those assets assuming their highest and best use by market participants, even though the entity itself may not use those assets to its highest and best use. The highest and best use, as defined in IFRS 13 Appendix A, is the use by market participants of a non-financial asset that is capable of maximizing the value of the asset or group of assets and liabilities (for example, a business) in which the asset would be used. According to the author, such rules can lead to an overestimation of the above-mentioned assets, and, consequently, to a violation of the prudence principle.
We also note some of the contradictions arising from the regulations of IFRS (IFRS) 13. Paragraph 19 of this standard states that since organizations engaged in different activities may have access to different markets, the markets, according to which fair value is determined, for one and the same the same asset or liability may be different for different entities. Therefore, the market from which fair value is calculated, and therefore the market participants, needs to be considered from the entity's point of view, given the differences between entities engaged in different activities. According to the author, these requirements are contrary to the regulations of paragraph 2 of IFRS 13, according to which fair value is not an assessment formed taking into account the specifics of the organization. The rules listed in this International Standard need to be aligned with each other.
When examining the methodology for calculating fair value in international standards, it is necessary to pay attention to the absence in the IFRS system of uniform regulations for the formation of this type of assessment. Indeed, IFRS 13 does not apply to lease transactions and share-based payment transactions that fall within the scope of IAS 17 and IFRS 2, respectively. As a result, international standards contain different rules for calculating one and the same type of evaluation. To solve this problem, it seems appropriate to establish in the IFRS system single methodology formation of fair value.
Analyzing the requirements for calculating the above type of assessment, it should be noted that IFRS does not say who should determine the fair value: an accountant or an appraiser (or both). Relevant regulations should be included in international standards.
Referring to the activities of professional appraisers, we would like to draw your attention to the fact that the approaches to calculating fair value (market, cost and income) provided for by IFRS 13 fully coincide with the approaches to determining market value contained in international valuation standards. But it is impossible not to recognize that International Valuation Standards (IVS) and International Financial Reporting Standards use different concepts to refer to the same valuation, determined on the basis of market, cost and income approaches: in IVS it is "market value", in IFRS it is "fair value". As argued above, fair value and market value are not synonymous. According to the author, the technique under consideration refers specifically to fair value. This suggests that the category "fair value" should be introduced into the International Valuation Standards, bringing it into line with the IFRS regulations.
All of the above, of course, should be taken into account when developing the Russian federal standard "Fair Value Valuation", as well as when improving the requirements of domestic valuation standards. For the above reasons, we believe that the requirements of this federal standard should be more detailed in comparison with the regulations of IFRS 13.
Problems of application of fair value in Russian and international accounting
2020-03-13 8854
An accountant of any domestic company is familiar with the concept of “IFRS fair value”, but only in its other formulation - “current market value”. Moreover, no provision on accounting gives clear recommendations on its formation or a specific description of the term. To address this issue, IFRS 13 Fair Value Measurement was specifically introduced.
As a result financial activities organization, information about its assets may or may not exist. Therefore, determining the true market value of assets can be quite difficult. To understand what fair value is in IFRS, it is necessary to immediately determine the purposes of its use:
Fair value under IFRS is the fair value of assets at the time of sale or the amount paid directly at the time of transfer of liabilities from one market participant to another. In a word, the concept of fair value of fixed assets under IFRS makes it possible to exclude the possibility of fraud on the part of any of the parties to the transaction.
If we talk about IFRS 13 “Fair Value Measurement” briefly, then the standard was introduced specifically to simplify the conduct of any transactions in the international market.
Fair value measurement in IFRS involves the determination of the main components, namely:
Fair value in accordance with IFRS implies compliance with certain conditions that make the transaction process as transparent as possible. So, by default it is assumed that:
As you can see, the use of IFRS 13 greatly simplifies transactions for all market participants, eliminating any possibility of fraud or concealment of information. Of course, it is quite difficult to fully describe all the benefits of switching to IFRS in one article. Take the IFRS Fundamentals Quiz on our academy course page.
The concept of "fair market value" is known to domestic accountants from international theory and practice. AT Russian provisions accounting uses a similar term. PBU contains the concept of "current market value". However, the rules do not contain a clear definition of it. Moreover, there are no recommendations for its evaluation. In this issue, foreign theory and practice of accounting is significantly ahead of the domestic one. In IFRS, the IFRS 13 standard was relatively recently introduced. It defines . Let's consider some provisions of the standard.
Fair value is the amount that can be received when selling fixed assets or paid when transferring obligations in ordinary transactions between participants in the turnover at the measurement date. It is worth saying that earlier in the standard there was a different definition. This is not to say that the new section has completely changed it. However, in IFRS 13 the concept is significantly expanded and clarified. From the previous definition, it was not clearly clear - the amount of purchase or sale. Questions arose during the preparation of IFRS 3. During the process, it became clear that under US GAAP, fair value is the amount of exit (sale), while in IFRS it was an indicator of the exchange - purchase (entry). Another ambiguity was related to the date on which the measurement is taken.
According to IFRS 13, fair value is exit amount. That is, it is an indicator of demand, not supply. Exit price - the amount that the seller will be able to receive, and not the amount at which he would like to sell something. Price and value- different indicators. And the latter is of practical importance. The same rule applies to obligations. What is cost in this case? It is the amount that the creditors expect to accept as repayment, and not the amount that the debtor would like to pay for getting rid of the obligation. As part of the active turnover may differ. This is especially true for operations with exchange-traded securities and other financial instruments.
Fair value is the amount that is determined by the expectations of future cash flows (outflow and inflow) associated with property or liabilities from the point of view of the participants in the turnover who own them at the measurement date. There are two ways to get finance. An asset or liability can be used or sold. Even if the participant will operate the property, the exit price will be determined by the expected flow from the sale of it to the subjects who, after the acquisition, will receive money from the use. In other words, any person, when acquiring an asset, will pay only for those benefits that he expects to receive later. Exit price is thus always the relevant definition of fair value. It does not matter whether the company intends to use the property or sell it.
In this standard, it is allowed to use 2 models of accounting for fixed assets: at cost and operating cost. The first is considered traditional. It is used in OS accounting in all national systems. The second model assumes the reflection of objects at a revalued cost. The corresponding procedures should be carried out with such frequency, which is sufficient to ensure that at any time the OS does not differ much from the exit price. This model has a rationale. In developed countries annual rate inflation is negligible. In this regard, its impact on the value of assets can be neglected. However, for fixed assets with a long period of use, the inflationary effect will accumulate over time. objects at cost will lead to the fact that the balance sheet will contain a lot of "heterogeneous indicators". Regular inventory of fixed assets will bring their cost to the same denominator. It is believed that this will give greater reliability to the reflection of objects in the reporting.
These standards also allow the use of 2 accounting models. However, unlike OS, there is one condition under which an intangible asset can be applied fair value. it active turnover. This is due to the following. The cost of intangible assets in an active market will be fair - the one that is used for accounting purposes. This means the recognition of unrealized losses or gains from a decrease / increase in the property's value. They are included in other general income. These amounts do not appear in the income statement. Upon disposal of revalued assets, the entire revaluation accumulated on them is written off to retained earnings.
This standard defines the recognition and special type- biological. Their feature is the process of transformation - growth, reproduction, degeneration. These phenomena cause quantitative or qualitative changes. The standard requires biological assets and agricultural produce to be accounted for at fair value, less costs to sell at the harvest date. Thus, the results of the transformation are reflected from the moment they appear. In accordance with the traditional model, changes in such assets are shown not when they occur, but when they are realized. This period for some types of products can last up to several years or decades. If the revenue is recognized at the moment of completion of the biotransformation, and the costs arise evenly throughout its entire period, then the principle of correlation of income and costs will be violated. Consequently, the financial result is also distorted. The IASB notes that biotransformation is a unique and fundamental feature of bioassets. In this regard, reporting should be carried out as soon as it occurs. Only in this case will it allow users to best analyze the financial results and future prospects of an enterprise engaged in agricultural production.
IAS 40 is dedicated to it. Such real estate is objects that are in possession to receive from them rent payments or capital gains (not for sale or use for production purposes). The standard states that such property should be carried at fair value for each reporting date with the allocation of changes in value for the period to the statement of losses and profits. It should be taken into account that in a number of states the turnover of real estate is not very active. Accordingly, the valuation of assets is significantly more difficult. For such cases, the Board provides an opportunity to choose an accounting model, as in IAS 16.
IFRS 13 is used when other standards allow or require fair value measurements. However, there are exceptions. These include:
The latter, in particular, include net realizable value, in accordance with IFRS 2, as well as value in use, according to standard 36. Net realizable value is the amount that an enterprise expects to receive from the sale of its inventories in the ordinary course of business.
IFRS 13 is the result of an attempt to bring IFRS and US GAAP closer together. Let's consider what this standard is and what requirements it imposes on fair value measurement under IFRS.
Many IFRS standards require you to estimate the fair value of certain items. Let's just give examples: financial instruments; biological assets; assets held for sale; and many others.
In the past, standards have provided limited guidance on how to determine fair value. The rules applied to all standards and their application was often highly controversial.
Finally, IFRS 13 Fair Value Measurement was published. Among other things, IFRS 13 is the result of an attempt to converge IFRS and US GAAP, and at present, the rules for measuring fair value in IFRS and US GAAP are practically the same.
So, let's see what this standard is.
The objectives of IFRS 13 are:
Fair value is a market indicator, and not the result of the valuation of specific objects.
This means that the company:
Fair value (FV, from the English "fair value") is the selling price of an asset or settlement of a liability in an orderly transaction between market participants at the measurement date.
Fair value corresponds to the market concept exit prices.
When an entity performs a fair value measurement, it must determine all of the following:
An asset or liability measured at fair value may be:
An asset or liability (whether individual or group) depends on its unit of account. The unit of account is determined in accordance with another IFRS that requires or permits fair value measurement (for example, IAS 36 Impairment of Assets).
When measuring fair value, an entity considers the characteristics of the asset or liability that a market participant would take into account when pricing the asset or liability at the measurement date.
These characteristics include, for example:
Fair value measurement assumes that the asset or liability is subject to orderly transaction between market participants as of the valuation date under current market conditions.
A deal is considered normal when it has 2 key components:
Market participants are buyers and sellers in the principal or most advantageous market for an asset or liability with the following characteristics:
A fair value measurement assumes that a transaction to sell an asset or transfer a liability takes place either:
Main market ("principal market") is the market with the highest volume and level of activity for the asset or liability. Different organizations may have different primary markets, as a company's access to a particular market may be limited.
Most profitable market("most advantageous market") is the market that maximizes the amount to be received from the sale of an asset, or minimizes the amount to be paid on the transfer of a liability, after accounting for transaction and transportation costs.
The fair value of a non-financial asset is measured based on its most efficient and best use from a market participant's point of view.
Highest and best use means the use of an asset that:
The best use of a non-financial asset may be to use it alone or in combination with other assets and/or liabilities (as a group).
When the highest and best use relates to a group of assets/liabilities, the synergies associated with that group may be reflected in the fair value of an individual asset in several ways, for example, by adjusting valuation techniques.
The fair value measurement of a financial or non-financial liability or an entity's own equity instrument assumes that the asset or instrument is transferred to a market participant on the measurement date, without settlement or cancellation.
An entity determines the fair value of a liability or equity instrument based on market price of an identical instrument, if any.
If a quoted market price for an identical instrument is not available, the fair value measurement depends on whether whether the liability or equity instrument is held (accounted for) by the other party as an asset or not:
This confusing algorithm can be illustrated with the following simplified diagram:
The fair value of the liability reflects the impact non-performance risk. Those. it is the risk that the company will default on its obligation.
The risk of default includes own credit risk , but is not limited to them.
For example, the risk of default may be reflected in different interest rates for different borrowers due to their different credit scores. As a result, they will have to discount the same liability at a different discount rate, so the present value of the liability will be different.
An entity shall not include a separate input or adjustment to other inputs that is associated with a potential limitation that prevents the liability or equity instrument from being transferred to someone else.
The fair value of the liability since redemption on demand ("demand feature") must not be less than the amount payable on demand, discounted from the first date payment can be called.
IFRS 13 requires an entity to carry out market valuations, rather than estimates based on company data. However, there exception to this rule:
If a company manages a group of financial assets and financial obligations on the basis of their NET exposure to market or credit risk, an entity may measure the fair value of that group on a net basis, as follows:
This is an arbitrary assessment option, and the company does not have to follow it. To apply this exemption, a company must meet the following conditions:
When an entity acquires an asset or incurs a liability, the price paid/received or the transaction price is entry price.
However, IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability, and this exit price.
In most cases, the transaction (entry) price is equal to the exit price or fair value. But there are situations where the transaction price is not necessarily the same as the exit price or fair value:
If the transaction price differs from fair value, the entity must recognize the resulting gain or loss, unless another IFRS specifies otherwise.
When determining fair value, an entity should use valuation techniques:
The valuation techniques used to measure fair value are applied consistently from period to period.
Nonetheless, the company can change the valuation method or its application if, in the circumstances, the change results in the same or a more representative fair value.
An entity accounts for a change in valuation method in accordance with IAS 8 in relation to a change in accounting estimate.
IFRS 13 allows for three measurement approaches:
IFRS 13 defines fair value hierarchy, which classifies the input data for estimation methods into 3 levels. The highest priority is given to the level 1 source data, and the lowest priority is given to the level 3 source data.
The company should maximize the use of Tier 1 inputs and minimize the use of Tier 3 inputs.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities to which the entity has access at the measurement date.
The company should not make adjustments to market prices. An exception is allowed only in certain circumstances, for example, when the quoted price does not reflect fair value (ie, when a significant event occurs between the valuation date and the quoted date).
Level 2 inputs differ from the quoted prices included in Level 1. However, they remain observable - they can be observed directly or indirectly in relation to the asset or liability.
Level 3 inputs are unobservable for the asset or liability.
An entity shall use Level 3 data to measure fair value only when relevant observable data is not available.
The following diagram describes the fair value hierarchy, along with examples of inputs to valuation techniques:
IFRS 13 requires wide disclosure enough information about:
Recurring fair value measurements reflected in the statement of financial position at the end of each reporting period (for example, financial instruments).
Non-recurring fair value measurements recognized in the statement of financial position in certain circumstances (for example, an asset held for sale in accordance with IFRS 5).
Because the disclosures are really extensive, here are examples minimum requirements to disclosures:
