IFRS 13 (Part – 2) Technical Issues

This is in continuation to my previous blog. In this blog I will be discussing about IFRS 13 in much more details. This blog covers some technical questions raised during recent webinar organised by IASB on 23^rd May, 2011. Some technical issues:

• When we talk about principal market does it means the market in which the entity normally trades or do we consider it to be market where market normally trades. As far as this question is concerned principal market means a market where the market often trades and not merely the entity.
• Distress market prices and inputs from distress markets are not to be considered for fair value calculation.
• The most important issue that needs attention is, IFRS 13 requires net risk position to be stated but IAS 32 requires gross presentation thus these two standards sound confusing, more clarification is required on this issue.
• Fair value determination in case of 1 Day transactions which are peculiar in case of banks still remains unaddressed, but IASB is working on this and shortly guidance on this issue will be made available.
• Another important point addressed is about cost as best estimate of fair value. Cost can no longer be the best estimate of fair value. Even if it is difficult to calculate fair value, using level 3 inputs fair value needs to be calculated.

FINANCIAL BHEL: IFRS 13- Fair value measurement (Part -1)

FINANCIAL BHEL: IFRS 13- Fair value measurement (Part -1): " Introduction: IFRS 13 specifies how the fair value is to be measured and not when it is to be measured. Even for the purpose of m..."

IFRS 13- Fair value measurement (Part -1)

  Introduction:

•  IFRS 13 specifies how the fair value is to be measured and not when it is to be measured. Even for the     purpose of measurement it specifies the hierarchy of inputs to be used for fair value measurement, it does not  specify the particular formula or method for calculation.
• It redefines the term fair value in order to make it more concrete and simple to interpret. 
• It provides inputs for fair value measurement where ever other IFRS requires fair value measurement.

            New Definition:

Definition: “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.”

Features of this definition:

• Exit price: As per new definition fair value is defined as exit price, the wordings “price that would be received to sell an asset or paid to transfer a liability” specifies this.
• Current price: Fair value is the current price the term “at measurement date” specifies this.
• Normal transaction: The fair value is the value based on normal transaction and not on forced or distress sale the term “orderly transaction” specifies it.

 New terms: principal market and most advantageous market

• Principal Market: It can be explained as market with highest level of transactions or activities.
• Most advantageous Market:  This means the market in which highest returns can be earned for asset and lowest amount will be paid for liability.

             Fair value measurement:

IFRS 13 specifies the ranking for inputs based on which fair value is to be determined; it do not specifies the measurement technique as it will differ from circumstances. The hierarchies of inputs are to be followed in sequence.

• Level 1 Inputs: Quoted price for identical asset or liability, if this price is available use it for calculating fair value. Example: In case of listed shares.
• Level 2 inputs: If level 1 inputsare not available we need to consider level 2 inputs for fair value measurement. These inputs include observable inputs other than quoted prices. Example: In case of fixed income securities.
•  Level 3 inputs:  These inputs include non-observable inputs. This is the option of last resolve, if no inputs for level 1 or Level 2 are available level 3 inputs are to be used. Example: In case of Non-current assets (Not always).

The flowchart below explains the requirements of IFRS 13.

Introducing IFRS 10, 11 and 12

IFRS 10, 11 and 12 are new additions to IFRS and accountancy literature, these standards serves as improvements and additions to existing standards. Let’s take a quick look at major changes that these standards propose.

IFRS 10:

      i.            IFRS 10 introduces a new definition of control based on which entities need to be consolidated.

     ii             As per new definition lots of factors need to be considered while ascertaining control, which is different from IAS 27 according to which governing financial and operating policies was the single criteria to be analyzed.

    iii.            IFRS 10 replaces some parts of IAS 27 related to consolidated financial statements and SIC 12 (related to SPE`s) in totality.

  iv.            As per IAS 27 Only currently exercisable potential voting rights were considered for assessing control.

    v.            As per IFRS 10 even Potential voting rights are to be considered if substantial.

IFRS 11 :

         i.            IFRS 11 describes the accounting for arrangements in which there exists a joint control.

       ii.            IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC 13.

      iii.            As per IFRS 11 joint arrangement are to be classified as either a joint venture or a joint operation.

     iv.            Proportionate consolidation (which was required as per IAS 31) is no longer permitted for joint ventures (as newly defined) only equity method is to be used.

       v.            A joint operator is required to recognises in relation to its interest in a joint operation:

a)      its assets, including its share of any assets held jointly;

b)      its liabilities, including its share of any liabilities incurred jointly;

c)       its revenue from the sale of its share of the output of the joint operation;

d)      its share of the revenue from the sale of the output by the joint operation; and

e)      its expenses, including its share of any expenses incurred jointly.

IFRS 12:

         i.            IFRS 12 sets out the disclosure requirements for subsidiaries, joint ventures, associates.

       ii.            IFRS 12 replaces the requirements previouslyincluded in IAS 27, IAS 31, and IAS 28 Investments in Associates related to disclosures.

      iii.            IFRS 12 requires a reporting entity to discloseinformation that helps users to assess the nature and financial effects of the reporting entity’srelationship with other entities.

These IFRS are effective for annual periods beginning on or after 1 January 2013.

IFRS - What shape will it take in future………!!!

IFRS – International financial reporting standards which are been looked upon as the future of accountancy and a effective tool for promoting free movement of capital and promoting transparency, will definitely play its intended role in future. With more than 120+ countries following these standards and Biggies like USA, JAPAN, INDIA and CHINA going for convergence, picture seems to be perfect and efforts on target.

But, what about the motive behind these standards ? Is USA playing its dominating role here too?

After the Norwalk agreement, US planned to go for convergence to IFRS and all the necessary steps were taken, plans where chocked out and everything done. FASB the body that frames US GAAP, got its representative in IASB and along with this got IASB and FASB to work together on every project, don`t know why this did not happened in case of other countries, why they were not actively involved in framing new IFRS`s . Thus, now every new IFRS or changes in existing IFRS requires FASB`s nod.

If this continues IFRS will be a small version of US GAAP in future, even if not atleast will be influenced by US GAAP. I am not saying US GAAP is not effective or its not a set of quality standards.  The question is Why US is given special treatment over other economies, Why aren’t all the countries working together if  we plan for GLOBAL ACCOUNTING STANDARDS “IFRS”.