Morgunverðarfundur KPMG. IFRS 13 Mat á gangvirði (Fair Value Measurement) 30. maí 2013 Magnús Gunnar Erlendsson

Morgunverðarfundur KPMG IFRS 13 Mat á gangvirði (Fair Value Measurement) 30. maí 2013 Magnús Gunnar Erlendsson

Agenda Objective Scope Fair value measurement principles Fair value at initial recognition Valuation techniques, inputs and fair value hierarchy Fair value in markets that are not active Disclosures Effective date and transition 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 1

Objective of IFRS 13 Define fair value Set out in a single standard a framework for measuring fair value Comprehensive framework for measuring fair value when such measurement is required or permitted under other IFRSs IFRS 13 provides guidance on how to measure fair value rather than when to measure fair value IFRS 13 makes a large number of consequential amendments to other IFRSs consisting primarily of deleting fair value guidance and cross-referencing to IFRS 13 The fair value measurement framework described in IFRS 13 must be applied to both initial and subsequent measurement if fair value is required or permitted by other IFRSs Require disclosures about fair value measurements Including for non-financial assets and liabilities 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 2

Scope of IFRS 13 IFRS 13 applies when other IFRSs require or permit fair value for measurement or disclosure purposes, such as: Financial instruments Most assets and liabilities acquired in a business combination Non-current assets held for sale in accordance with IFRS 5 Investment property/intangibles/pp&e held at fair value Biological assets Out of scope measurement & disclosures IFRS 2 Share-based Payment IAS 17 Leases Out of scope disclosures IAS 19 Employee benefits IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 36 Impairment of Assets 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 4

General IFRS 13 requirements on scope Other IFRS permits /requires? Initial measurement (based on) FV Subsequent measurement (based on) FV Disclosure about measurement (based on) FV Apply IFRS 13 FV measurement requirements if not explicitly scoped out Apply IFRS 13 disclosure requirements if not explicitly scoped out 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Scope of IFRS 13 Item Interest rate swap In scope of FV measurement requirements Y: Initial and subsequent measurement In scope of FV disclosure requirements Y: Subsequent FV measurement Loan measured at amortised cost Property plant and equipment Revenue Investment property (cost model) Y: Initial measurement and FV disclosure Y: Subsequent measurement based on revaluation model N: Subsequent measurement based on cost model Y: Measurement of revenue Y: FV (disclosure) Y: FV disclosure Y: Subsequent measurement based on revaluation model N: Subsequent measurement based on cost model N: Item not recognised in the statement of financial position Y: FV (disclosure) 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Definition of fair value 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. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). Hypothetical transaction; an entity s intention to hold an asset or to settle or otherwise fulfill a liability is not relevant when measuring fair value. 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 8

Implication of IFRS 13 FV definition Although the FV definition is not significantly different from previous definition, IFRS 13 guidance clarifies that: The new definition explicitly states that fair value is based on an exit price from the perspective of a market participant. Fair value should be measured regardless of entity s intent or ability to sell the asset or transfer the liability at the measurement date. Liabilities should be measured at the price which a liability would be transferred to a market participant (former definition referred to settlement of liability). Transfer Settlement Liability remains outstanding Cancellation or extinguishment of liability It is explicitly stated the fair value is measured at the measurement date. The fair value should represent current market condition. 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 6/3/2013 9

The asset or liability A fair value measurement is for a particular asset or liability. IFRS 13 also applies when an entity measures its own equity instruments at fair value The asset or liability measured at fair value might be either of the following: (a) A stand-alone asset or liability (e.g. a financial instrument or a non-financial asset); or (b) A group of assets, a group of liabilities or a group of assets and liabilities (e.g. a cash-generating unit or a business). An entity must take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example: (a) The condition and location of the asset; and (b) Restrictions, if any, on the sale or use of the asset. With limited exceptions, IFRS 13 does not prescribe the unit of account for fair value measurement; look to relevant IFRSs. 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 10

The transaction Principal market The market with the greatest volume and level of activity for the asset or liability Most advantageous market The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs. ONLY used in the absence of a principal market Entity must have access to the principal (or most advantageous) market Determined from the entity s perspective, based on ability to access Absent evidence to the contrary, the market in which the entity would normally sell the asset or transfer the liability is assumed to be the principal (or most advantageous) market 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 11

Example of two markets dillemma. Össur shares trades both in Iceland and Denmark. Currently ISK stock prices are higher than DK. Which one is Principal market? Which one is Most Advantageous? Price difference between Össur share's in Iceland and Denmark ISK 250 200 150 100 50 50 40 30 20 10 0-10 0 Diff Össur ISK Össur DK converted to ISK -20 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. GO HEADER & FOOTER TO EDIT THIS TEXT 6/3/2013 12

Highest and best use of a non-financial asset Do market or other factors suggest that different use by market participant maximises asset s value? Yes No FV is based on asset s current use. Identify other uses that are physically possible, legally permissible AND financially feasible either on: Stand-alone basis; or In combination with other assets or assets and liabilities. Measure FV based on use that maximises the asset s value = highest and best use. 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Highest and best use Is the possible use of a non-financial asset? Physically possible? yes Legally permissible? yes Financially feasible? yes Maximises value? no no no no Is not used to value the asset yes Is used to value the asset IFRS 13.29: Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. However, an entity s current use of a nonfinancial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset. 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 14

IFRS 13 impacts the Fair Value measurement in accordance with IAS 40 (Investment Properties) Main changes relates to paragraphs 33 52 regarding the Fair Value model Before IFRS 13 fair value was defined within the standard. The definition has been replaced with a paragraph stating that fair value of investment property to be measured in accordance with IFRS 13. This means that Invesment properties should be measured based on their Highest and best use. IAS 40 paragraph 51 did include one key restriction regarding fair value measurement: IAS40.51: The fair value of investment property does not reflect future capital expenditure that will improve or enhance the property and does not reflect the related future benefits from this future expenditure. This paragraph has now been removed from IAS 40. 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. GO HEADER & FOOTER TO EDIT THIS TEXT 6/3/2013 15

How IFRS 13 can impact Real Estate companies The standard may affect how real estate companies measure their asset portfolio. Under the new standard alternative use of investment property may prove to be more valuable. i.e. additional building rights changes of land-use plans However the alternative use must be: Physically possible Legally permissible Financially feasible Source: Heimasíða Klasa, www.klasihf.is Maximise value 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. GO HEADER & FOOTER TO EDIT THIS TEXT 6/3/2013 16

Example highest and best use An entity acquires in a business combination land that is currently used as a site for a factory Recent zoning changes permit residential use of land and some adjacent sites have been developed for residential use The highest and best use of the land is determined by comparing value based on current use As an industrial property (current use), the values of the land and factory are 300,000 and 140,000 respectively value as a vacant site ready for residential development, considering the costs to demolish the factory and prepare the land as vacant site As a site for residential property development, fair value of vacant site, after considering costs for demolishing the factory and other conversion costs, is 550,000 Conclusion: The land is valued at 550,000 and the buildings at 0 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 17

Unit of account and unit of valuation Is the unit of valuation provided in IFRS 13? No Yes Unit of valuation may be different from unit of account Determine unit of account in accordance with IFRS that requires or permits FV measurement Unit of valuation = unit of account 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Case example: Large holding Fact pattern: Entity P holds 8% (i.e. 1.5 million shares) of the share capital in Entity Q. Daily trading volume is 1% of outstanding shares. The quoted price for one share in Q is CU 10 at the measurement date. P assumes that it would be able to sell its 8% stake in one transaction for CU 13.5 million at the measurement date. Q1a: What is the FV of P s 8% interest in Q at the measurement date if Q s shares are traded in an active market? Q1b: How would your approach change if the market for Q s shares was inactive? 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Mini-case solution 1: Large holding Q1a: What is the FV of P s 8% interest in Q at the measurement date if Q s shares are traded in an active market? Unit of valuation and unit of account is individual share in accordance with IFRS 13.14 and IAS 39/IFRS 9. If Level 1 input available, it should be used for FV measurement (IFRS 13.69, 77, 80): 1.5 million shares CU 10 = CU 15 million. Discount of CU 1.5 million is a blockage factor that is: a characteristic of the entity s holding; inconsistent with the unit of account; and not a characteristic of the individual share. CU 15 million Q1b: How would your approach change if the market for Q s shares was inactive? 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Groups of financial instruments Net Exposures Group managed on basis of net exposure to particular market risk or credit risk to a particular counterparty in accordance with documented risk management or investment strategy? yes Provide information to key management personnel on that basis? yes Measured at fair value in the statement of financial position? yes Measurement on a net basis permitted no no no Measure individual assets and liabilities, measurement on a net basis prohibited Note: Refers to unit of account for measurement only. Presentation established by other IFRSs 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 21

Application to liabilities and own equity instruments Transfer of liabilities The valuation of liabilities is performed using a transfer notion, i.e. the liability is not assumed to be settled with the counterparty or otherwise extinguished on the measurement date Restrictions on transfer Separate input or adjustment to other input not made for a restriction on an entity s ability to transfer a liability or own equity instrument Restriction assumed to be reflected in other inputs Non-performance risk of a liability Fair value of a liability reflects non-performance risk, i.e. the risk that an entity will not fulfil the obligation Non-performance risk includes, but is not limited to, credit risk and is assumed to be the same before and after the transfer Inseparable third-party credit enhancements may need to be excluded 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 22

Application to liabilities and an entity s own equity instruments : Quoted price for transfer of an identical or similar liability / own equity instrument? yes Use quoted price no yes Value from the perspective of market participant that holds the asset Identical instruments held as an asset by another party? no Value from the perspective of market participant that owes liability or issued equity claim yes Quoted price for identical instrument held as asset? Use quoted price (adjusted) no Use another valuation technique 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 23

Fair value at initial recognition Transaction is between related parties Transaction is forced Unit of account represented by the transaction is different from unit of account used for measuring fair value The market in which transaction takes place is different from the market in which the entity would sell the asset or transfer the liability May indicate that transaction price and fair value may differ IFRS 13 does not prescribe rules for recognition of gains or losses at initial recognition look to IFRS that permits/requires the fair value measurement Assumed position is to take to profit or loss unless other IFRS says otherwise 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 25

Valuation techniques Market approach Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities Income approach Converts future amounts (e.g. cash flows or income and expenses) to a single present (discounted) amount Cost approach Reflects the amount that would currently be required to replace the service capacity of an asset (current replacement cost) 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 27

Inputs to valuation techniques Inputs refer broadly to assumptions that market participants would use when pricing the asset or liability, including assumptions about risk Observable - inputs that are developed based on observable market data and reflect market participants assumptions Unobservable - inputs for which market data are not available and which are developed based on the best available information about market participant assumptions Valuation technique should maximise use of relevant observable inputs and minimise use of unobservable inputs 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 28

Fair value hierarchy IFRS 13 contains a hierarchy of fair value Hierarchy the same as introduced by IFRS 7 The fair value hierarchy prioritises the inputs to valuation techniques used to measure fair value into three levels, considering the relative subjectivity of inputs Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the reporting date Level 2 inputs other than quoted prices included in level 1, that are observable for the asset or liability, either directly or indirectly Level 3 unobservable inputs 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 29

Fair value hierarchy (cont d) Quoted price for an identical item in an active market? yes Price adjusted? (paragraph 79) no Level 1 no yes Any significant unobservable inputs? no Level 2 yes Level 3 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 30

Premiums and discounts Level 1 price? no Premium / discount a characteristic of the item? yes Premium / discount consistent with the unit of account? yes Include premium / discount in fair value measurement as required yes no no Use quoted price (except in limited circumstances detailed in IFRS 13.79) Premium / discount not included in the fair value measurement 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 31

Inputs based on bid and ask prices When inputs are determined based on bid and ask prices (e.g. in a dealer market), fair value measurement should, irrespective of the level in the hierarchy, use the price in the bid-ask spread that is most representative of fair value Use of bid prices for long positions (assets) and ask prices for short positions (liabilities) is permitted but not required IFRS 13 does not preclude use of mid-market pricing or other pricing conventions used by market participants as a practical expedient for fair value measurements within a bid-ask spread IAS 39 stated that bid-ask spread includes only transaction costs IFRS 13 does not make such statement only noting that it does not include adjustments for counterparty credit risk 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 32

Fair value in markets that are no longer active IFRS 13 includes guidance broadly consistent with guidance in the IASB s Expert Advisory Panel Report (October 2008) for when markets are no longer active The objective of a fair value measurement does not change when a market for an asset or liability is not active. However it is taken into account that: measuring fair value in a market that is not active depends on the facts and circumstances and requires significant judgement in an inactive market, transactions or prices quoted may not be determinative of fair value (e.g. there may be transactions that are not orderly) further analysis of transactions or quoted prices is needed, and a significant adjustment to transactions or quoted prices may be necessary to measure fair value An entity s intention to hold an asset is not relevant 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 34

Fair value in markets that are no longer active (continued) Regardless of the valuation technique used an entity includes appropriate risk adjustments, including a risk premium reflecting the amount market participants would demand because of the risk (uncertainty) inherent in the cash flows of an asset or liability IFRS 13 describes factors that may indicate that there has been a significant decrease in the volume or level of activity for an asset or liability. An entity should evaluate the significance and relevance of factors to determine whether a market is not active If a market is not active, it is inappropriate to conclude that all transactions in that market are not orderly 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 35

Case Example: Decrease in volume or level of activity Entity D holds 4% of share capital in Entity F, quoted price on stock exchange is CU 200 at measurement date (Q4-20X2). During Q2-20X2 trading was suspended for 8 weeks and during 20X2 government took several steps to support the market. Due to financial and political instability, the share price and trading activity have declined sharply since Q2-20X2, with historical lows in Q4-20X2. Trading volume at measurement date is proportionate to quarterly trading volume. Q2: Is D allowed to use a price, other than the quoted price, to measure the FV of a share in F at the measurement date? 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Mini-case solution 2: Decrease in volume or level of activity Q2: Is D allowed to use a price, other than the quoted price, to measure the FV of a share in F at the measurement date? Is market active? (i.e. is the quoted price a Level 1 input?) In an active market transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. There may be a significant decrease in volume or level of activity for the shares in F. Significant decrease in volume or level of activity inactive market. Based on fact pattern presented sufficient evidence to consider the market active. Even if market is inactive, quoted price may still represent best evidence of FV. No 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Significant decrease in volume or level of activity and transactions that are not orderly Factors that may indicate significant decrease in volume or level of activity include, for example: Few recent transactions; Quoted price not based on current information; or Quoted prices vary substantially over time or among market makers. In case of a significant decrease in volume or level of activity, further analysis of transactions or quoted prices is needed. Circumstances that may indicate that a transaction is not orderly include e.g.: Inadequate exposure to allow usual and customary marketing activities Seller is near bankruptcy or receivership. Orderly... Not orderly... Not known to be orderly... NEW 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn.

Disclosures Objective of disclosures for assets and liabilities measured at fair value is to provide information that enables financial statements users to assess methods and inputs used to develop those measurements for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of measurements on profit or loss or OCI IFRS 13 requires certain minimum disclosures by classes of assets and liabilities IFRS 13 requires that an entity should present quantitative disclosures in a tabular format unless another format is more appropriate 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 40

Disclosures (continued) Significant new disclosure requirements Quantitative disclosure about unobservable inputs for Level 3 Description of Level 3 valuation processes, policies and procedures Narrative description of sensitivity to changes in unobservable inputs for recurring Level 3 measurements, including interrelationships between inputs Fair value hierarchy and valuation techniques for amounts not measured at fair value but fair value is disclosed in the financial statements Accounting policy choice disclosures: Timing of transfers between levels of the hierarchy Exemption allowing measurement of groups of financial assets and financial liabilities Liabilities with inseparable third-party credit enhancements 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 41

Disclosures (continued) Recurring Non-recurring FV disclosed Ref Requirement L1 L2 L3 L1 L2 L3 L1 L2 L3 93(a) Fair value at end of reporting period 93(a) Reasons for the measurement 93(b) Level within hierarchy 93(c) Transfers within hierarchy 93(d) Description of valuation technique and inputs 93(d) Any changes to valuation technique and reasons 93(d) Quantify unobservable inputs 93(e) Reconciliation of opening and closing balance 93(f) Unrealised gains/losses from remeasurement 93(g) Description of valuation processes and policies 93(h)(i) Narrative sensitivity to changes in unobservable inputs 93(h)(ii) Quantitative sensitivity to changes in unobservable inputs (for financial assets and financial liabilities only) 93(i) If highest and best use differs from actual, then reasons why Disclosure required Recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit in the statement of financial position at the end of each reporting period. Non-recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit in the statement of financial position in particular circumstances (e.g. when an entity measures an asset held for sale at fair value less costs to sell in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations because the asset s fair value less costs to sell is lower than its carrying amount). 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 42

Disclosures (continued) Interim financial statements For financial instruments measured at fair value, the fair value disclosures required in annual financial statements also apply for interim financial reports under IAS 34 For non-financial assets and non-financial liabilities, no additional fair value disclosure requirements are required for interim reporting beyond the existing requirements in IAS 34 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 43

Application date IFRS 13 applies for annual periods beginning on or after 1 January 2013 IFRS 13 is applied prospectively as of the beginning of the annual period in which the final standard is initially applied The disclosure requirements need not be applied to comparative information provided for periods before the date of initial application 2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 45

2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 46

2013 KPMG ehf., íslenski aðilinn að KPMG International, svissnesku samvinnufélagi. Allur réttur áskilinn. 47

Takk fyrir. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2013 KPMG ehf., an Icelandic private limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Iceland. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International").