The Role of Fair Value and Value in Use in IFRS Financial Statements

The Role of Fair Value and Value in Use in IFRS Financial Statements

Profit The Framework modified by current IFRS Opening net assets Changes in net assets Closing net assets Transactions with owners as owners Income less expenses = Comprehensive income Profit for year Other comprehensive income (OCI)

Profit and the Measurement of Assets and Liabilities (1989) The Framework s approach is applicable to a range of accounting models and the use of different measurement bases Financial statements are most commonly prepared in accordance with an accounting model based on recoverable historical cost and the nominal financial capital maintenance concept Other measurement models and concepts may be more appropriate IASB Conceptual Framework, Introduction and chapter 4, paragraphs 4.56 and 4.65

Profit and the Measurement of Assets and Liabilities (Today) Financial statements are most commonly prepared in accordance with an accounting model based on recoverable historical cost The fair value model is required for derivatives and some other financial assets and financial liabilities biological assets subsidiaries of investment entities The fair value model is allowed, but very rarely used, for some other assets and liabilities

The Cost Model Assets Definition of an asset An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity The cost model for an asset At each reporting date, an asset is measured at its cost adjusted for: its conversion into cash or cash equivalents the consumption or loss of the economic benefits embodied in the asset

Applying the Cost Model Assets The historical cost of an asset is: the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the asset at the time of its acquisition IFRS specify the costs that are included in, or excluded from, the cost of assets how to measure cost in the different circumstances in which the entity might acquire the asset when fair value must be used to measure the cost of an asset

Applying the Cost Model Assets The economic benefits embodied in an asset may be: converted into cash and cash equivalents or other assets consumed through use lost through damage, waste, economic circumstances etc. IFRS specify how to measure and account for the receipt of cash and cash equivalents or other assets how to measure and account for the consumption or loss of the economic benefits embodied in an asset

Applying the Cost Model Assets Under the cost model: the carrying amount of an asset must not exceed the amount which the entity expects to recover from the use, sale or other means of recovery of the asset (recoverable amount) Every IFRS dealing with assets specifies how to measure the recoverable amount* for the relevant assets in what circumstances value in use and fair value should be used as the recoverable amount * Unfortunately different IFRS use terms other than recoverable amount but what ever the term used the objective is the same, to measure the amount which the entity expects to recover from the asset

Using Value in Use and Fair Value to Measure Recoverable Amount Value in use is used to measure the recoverable amount of an asset when the economic benefits can be recovered through the use of the asset Fair value is used to measure the recoverable amount of an asset when the economic benefits can be recovered through the sale of the asset

Applying the Cost Model Assets and liabilities IFRS require the disclosure of fair value measurement for the following assets and liabilities measured using the cost model: investment property (IAS 40) financial assets and financial liabilities (IFRS 7) IFRS encourage the disclosure of fair value measurement for the following assets: property, plant and equipment (IAS 16) (in practice the disclosure is rarely made)

The Fair Value Model Assets Definition of an asset An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity The fair value model for an asset At each reporting date, an asset is measured at its fair value

Fair Value Model Mandatory for derivatives (IAS 39/IFRS 9) equity investments (IFRS 9) some hybrid financial instruments (IFRS 9) other financial assets that do not meet business model test for amortised cost (IFRS 9) defined benefit plan assets (IAS 19) biological assets (IAS 41) subsidiaries of investment entities (IFRS 10 amendment)

Fair Value Model Optional for investment property (IAS 40) (common) property, plant and equipment (IAS 16) (very rare) intangible assets (IAS 38) (not used) financial assets and financial liabilities that could be measured at amortised cost (IAS 39 and IFRS 9) (rare and selective under IAS 39)

Using Value in Use and Fair Value in the Fair Value Model Fair value is used in the fair value model to: measure assets and liabilities at each reporting date measure the cost of an asset or liability on initial recognition Value in use is used in the fair value model to measure the recoverable amount of an asset when the economic benefits can be recovered through the use of the asset and value in use is higher than fair value (this is rare and arises only when the fair value model is used for IAS 16 and IAS 38)