IFRS Conference Estimating current value measures in IFRSs

1. IFRS ConferenceEstimating current value measures in IFRSs Hilary Eastman – Project Manager The views expressed in this presentation are those of the presenter, not necessarily those of the IASB

2. Current value concepts in IFRSs… • Fair value • Value in use • Amount to settle or transfer a present obligation • Net realisable value • Present value • Net present value • Expected value • Market value

3. …and some variants • Fair value less costs to sell (or point of sale costs) • Fair value less accumulated depreciation/amortisation • Fair value less accumulated amortisation and impairment loss • Fair value less impairment loss

4. The use of fair value in IFRSs

5. Where does IFRS use fair values?Requirements

6. Where does IFRS use fair values?Options

7. IFRS implementation studyOverview • Study by the ICAEW: EU Implementation of IFRS and the Fair Value Directive • Purpose of study: • Inform the EC about the implementation of IFRSs in the EU through IAS regulation and the implementation of the Fair Value Directive • Data sample: • IFRS consolidated financial statements of 200 publicly-traded companies in 25 countries that were EU member states in 2005 • Financial statements for the first financial year starting on or after 1 January 2005

8. IFRS implementation studyFair value option in IAS 39 Fair value option for financial instruments Used for some FIs 36 Not used 164 Source: EU Implementation of IFRS and the Fair Value Directive prepared by the ICAEW, October 2007

9. IFRS implementation studyRevaluation model in IAS 16 Used for some properties and all plant and equipment 3 Property, plant and equipment Used for all properties 5 No own-use PP&E 1 Revaluation model for all PP&E 0 Cost model for all PP&E 191 Source: EU Implementation of IFRS and the Fair Value Directive prepared by the ICAEW, October 2007

10. IFRS implementation studyRevaluation model in IAS 40 Investment property Fair value model 23 Cost model 58 No investment property 119 Source: EU Implementation of IFRS and the Fair Value Directive prepared by the ICAEW, October 2007

11. IFRS implementation studyFair value model in IAS 41 Biological assets Fair value model 5 Cost model for some or all 4 No biological assets 191 Source: EU Implementation of IFRS and the Fair Value Directive prepared by the ICAEW, October 2007

12. IFRS implementation studyOther findings • All companies had held-for-trading financial instruments (including derivatives), which are remeasured at fair value under IAS 39 • In many cases there is ‘little evidence’ of available-for-sale financial assets, which are remeasured at fair value under IAS 39 • No companies remeasured intangible assets at fair value using the revaluation model in IAS 38 Source: EU Implementation of IFRS and the Fair Value Directive prepared by the ICAEW, October 2007

13. Measuring current values

14. Using observable market prices • A quoted price in an active market for an identical asset or liability is the most objective evidence of value • Sometimes there will be quoted prices for similar assets or liabilities or quoted prices in inactive markets for an identical asset or liability • Judgment is required to adjust from the quoted price to the value of the subject asset or liability

15. Using cash flow estimates • In the absence of quoted market prices, value can be estimated using a discounted cash flow (DCF) analysis • Cash flows of the entity or cash flows of market participants? • What about taxes? • An important part of a DCF analysis is the D: What discount rate should be used? • Discount rate for the business (eg weighted average cost of capital) or for the individual asset or liability? • Market based vs entity specific When preparing a DCF model, ensure that there is internal consistency between the cash flows and the discount rate.

16. Using replacement costs • Estimate of the amount to replace the service capacity of an asset • Not necessarily the actual historical cost or the sum of the costs for which the seller wants to be compensated—must also consider the effect of market conditions • Replacement cost is an economic concept, not an accounting concept (historical cost) • Includes obsolescence: • Physical • Functional/technological • Economic Ensure that all cost and obsolescence components (including profit margin and return on capital) are included to arrive at a value for the subject asset.

17. Reconciling the values under each approach • If information is available for all three approaches, try to reconcile the valuations • But preference must be given to a quoted market price in an active market for an identical asset or liability • Issues to consider: • What does each approach attempt to capture? • Why would the market price be different from the model price?

18. Questions and comments Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.