Presentación Fundación IFRS 13

8/12/2019 Presentacin Fundacin IFRS 13

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Agenda Part I: context and scope

Part II: measurement of fair value Part III: valuation approaches and techniques

Part IV: disclosures

Part V: effective date and transition

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IFRS Foundation


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Part IContext and scope

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Part I: context and scope Why IFRS 13 is necessary

Scope when IFRS 13 applies Scope what IFRS 13 does not apply to

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Before IFRS 13 dispersed andconflicting guidance 6

IAS 40IAS 39/IFRS 9 IAS 41IAS 36 Etc.

IFRS 13

Single source of measurement guidance Clear measurement objective Consistent and transparent disclosures about fair

value

Topic 820 in US GAAP (codified SFAS 157)

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The previous definition of fair value 7

Fair value definition Its weaknesses

The amount for which anasset could be

exchanged or a liability settled

between knowledgeable, willing parties in an arms

length transaction.

It did not specify whether an entityis buying or selling the asset

?

It was unclear about what settling

meant because it did not refer tothe creditor

It was unclear about whether it wasmarket-based

It did not state explicitly when theexchange or settlement takes place

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When does IFRS 13 apply?

When another IFRS requires or permits fair valuemeasurements or disclosures about fair valuemeasurements

IFRS 13 also applies to measurements, such as fair

value less cost to sell, based on fair value ordisclosures about those measurements

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When does IFRS 13 apply? 9

For example, if you own a biological asset

IAS 41 A biological asset shall be

measured on initial recognition andat the end of each reporting period

at its fair value less cost to sell

IFRS 13

What

andwhen

How

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What does IFRS 13 not apply to? 10

Excluded from thescope

IFRS 2 and IAS 17

Disclosures in IFRS 13not required for

Plan assets (IAS 19) Retirement benefit plan

investments (IAS 26) Assets for which recoverable

amount is fair value less costof disposal (IAS 36)

Not required formeasurement similar tofair value

IAS 2 (net realisable value) IAS 36 (value in use)

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Part IIMeasurement of fair value

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Part II: measurement of fair value Definition of fair value and measurement principles

Considerations specific to non-financial assets Considerations specific to liabilities

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Definition of fair value andmeasurement principles

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IFRS 13s new definition of fair value 14

New fair value definition Comments

the price that would bereceived to

sell an asset or paid totransfer a liability in an

orderly transactionbetween market

participants at themeasurement date .

It specifies that the entity is sellingthe asset

It refers to the transfer of a liability

It is clear it is market-based

It states explicitly when the sale ortransfer takes place

It is not a forced or distressed sale

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Fair value at initial recognition

Transaction price (entry price) = Fair value(exit price) unless: Transaction takes place in different

markets Transactions are for different units of

account

Seller is distressed or forced Transactions are between related parties

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A hypothetical transaction price 16

Marketparticipant

buyer

Marketparticipant

seller

Fair valueof

Principal market (or mostadvantageous market)

an asset

a liabilit y

at the

measurementdate

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Who would transact for the item?

Market participants are buyers and sellers in theprincipal (or most advantageous) market who are:

Market participants act in their economic bestinterest

Maximise the value of the asset Minimise the value of the liability

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Independent Knowledgeable

Able to enter into atransaction

Willing to enter intoa transaction

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What is being measured?

Unit of account IAS 41: A biological asset shall be measured at its fair value less costs to sell

Characteristics Which characteristics would a market participant

buyer take into account? age and remaining economic life condition

location restrictions on use or sale contractual terms

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Where would the transaction take


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Where would the transaction takeplace?

In most cases, these markets will be the same

arbitrage opportunities will be competed away The entity must have access to the principal (or most

advantageous) market

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Fair value is the price in the

Principal market Or, if no principal market, themost advantageous market

The market with the greatestvolume and level of activity forthe asset or liability

The market that maximises theamount that would be received tosell the asset and minimises theamount that would be paid totransfer the liability

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Transaction and transport costs 20

Description Included in fair value?

Transactioncosts

The costs to sell the assetor transfer the liability thatare directly attributable tothe disposal of the asset

or the transfer of theliability

No (Although they areconsidered in theassessment of whichmarket is most

advantageous)They are a characteristic ofthe transaction, not of theasset or liability

Transportcosts

The costs that would beincurred to transport anasset from its currentlocation to its exit market

Yes Transport changes acharacteristic of the asset(its location)

IFRS Foundation

How do we arrive at a market based


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How do we arrive at a market-basedmeasurement? 21

Is there a quoted price in an active market for an identical asset or liability?

Use this quoted price tomeasure fair value (Level 1)

Replicate a market price through avaluation technique* (using observable +

and unobservable inputs: Levels 2 and 3)

No significantunobservable

(Level 3) inputs =

Level 2 measurement

Use of significantunobservable

(Level 3) inputs =

Level 3 measurement

Must use without adjustment

Yes No

* Valuation techniques include themarket approach, income approach

and cost approach.+ Maximise the use of relevant observable inputs and minimise the use of unobservableinputs. Observable inputs include market data (prices and other information that is publiclyavailable). Unobservable inputs include the entitys own data (budgets, forecasts ), which must beadjusted if market participants would use different assumptions.

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Considerations specific to

non-financial assets

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Highest and best use

Fair value assumes a non-financial asset isused by market participants at its highest andbest use the use of a non-financial asset by market

participants that maximises the value ofthe asset

physically possible

legally permissible financially feasible

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Highest and best use continued

Highest and best use is determined from theperspective of market participants, even if the entityintends a different use.

However , an entitys current use of a non -financial

asset is presumed to be its highest and best useunless market or other factors suggest that adifferent use by market participants would maximisethe value of the asset.

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Highest and best use continued

Highest and best use is usually (but not always) thecurrent use if for competitive reasons an entity does not

intend to use the asset at its highest and best

use, the fair value of the asset should still bemeasured assuming its highest and best use bymarket participants (defensive value)

Does not apply to financial instruments or liabilities

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Valuation premise A non-financial asset either:

provides maximum value through its use in combinationwith other assets and liabilities as a group

is its value influenced by it being operated with otherassets?

an example: equipment used in production facility market participants are assumed to hold

complementary assets provides maximum value through its use on a stand-alone

basis

is its value independent of its use with other assets? an example: a vehicle or an investment property

Does not apply to financial instruments or liabilities

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Considerations specific to liabilities

IFRS Foundation

Transfer notion liabilities and an


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Transfer notion liabilities and anentitys own equity instruments

Fair value assumes a transfer to a marketparticipant who takes on the obligation. The transferassumes:

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Liability or equity remains outstandingRestrictions on transfer are already reflected in

inputs; no additional adjustment required

Fair value of a liability reflects the effect ofnon-performance risk

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Decision tree liability measurement 29Is there an

observable marketprice to transfer the

instrument? Does somebody hold thecorresponding asset?

Fair value =observable marketprice of instrument

Fair value = fair value ofthe corresponding asset

Is there an observablemarket price for the

instrument traded as anasset?

Fair value = anothervaluation

technique*

No Yes

Yes No

Yes

Fair value =observable market

price of asset

No

Fair value =another valuation

technique

* Using theperspective of amarket participant thatowes the liability orissued the claim onequity

Level 2 or 3 IFRS Foundation


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No corresponding asset

Two possible ways to approach it:

1. Use the future cash flows that a market participantwould expect to incur in fulfilling the obligation ,including the compensation that a market

participant would require for taking on theobligation. Such compensation includes: the cost to fulfil the obligation plus a return for

undertaking the activity; and

a risk premium to compensate for the risk thatactual cash flows might differ from expectedcash flows.

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No corresponding asset continued

2. Use the amount that a market participant wouldreceive to enter into or issue an identical liability orequity instrument.

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Part IIIValuation approaches and

techniques

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Part III: valuation techniques Valuation approaches

Valuation techniques illustration for unquotedequity instruments

Bid and ask spread, premiums and discounts

Measuring the fair value of portfolios

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Valuation approaches

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Valuation approaches continued

Cost approach the cost to acquire or reconstruct a substitute

asset of comparable utility, adjusted for physical,functional and economic obsolescence

often used for PP&E and some intangibles Income approach

converts future amounts (eg cash flows) to asingle current discounted amount, for example:

present values option pricing models multi-period excess earnings method

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Selecting a valuation approach 37

L e v e

l 2

L e v e

l 1

L e v e

l 3

Market approachMarket price is available

Price needsadjustment

Observableinputs

Price foridentical item

Must be usedwithoutadjustment

Cost approach(eg replacement cost)

Income approach(eg discounted cash flow)

Observableinputs

Rare

Observableinputs

Rare

Price needsadjustment

Unobservableinputs

Unobservableinputs

Unobservableinputs

Not directlyincome-producing

No identical market price Price needs adjustment

Directly identifiable cashflows

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Valuation techniques illustrationfor unquoted equity instruments

IFRS Foundation

Measuring the fair value of unquoted


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equity instruments

Scope of this particular illustration:

Unquoted equity instruments not quoted in anactive market

Non-controlling interest within the scope of IFRS 9

A range of valuation techniques can be used.

Judgement is involved in the selection of a valuation technique (given

specific facts and circumstances, some

techniques might be more appropriate thanothers) when applying the valuation technique

IFRS Foundation

V l i h d h i


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Valuation approaches and techniquesValuationapproaches

Valuation techniques

Market approach Transaction price paid for an identical ora similar instrument of an investee

Comparable company valuation multiples

Income approach Discounted cash flow (DCF) method

Dividend discount model (DDM)

Constant-growth DDM

Capitalisation model

A combination ofapproaches may beused

Adjusted net asset method

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M k h


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Market approach Uses prices and other relevant information that have

been generated by market transactions that involveidentical or comparable assets.

Techniques that are most commonly referred to forvaluing unquoted equity instruments are related to the

data sources that they use: transaction price paid for an identical or a similar

instrument of an investee comparable company valuation multiples derived from

quoted prices (ie trading multiples) or from prices paid intransactions such as mergers and acquisitions (ietransaction multiples)

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V l ti lti l


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Valuation multiples

Valuation basis: Equity value Enterprise value (EV)

Multiple = ( )

Performance measures: EBITDA, EBIT, EBITA Earnings, ie net income (E)

Book value, ie value of an entitys shareholdersequity (B)

Revenue

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Commonly used valuation multiples


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Commonly used valuation multiples Earnings multiples commonly used when valuing:

established business with an identifiable stream ofcontinuing and stable earnings:

, , (where P is entitys market capitalisation)

Book value multiples: where entities use their equitycapital bases to generate earnings (eg businessesthat have not yet generated positive earnings)

Revenue multiples:

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Example applying comparablecompany peers multiples ti d


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company peers multiples continued

Step 1 Identify comparable peers

The investor has selected six comparable publiccompany peers that operate in the same businessand geographical region as Entity J.

Step 2 Select the performance measure that ismost relevant to assessing the value for the investee.

The investor has chosen the EV/EBITDA multiple tovalue Entity J because there are differences in the

capital structure and depreciation policies betweenEntity Js comparable company peers and Entity J.

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Example applying comparablecompany peers multiples ti d


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Step 3 Apply valuation multiple to obtain fair value

Trading multiples of the comparable public companypeers are:

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Upon further analysis, these entities areconsidered comparable (ie similar risk,growth and cashflow-generating profiles

IFRS Foundation

Example applying comparablecompany peers multiples continued 48


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company peers multiples continuedStep 3 continued

Investor selected average multiple (ie 8.5x)because it appropriately reflects Entity Jscharacteristics relative to its peers.

= = 100 8.5 =850

= @ =850 350 = 500

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Example applying comparablecompany peers multiples continued 50


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Step 4 continued

Discount for the lack of liquidity assessed tobe 30% on the basis of relevant studiesapplicable in the region and industry as well ason the specific facts and circumstances.

Therefore = 500 1 0.3 = 350

And the fair value of 5% non-controlling interestis CU17.5m (ie CU350m 0.05)

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Income approach 51


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Income approach

Income approach converts future amounts(eg cash flows) to a single current (iediscounted) amount. Discounted Cash Flow method (DCF)

Dividend Discount Model (DDM) Constant growth DDM Capitalisation model

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WACC: cost of debt capitalcomponent and computation 53


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component and computation

= ( + ) ( 1 ) + ( + )

Computing WACC requires cost of equity capitaland cost of debt capital ( , respectively) and

market participants expectations of the investeeslong-term optimal capital structure

There are a number of approaches for estimating Based on recent borrowings

By reference to an actual or synthetic creditrating and default spread

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IFRS Foundation

WACC: cost of equity capitalcomponent 54


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component

Cost of equity capital ( ) is often estimated usingCAPM:

= +

where:

is the expected rate of return on a risk-free asset is the required market rate of return on a fully

diversified portfolio

is the measure of the systematic risk for theindividual shares

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Example DCF method usingenterprise value 55


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p

An investor has 5% non-controlling interest in EntityR.

FCFF of Y 1 to Y 5 of CU100m and terminal valuefrom Y 5 onwards is CU1,121.8m (assumption:inflation is offset by market shrinkange, no growth innominal terms)

WACC 8.9%

Fair value of debt = CU240m

Non-controlling interest discount CU8m

Discount for the lack of liquidity CU4.09m

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Example DCF method usingenterprise value continued 56


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p

IFRS Foundation

Example DCF method usingenterprise value continued 57


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p

IFRS Foundation

A combination of approaches adjusted net asset method 58


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j

Involves deriving the fair value of an investees equity

instruments by reference to the fair value of its assetsand liabilities (recognised and unrecognised).

Appropriate for an investee whose value is mainlyderived from the holding of assets (rather than from

deploying those assets as part of a broader business). Requires measurement of the fair value of the

individual assets and liabilities.

Non-controlling interest and liquidity discounts may beapplicable.

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Bid and ask spread,premiums and discounts

IFRS Foundation

Pricing within a bid-ask spread 60


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The price atwhich the dealerwill

For an asset, thenon-dealerentitys

For a liability, thenon-dealerentitys

Bid price buy exit price entry price

Ask (offer) price sell entry price exit price

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Pricing within a bid-ask spread continued 61


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If an asset or a liability measured at fair value has abid and an ask price, use the price within the bid-ask spread that is most representative of fair value

Mid-market pricing or other pricing conventions canbe used as a practical expedient for fair valuemeasurements within a bid-ask spread if theseconventions do not contravene the principle

IFRS Foundation

Premiums and discounts 62


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Any premium or discount applied must beconsistent with:

characteristics of asset or liability the unit of account in the IFRS requiring fair

value

No block discounts an adjustment to a quoted price for reduction

that would occur if a market participant were to

sell a large holding of assets or liabilities in oneor a few transactions

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Measuring the fair value ofportfolios

IFRS Foundation

64Portfolios of financial instruments


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IFRS 13 permits an entity to measure a group offinancial assets and financial liabilities on the basis ofthe net risk exposure to either market risks or creditrisks.

This practice was already allowed in IAS 39/IFRS 9

The exception was permitted because: derivatives often cannot be sold, but management

can mitigate risk exposure by entering into anoffsetting position

portfolio composition is entity-specific (depends onentitys risk preferences )

IFRS Foundation

Portfolios of financial instrumentscontinued 65


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Conditions that need to be met: Entity must have documented risk management strategy The entity provides information on the basis of the net risk

exposure to key management personnel Only for portfolios of instruments measured at FV

Accounting policy decision

Does not affect presentation in IAS 32. Allocations shall be performed on a reasonable and

consistent basis.

Portfolio-level adjustments may need to be allocated to theunit of account for presentation purposes.

IFRS Foundation

66Portfolios of financial instrumentscontinued


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If there are offsetting market risks : can apply bid-ask spread to net open risk

position offsetting risks must be substantially the same duration of instruments leading to exposure to

market risk must be substantially the same

Market risk: the risk that the price will fluctuatebecause of changes in market prices

(currency risk, interest rate risk and otherprice risk).

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General 69


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Fair value at end of reporting period

Level in hierarchy

Transfers between levels

Valuation techniques and inputs used If highest and best use is different from

current use

IFRS Foundation

General continued 70


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Disclosures also required for unrecognisedamounts (ie that are only disclosed) oramounts recognised using a differentmeasure (eg amortised cost)

eg financial asset at amortised cost, butIFRS 7 requires disclosure of assets fairvalue

Quantitative disclosures in a table unlessanother format is better IFRS Foundation

General continued 71Ill t ti E l 15 F i l t th d f th


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Illustrative Example 15 - Fair values at the end of thereporting period and level of the fair value hierarchy

for recurring fair value measurements

IFRS Foundation

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Quoted prices inactive markets

for identicalassets

(Level 1)

Significant otherobservable

inputs(Level 2)

Significantunobservable

inputs(Level 3)

Total gains(losses)

Recurring fair value measurements

Trading equity securities (a) :Real estate industry 93 70 23 Oil and gas industry 45 45 Other 15 15

Total trading equity securities 153 130 23

Other equity securities (a) :Financial services industry 150 150 Healthcare industry 163 110 53 Energy industry 32 32 Private equity fund investments (b) 25 25 Other 15 15

Total other equity securities 385 275 110

(CU in millions)Fair value measurements at the end of the

reporting period using

Description

General continued 72


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Non-recurring fair value measurements

Assets held for sale (c) 26 26 (15) Total non-recurring fair value measurements 26 26 (15)

(a) On the basis of its analysis of the nature, characteristics and risks of the securities, the entity has determined that presenting them byindustry is appropriate.(b) On the basis of its analysis of the nature, characteristics and risks of the investments, the entity has determined that presenting themas a single class is appropriate.(c) In accordance with IFRS 5, assets held for sale with a carrying amount of CU35 million were written down to their fair value of CU26million, less costs to sell of CU6 million (or CU20 million), resulting in a loss of CU15 million, which was included in profit or loss for theperiod.(Note: A similar table would be presented for liabilities unless another format is deemed more appropriate by the entity.)

Illustrative Example 15 - Fair values at the end of thereporting period and level of the fair value hierarchyfor non- recurring fair value measurements

IFRS Foundation

More information about Level 3 73


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Quantitative disclosure of unobservableinputs and assumptions used

Reconciliation of opening to closing balances

Description of valuation process in place

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More information about Level 3 continued 74


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Sensitivity analysis: narrative discussion about sensitivity to changes

in unobservable inputs, including inter-relationships between inputs that magnify ormitigate the effect on the measurement

quantitative sensitivity analysis for financialinstruments

More detail in determining classes

IFRS Foundation

More information about Level 3 continued 75Illustrative Example 17 Quantitative information


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Illustrative Example 17 Quantitative informationabout significant unobservable inputs used

Quantitative information about fair value measurements using significant unobservable inputs (Level 3)(CU in millions)

DescriptionFair value at

31/12/X9 Valuation technique(s) Unobservable input Range (weighted average)

Other equi ty securities:Healthcare industry 53 Discounted cash flow w eighted average cost of capital 7% - 16% (12.1%

long-term revenue grow th rate 2% - 5% (4.2%)

long-term pre-tax operating margin 3% - 20% (10.3%discount for lack of marketability(a) 5% - 20% (17%)control premium(a) 10% - 30% (20%)

Market comparable companies EBITDA multiple(b) 10 - 13 (11.3)revenue multiple(b) 1.5 - 2.0 (1.7)

discount for lack of marketability(a) 5% - 20% (17%)control premium(a) 10% - 30% (20%)

Energy industry 32 Discounted cash flow w eighted average cost of capital 8% - 12% (11.1%long-term revenue grow th rate 3% - 5.5% (4.2%)

long-term pre-tax operating margin 7.5% - 13% (9.2%

discount for lack of marketability(a)

5% - 20% (10%)control premium(a) 10% - 20% (12%)

Market comparable companies EBITDA multiple(b) 6.5 - 12 (9.5)revenue multiple(b) 1.0 - 3.0 (2.0)

discount for lack of marketability(a) 5% - 20% (10%)control premium(a) 10% - 20% (12%)

Private equity fund investments 25 Net asset value (c) n/a n/a

IFRS Foundation

More information about Level 3 continued 76Illustrative Example 18 Valuation processes:


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An entity might disclose the following:(a) For the group within the entity that decides the entitys valuation policies andprocedures:

its description; to whom that group reports; and the internal reporting procedures in place (eg whether and, if so, how pricing,

risk management or audit committees discuss and assess the fair value

measurements);(b) the frequency and methods for calibration, back testing and other testingprocedures of pricing models;(c) the process for analysing changes in fair value measurements from period toperiod;(d) how the entity determined that third-party information, such as broker quotes or

pricing services, used in the fair value measurement was developed in accordancewith the IFRS; and(e) the methods used to develop and substantiate the unobservable inputs used ina fair value measurement.

Illustrative Example 18 Valuation processes:

IFRS Foundation

More information about Level 3 continued 77Ill t ti E l 19 N ti di i b t


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Illustrative Example 19 Narrative discussion aboutsensitivity to changes in unobservable inputs:

The significant unobservable inputs used in the fair valuemeasurement of the entitys residential mortgage -backedsecurities are prepayment rates, probability of default andloss severity in the event of default. Significant increases(decreases) in any of those inputs in isolation would resultin a significantly lower (higher) fair value measurement.Generally, a change in the assumption used for theprobability of default is accompanied by a directionally

similar change in the assumption used for the lossseverity and a directionally opposite change in theassumption used for prepayment rates.

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Part V: Effective date and

transition

IFRS Foundation

Effective date and transition 79


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Effective 1 January 2013

Earlier application permitted Prospective application, no comparatives

IFRS Foundation

Documents

Presentación Fundación IFRS 13