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IFRS 13 - FAIR VALUE MEASUREMENT (PART 1) — Transcript

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0:05Good day. Welcome to another session of
0:07Fog Accounting Tutorials. Today we are
0:09going to continue our study on the
0:11International Financial Reporting
0:13Standards. And the topic for today is
0:17fair value measurement, which is IFRS
0:1913. Fair value measurement. Now, I am
0:23sure that in your study of accounting
0:25and financial reporting, you have come
0:27across a lot of fair value measurement
0:30in terms of the preparation of published
0:32financial statements for companies, for
0:36uh final account for sole trader and
0:38then maybe for partnerships. You may
0:41also have come across it in the
0:42preparation of consolidated financial
0:44statements and in other areas where we
0:47usually talk about fair value of assets,
0:49like standards like property, plant and
0:52equipment, investment property have all
0:54mentioned fair values in their
0:56presentations. Now,
0:58I just want you to understand that aside
1:01those places where we have used fair
1:03value
1:04in the measurement of assets and
1:06liabilities, especially assets,
1:09we have a separate standard that has
1:11been set aside for fair value
1:13measurement, and that is IFRS 13,
1:16International Financial Reporting
1:18Standard number 13. And that is what we
1:20are going to delve into today. We are
1:23going to look at the pros and cons of
1:25this standard and then how to go about
1:28the measurement of fair values as
1:30prescribed by IFRS 13. And so I'm not
1:32going to take much of your time. Just as
1:35I do in every standard, I'm going to
1:37begin with the scope of the standard and
1:39then I'll talk about some exclusions,
1:41which is literally part of the scope,
1:43and then we look at the key matters that
1:45we need to take note of, and then we
1:47solve questions. Okay.
1:49So let us begin with the standard.
1:52Now,
1:53IFRS 13 defines the concept of fair
1:56value and sets out the procedure for the
2:00measurement of fair values for assets
2:02and liabilities. Okay? That is the scope
2:05of the standard.
2:07It defines what fair value is and then
2:09it gives us a framework,
2:12a framework for the measurement of fair
2:13values for not only assets, but assets,
2:17liabilities, and even owner's own
2:19equity. Okay? So that is the scope of
2:23IFRS 13. So whatever fair value
2:26assignment or fair value measurement
2:28that we want to do, regarding an asset
2:30or liability, we need to follow the
2:33framework that has been prescribed by
2:35IFRS 13. Now, moving on straight
2:38forward, now that we know that the main
2:40scope or the scope is about the
2:41measurement of
2:43um
2:43fair value not only for assets, but for
2:46assets, liabilities, and equity,
2:49we need to look at some exclusions
2:50because if you are not careful, once we
2:53are saying that we use it for the
2:55measurement of fair value, okay, we are
2:57going to apply to all standards and all
2:59assets, liabilities, and equity.
3:02However, the standard IFRS 13 has
3:05excluded certain standards that are
3:08excluded from the application of this
3:11uh framework in the measurement of fair
3:14values. Okay, so we are going to look at
3:16exclusions from IFRS 13. Okay, so
3:19exclusions.
3:26Exclusions. So we are saying that the
3:29scope is that it defines fair value and
3:32then sets out a framework for the
3:34measurement of the fair values for
3:36assets, liabilities, and an entity's own
3:38equity. Now, nonetheless, there are some
3:41exclusions from IFRS 13 and the
3:43exclusions helps us to understand the
3:46basic concepts that are in the standard
3:48itself because when you know what it is
3:51not, then you understand what it is
3:53better. You understand? So let us look
3:55at exclusions from IFRS 13. Now, this
3:59standard says that IFRS 13 applies to
4:02all IFRS where fair value measurement is
4:06required, except these that I'm going to
4:08mention.
4:10It applies to all IFRS. So take note. We
4:13are trying to understand the scope with
4:14the exclusions. It applies to all IFRS
4:18where a fair value measurement is
4:19required with the exception of these
4:21three standards. One, share-based
4:24payment
4:30share-based payment transactions.
4:35That is covered by IFRS 2. So you see,
4:39normally when we give you the exclusion,
4:41we show you which standard regulates the
4:43exclusion. That is what we have done in
4:45all our videos. Now, so the first
4:48exclusion is that it We are saying that
4:50it applies to all IFRS, all IFRS where
4:53fair value measurement is required with
4:55the exception of share-based payment
4:57transactions. That is the first one and
4:59then
5:00leasing
5:02leasing transactions or lease
5:04transactions. And that is covered by
5:07IFRS 16.
5:10Okay, so
5:12it excludes share-based payment
5:13transactions. It also excludes the
5:16measurement of fair value under leasing
5:18transactions. Then it also excludes
5:22measurements which are similar to but
5:24not the same as fair value. So it
5:26excludes
5:27fair value measurement under share-based
5:30payment transactions. It also excludes
5:33fair value measurement under leasing
5:35transactions. Then it excludes
5:37measurements that are similar to but not
5:39the same as fair value. So
5:43measurements
5:47that are
5:50similar to
5:52comma
5:54but not
5:56the same
5:58as
6:00fair value.
6:06Now, what do we mean by measurements
6:08that are similar but not the same as
6:10fair value? I'm going to give you
6:11example. So the standard provides
6:13examples to that. So the first example
6:16of a measurement that is similar but not
6:19the same as fair value is
6:21net realizable value of inventory.
6:31Net realizable value of inventories.
6:33That is covered under IAS 2.
6:35Okay? So you see that when you look at
6:38the net realizable
6:40How did I even spell realizable?
6:47So realizable.
6:51Yes. So when you look at net realizable,
6:53NRV of inventories, it looks like uh uh
6:57fair value but it's on its own and then
7:00it's regulated by IAS 2. It looks
7:02similar to the way we do the measurement
7:04of fair value, but it is not fair value.
7:07That is why we are saying measurements
7:08that are similar but not the same as
7:10fair value. Net realizable value of IAS
7:122 looks similar to fair value
7:14measurement, but it is not fair value.
7:16So it's part of the exclusions. And then
7:19also value
7:23value in use
7:26as in impairment, IAS 36. Value in use.
7:30That is when you are estimating the cash
7:33flows of a particular asset into the
7:36future and then you discount them into
7:38today's terms to find the present value
7:41of the estimated future cash flows. It
7:43looks similar to the measurement of fair
7:45value, but the standard says it is not
7:47fair value. So these are exclusions from
7:50IFRS 13. So it means that if you are
7:53preparing or you are solving any
7:55question on IFRS 13 and then you meet
7:57any of these things, it is not supposed
7:59to be part. These are exclusions.
8:02Share-based payment transactions, we
8:04don't do the
8:05the fair value measurement of
8:07share-based payment transactions are
8:09excluded from IFRS 13. That of leasing
8:12transactions is excluded. The
8:14measurements that are similar to but not
8:16the same as fair value like NRV of
8:19inventories and then value in use
8:21according to IAS 36. So these are
8:24exclusions from the scope of IFRS 13.
8:30Now,
8:31having understood the exclusions from
8:33the scope of IFRS 13, let us now begin
8:36to define what fair value is cuz we are
8:38looking at fair value measurement. So
8:40what is fair value?
8:41For those of you who have studied or
8:43watched my video on IAS 16, IAS 36, IAS
8:4840, IAS 38, and all those uh standards
8:52that relate to non-current assets, you
8:54realize that I gave or we gave some
8:56definitions of fair value in there. And
8:59it is not me who generated those
9:01definitions. Those are definitions that
9:03are in those standards for fair value.
9:05And we said that fair value is the
9:07amount at which the asset will be
9:09exchanged between knowledgeable and
9:11willing parties in an arm's length
9:13transaction. That is how we gave the
9:15definition for fair value. The focus of
9:17that definition is purely based on
9:19assets because those standards are asset
9:22standards. They are standards of assets.
9:25So therefore, the definition of fair
9:28value in those particular standard is
9:30limited only to assets. That is why we
9:34said that it is the value at which the
9:36assets will be exchanged between
9:38knowledgeable and willing parties in an
9:40arm's length transaction. Over there we
9:42are focusing on assets only. When it
9:44comes to IFRS 13, I said that the scope
9:47is not for only assets, but assets and
9:49liabilities. Of course, I added equity,
9:51but equity is a special kind of
9:53liability. I have mentioned it to you
9:55before. So we can generally see
9:58that IFRS 13 relates to the fair value
10:01measurement of not only assets, but
10:04assets and liabilities. So, you want if
10:07you want to define the fair value under
10:09IFRS 13, you are not just going to go by
10:12the scope of assets, but it's supposed
10:14to be for both assets and liabilities.
10:16So, there's going to be a slight
10:18modification in the way we are going to
10:19define fair value under IFRS 13 because
10:23in IAS 16, we said that it's the value
10:25at which the asset but in IFRS 13, we
10:28are not going to talk about only asset,
10:29but assets and liabilities. So, you need
10:32to understand what we are doing.
10:34Okay. So, then what is
10:37fair value as defined by IFRS 13?
10:40Now, according to IFRS 13, fair value is
10:43a price that will be received to sell an
10:46asset or paid to transfer a liability in
10:50an orderly transaction between market
10:53participants at the measurement date.
10:56So, I'm putting that on your screen.
10:58Look at it carefully.
11:00Fair value is defined as the price that
11:03would be received to sell an asset or
11:06paid to transfer a liability in an
11:09orderly transaction between market
11:12participants at the measurement date.
11:17So, I repeat, the price that would be
11:19received to sell an asset, that is the
11:21first part, or paid to transfer a
11:24liability.
11:25In an orderly transaction between market
11:29participants
11:31at the measurement date.
11:34That is from IFRS 13 paragraph nine.
11:38So, you see that there's quite a change.
11:40Instead of using knowledgeable willing
11:42parties, they have used market
11:43participants in this definition. Now,
11:46the market participants are assumed to
11:48be knowledgeable third parties. Okay.
11:51So, once we say market participants,
11:54they are knowledgeable and they are
11:55willing. And then we are saying that the
11:57price that will be received to sell an
11:59asset or paid to transfer a liability in
12:03an orderly transaction
12:05between market participants
12:07and it's supposed to be at the
12:09measurement date.
12:10Okay, at the measurement date. So, it
12:13means that if I put the value on this
12:15asset, this asset today as 200 cedis
12:20the value may change tomorrow. So,
12:22tomorrow I have to do a new measurement.
12:24So, we keep on assessing assets and
12:27liabilities for their fair values
12:30almost every period. And once we do an
12:32assessment, if that asset is not sold
12:34today and we want to postpone selling to
12:37tomorrow, then what it means is that
12:39tomorrow will be a different date. It is
12:41not sold on the date of measurement on a
12:43different day. So, we have to do a new
12:44measurement for fair value at the date
12:46when we want to sell. That is why the
12:48definition highlights on at the
12:50measurement date.
12:52Okay. So, once we move away from the
12:53measurement date, we may likely have a
12:56different fair value for the asset or
12:57the liability. That's what we are trying
12:59to say.
13:00So, let me say again that fair value is
13:03defined at the price as the price that
13:06is received to sell an asset
13:09or paid to transfer a liability in an
13:12orderly transaction between market
13:15participants at the measurement date.
13:17That is the standard definition for fair
13:20value under
13:22IFRS
13:2613.
13:27The price that will be received to sell
13:29an asset or paid to transfer a liability
13:32and it should be in an orderly
13:34transaction between market participants
13:37at the measurement date. All right. Now
13:42having understood or known the
13:43definition for fair value, we we are
13:45going to look at the factors that should
13:47be considered in pricing an asset or
13:49liability because we have said that fair
13:51value is a price. Okay, is a price. Is a
13:54price. Key emphasis on price. Fair value
13:57is a price that would be received to
14:00sell an asset or the price that would be
14:02paid to transfer a liability. So,
14:04whether asset or liability, we are
14:05focusing on the pricing of the asset or
14:07pricing of the liability. And so, how do
14:09we do the pricing? So, we are going to
14:11look at the next subtopic as factors to
14:13consider in pricing an asset or
14:16liability. So, let's look at that. Let
14:17me clean this. We are looking at
14:21factors
14:23to
14:24consider
14:27when pricing
14:31an
14:33asset
14:34or liability.
14:38So, we are looking at factors to
14:40consider when pricing because before you
14:42determine the fair value of an asset,
14:44you need to price it. And before you
14:46price the asset or liability, there are
14:48some factors you need to consider. Okay,
14:50there are three factors that you need to
14:52consider when pricing an asset or
14:54liability.
14:55And the three factors are one
14:58the condition of the asset.
15:01So, the condition
15:03of the assets
15:06or liability.
15:09So, you you factor you consider its
15:11condition then the location.
15:17The location
15:19the location of the assets or liability.
15:22Normally, when it comes to location,
15:24it's more
15:25um
15:27concerned with assets. It's mostly
15:28concerned with assets because when it
15:30comes to though the liability could also
15:32have a location. I mean, it's arguable,
15:34but we are looking at you consider the
15:37condition of the assets or liability,
15:39then you consider the location of the
15:40asset. Then also, the final thing is you
15:43consider the restrictions on its use.
15:48Restrictions
15:50on use.
15:52Okay. So, these are the three key
15:55factors that you must consider when you
15:57want to price any asset. So, what is the
16:00condition of the asset? I assuming that
16:02you want to value your motor vehicle,
16:05you look at the condition. Is it still
16:07in good shape? Is it brand new? Is it
16:10uh
16:11roadworthy? Can it go for 30 km drive or
16:15it has the strength only go for 10 km?
16:18Does it have a strong engine? I mean,
16:20you are looking at the condition. So,
16:23before you put the price tag, assuming
16:25you want to sell the asset, before you
16:27price it, you look at a lot of things
16:29about its condition. So, the condition
16:31of the asset at the time of pricing is
16:33very important. You cannot price an
16:35asset that is degraded, deteriorated,
16:38depreciated to zero and you are pricing
16:40it as if it's brand new. You can't do
16:42that. So, before you price any asset, we
16:44are looking at how to determine fair
16:46value. We are we are moving for
16:47somewhere. Okay. But we are saying that
16:49before you price any asset or liability,
16:51look at the condition of the asset or
16:53liability. Then we look at the location.
16:56Let's take land for example. You see
16:59that lands that are sold
17:01in residential area or in town are more
17:04expensive than lands that are sold
17:07in the outskirts of the towns where no
17:10people usually don't live. When it's
17:11going into the forest. Lands that are
17:13closer to the forest or bush definitely
17:16will have a lower pricing than lands
17:18that are sold in the middle of the city.
17:20You understand? That is what we call the
17:22location. So, before you even price the
17:24asset, you also consider the location of
17:26the asset to price it. So, we are
17:29looking at its conditions and then we
17:31look at the location. So, these are tips
17:34that have been given to us by IFRS 13 to
17:36help us do proper fair value measurement
17:39so that we don't overstate the value of
17:41our asset or liability or understate the
17:43value of the asset or liability. So, we
17:45consider the condition of the asset and
17:47then we consider its location. And then
17:49finally, we consider the restrictions on
17:51use. There are some assets that are
17:53restricted in the its use. Okay, for
17:55example, if you are buying in a land in
17:58a mining area
18:00and then you are restricted from digging
18:02the ground to find the minerals. You can
18:04only maybe use it for farming or you can
18:06only use it build a house and stay. Now,
18:09while there is a restriction on the use,
18:11even though the land is rich in minerals
18:14the price of that land will be lower
18:17it than when
18:20it is
18:21mean or you are being allowed to mine on
18:24the land. I mean, it means you are going
18:26to discover gold and oil and all that.
18:28So, once there are restrictions on use,
18:32it affects the pricing. If there is no
18:34restrictions on the use of whatever
18:35assets or liability, it also affects the
18:38pricing.
18:40The restrictions could be
18:42state laws. Okay.
18:44Sometimes it happens. So, all that we
18:47are trying to say is that there are
18:48three conditions
18:50or factors, sorry, that you
18:53have to look at when pricing an asset.
18:55And the first one is the condition of
18:57the asset or liability. The next one is
18:59the location and the final one is the
19:01restrictions on use. These are the
19:03provisions given to us by IFRS 13 on
19:07pricing of your asset or liability. So,
19:09now that we have been able to do this,
19:11let us also look at the approaches. The
19:14approaches for determining the fair
19:16value of an asset. So, we have looked at
19:18the factors to consider when pricing.
19:20Now, we are looking at the approaches.
19:23The approaches to determining the fair
19:25value of an asset or liability. So, the
19:28approaches
19:32to
19:34determining
19:36the fair value
19:40of an assets
19:43or liability.
19:48So, we have looked at the factors to
19:51consider when pricing. Now, we are
19:53looking at the approaches
19:55to determining the fair value of an
19:57asset or liability.
19:59Now, there are three approaches
20:02to determining the fair value. So, the
20:05factors to consider when pricing is
20:07different from the approaches to
20:09determining the fair value. There are
20:11three approaches to determining the fair
20:13value of an asset or liability. I'm
20:15going to list them and I'm going to
20:16explain to you. So, the first one
20:19is the market approaches. So, market
20:23approach.
20:27And then the second one is the cost
20:28approach.
20:32And then finally, we look at income
20:34approaches
20:36or income approach.
20:39So, these are three different approaches
20:43to determining the value of an asset.
20:45You can either use the market approach
20:47to do that or you can use the cost
20:49approach to do that or you can use the
20:51income approach to do that equally. Now,
20:53I'm going to explain each of them to
20:55you.
20:56When it comes to the market approach,
20:58valuations are based on recent sales
21:00prices. So, valuations
21:03are
21:07are based
21:09on recent
21:12sales
21:15prices.
21:17So, what are what am I trying to say or
21:19explain? What I'm trying to say is that
21:21when you're using the market approach to
21:23determine the fair value of your asset
21:25or liability, then you are going to
21:27consider its recent sales prices. So,
21:30you go to the market and then you begin
21:32to ask because for example, if this is
21:34the asset that you want to value or put
21:37a fair value on, you go to the market
21:39and you determine recent sales of this
21:41same asset. How much are the various
21:44retailers and wholesalers selling the
21:46asset?
21:47Identical assets. So, you go there and
21:49you realize that okay, they are selling
21:50it for
21:5220 CDs. This one sells it for 21. This
21:54one sells it for 19 CDs. So, you see
21:57that when you you gather three prices
21:59like that on the market on recent sales
22:01prices, one is selling for 19, another
22:03selling for 20, another selling for 21.
22:05You can find an average and say that
22:07okay, the fair value of the asset is 20
22:09CDs or 20 dollars. So, when you are
22:12using the market approach, it means you
22:14go to the market and then you use the
22:16recent sales prices to do your
22:18valuation. So, valuations of the asset
22:22are based on the recent sales prices.
22:25That is when you are using the market
22:27approach.
22:28Now, if you are using the cost approach,
22:31the cost approach is the valuations will
22:33be based on its replacement cost. So,
22:36valuations are based on replacements
22:41cost.
22:43So, in other words, how much will it
22:45cost you to replace the asset in your
22:46hand? So, you hold this asset, okay, or
22:49you have a motor vehicle. Now, you are
22:51no more going to the market to ask how
22:53much they are selling it. No. But the
22:55question is now, how much will I have to
22:58incur if I want to replace this asset?
23:00So, if this asset gets lost now and I
23:02want to replace it, how much cost will I
23:05incur? Because when we talk about cost,
23:07it is not only about price. Remember
23:09that with the market approach, the focus
23:11is only on the prices on the market. But
23:13when it comes to the cost approach, it
23:14is the price plus other
23:17components of cost. Remember, you can
23:19refer to IAS 16 for components of cost
23:22of an asset. Okay? So, when it comes to
23:24the cost approach, don't think that it
23:26is the same as a market approach where
23:28we go and take the sales prices on the
23:30market and then we find an average of
23:32that as a fair value of the asset. When
23:34it comes to the cost approach, you are
23:35looking at the replacement replacement
23:37cost. And when we say replacement cost,
23:39it is not only the amount you used in
23:41buying back the asset when it gets lost
23:44or missing, but it includes other costs
23:46like installation, testing once because
23:49you may have established the plant,
23:50okay, and then it's in use. So, if the
23:53plant is no more there, how much cost
23:55will you incur in buying, installing,
23:57testing, and making sure that it's fit
23:59for purpose? That is the replacement
24:02cost. So, when you are using the cost
24:03approach, then it means our valuation
24:05will be based totally on the replacement
24:07cost. Please, I don't want you to be
24:09confused. I want you to understand how
24:10we can use the cost approach to
24:13determine the fair value of an asset.
24:15And then finally, the income approach.
24:18How do we use the income approach to
24:21determine the fair value of an asset?
24:23Remember that an organization can use
24:25any of them. It's not obliged that you
24:27should use all three, but you can just
24:29adapt one of them. That is the standard
24:31has provided these three as
24:32alternatives. So, you can choose any of
24:34the approaches to value fair value your
24:37asset. Now, the income approach.
24:39With the income approach, the valuation
24:42is based on financial forecast.
24:48Valuations are based on financial
24:51forecast. So, you look at the how much
24:56money the asset is going to generate for
24:58you in the
25:00in the end or by the end of its useful
25:02life. So, if you have 10 more years to
25:04use the asset, you can do a financial
25:07estimate of annual um cash flows that is
25:10going to be generated by the asset. And
25:12then based on that, you can discount it
25:14like the value in use and then you use
25:16that as the income approach. So, the
25:20income approach is based on financial
25:22forecast.
25:23Fair value measurements are based on
25:25financial forecast. That is the income
25:27approach. So, these are three approaches
25:30to determining the fair value of an
25:32asset or liability. You can use the
25:33market approach, the cost approach, or
25:36the income approach. I am sure this is
25:39very understandable up to this point.
25:42Okay. Now, what we are going to do is
25:44that we are going to define what what an
25:46active market is. And what is an active
25:48market? And then we will look at
25:50the measurement of fair value in
25:54practice before we look at the question.
25:56We are going to zoom into the practical
25:59measurement of fair value. Okay,
26:01measurement of fair value itself. Where
26:03we are going to look at the level one,
26:05level two, level three input. But before
26:07that, let us define an active market.
26:10Once we are able to define an active
26:11market, it will help us in the
26:13measurements that we are going to do.
26:14So, what is an active market?
26:17What is an active market?
26:19You can see that on your screen.
26:22An active market is a market
26:25in which transactions for the asset or
26:27liability take place
26:29with sufficient frequency and volume to
26:32provide pricing information on an
26:35ongoing basis.
26:36I repeat.
26:38A market in which an active market is a
26:40market in which transactions for the
26:42asset or liability take place
26:44with sufficient frequency
26:47and volume
26:49to provide pricing information on an
26:51ongoing basis. So, what we are trying to
26:54say is that before we call a market an
26:56active market, then there is a
26:59high frequency or an an acceptable level
27:04of frequency of similar transactions of
27:06the sale of the asset or liability. And
27:08not only about the frequency, but the
27:11volume as well. Sufficient frequency and
27:13sufficient volume. So,
27:16I mean, there are goods on the market
27:18and then it also happens on a regular
27:21basis. The sale of the asset and the
27:23purchase of the asset is ongoing on the
27:25market. We call it an active market
27:29because it is easier to determine the
27:32pricing average always on the market.
27:34Once that the sale of the asset or
27:36liability is ongoing
27:38on the market at a sufficient frequency
27:41and volume, then it provides pricing
27:44information all the time on an ongoing
27:46basis. That is what an active market is
27:48all about. Let me read it again for you
27:50and then we zoom into the practical
27:52measurement.
27:53Now, an active market is a market in
27:55which transactions for the asset or
27:57liability takes place with sufficient
28:01frequency
28:02and volume to provide pricing
28:04information on an ongoing basis. So,
28:07this is an active market. Now,
28:11we are moving to measurement of fair
28:13value itself. You see, the topic is fair
28:16value measurement or that is the name of
28:18the standard. We have so far been able
28:21to define what fair value is. We have
28:23looked at the scope and the exclusions.
28:25We have looked at factors to consider
28:27when pricing. Now, we have looked at the
28:29approaches to measurement of fair value.
28:32Now, we are going to look at the
28:33measurement itself.
28:36The practical measurement of fair value.
28:38And then what some things that you need
28:40to consider in the measurement of fair
28:43value.
28:44Remember that for almost all the
28:46standards that we have done relating to
28:47assets and liabilities, we have looked
28:49at recognition criteria and the
28:51measurement criteria. Here, what we are
28:53going to look at is the measurement.
28:56The measurement criteria for fair value.
28:59So, measurement.
29:08Or let me say practical measurement.
29:11I'm just adding the practical though.
29:13It's not in the standard, but I am
29:15trying to let you understand what I mean
29:18because
29:19please pay attention. What I'm going to
29:20teach you here is what we are going to
29:22use to solve the question.
29:24And almost all the questions that come
29:25under fair value measurement will test
29:27you on this.
29:29Okay, so please pay attention.
29:31Now, from what we have studied so far,
29:34I'm sure you understand that fair value
29:36measurement is more of a market-based
29:38measurement, not necessarily an entity's
29:40own intuition or guesswork to put the
29:44value of an asset. It's market-centered.
29:46Okay? From all that we have done is
29:48because even with the even if it's not
29:50the market approach you're using, the
29:52cost approach has an element of market
29:54because you still need a pricing, okay?
29:57And the income-based approach is also
29:59having some market element because you
30:01sell to the market before you generate
30:02the income. So, the fair value
30:04measurement itself is market-based, and
30:07therefore we try to use more more of the
30:10observable inputs
30:13in putting in valuation of the
30:15of asset rather than the unobservable
30:18ones. Now, we have observable inputs and
30:21we have unobservable inputs. When we say
30:23observable inputs, we can look at the
30:25pricing and then the value of the asset
30:28for similar assets and all that. I'm
30:30coming there. And then we have
30:32unobservable inputs.
30:34Now, to make it easier, IFRS 13 has
30:39established a hierarchical order,
30:42or you call it a scale of preference,
30:45for putting or determining the fair
30:47value of an asset or liability. And so,
30:49they have established it as level one,
30:51level two, level three.
30:53So, I'm going to explain to you. It's
30:55very critical, and it's very technical
30:58as well. And so, I'm going to write the
31:00levels, but I'm going to also put them
31:02on your screens. We read what goes into
31:05each level, we discuss to understand
31:07before we solve a question. So that when
31:09we are solving a question, it will be
31:10easier for you to determine whether this
31:12statement is from level one or that
31:14statement is from level two or from
31:15level three. Now, they have established
31:17a hierarchical order, so we have level
31:21one inputs,
31:23and then we have level
31:25two
31:26inputs, and then we have level three
31:31inputs. Now, I have spaced them because
31:34when I need to write something related
31:36to them, I'll put them there down for
31:38you to see. But, I'm going to still put
31:40them on the screen so that we all look
31:41at it. I cannot write everything here,
31:43but we need to all read together so that
31:45we understand what they are trying to
31:47mean. Now, these are three levels: level
31:49one inputs, level two inputs, and level
31:51three inputs. When we are doing
31:53measurement of fair value,
31:55according to the standard,
31:58scale of preference, it means that
32:00preference must be given to level one
32:02input. When level one inputs are not
32:04there, then we value the asset or
32:06liability based on level two input. When
32:09level two inputs are not present, before
32:11we can opt for level three. In other
32:13words, level three input should never be
32:15used except there is no level one and
32:18level two input.
32:19I hope you are getting. I know you don't
32:22know the contents of the levels yet. I'm
32:23going to show you, but I want you to get
32:25this first. That level three input can
32:27only be used to fair value an asset or
32:29liability when there are no level one or
32:31level two inputs available. Now, level
32:34two input can only be used when there is
32:36no level one. Whenever there is a level
32:38one input, we always rely on a level one
32:40input and ignore the two and three input
32:42even when they are available. This is a
32:44scale of preference.
32:46And that is what has been established by
32:48IFRS 13. And this is the technical
32:50aspect that most of us do not
32:52understand. That is why we are not able
32:54to solve questions of IFRS 13. Now, when
32:57it comes to level one input, we are
32:59looking at observable. I told you that
33:01IFRS 13 is a market-based approach
33:04centered or sorry. IFRS 13 is a
33:07market-centered approach. Therefore,
33:10what it's trying to mean is that we
33:11should focus more on the observable
33:14inputs
33:16and then
33:17move away from unobservable.
33:20The level three inputs are purely
33:21unobservable. I'm going to show you.
33:24Level one and level two are observable.
33:26Level three is unobservable. So, let me
33:28just give you a hint that these ones are
33:30observable
33:32inputs.
33:39This is also
33:41mostly or largely observable,
33:44but this one is unobservable.
33:49Now, I want you to take note. Now, even
33:53though the first two are observable,
33:54I've said that priority is given to
33:56observable inputs than the unobservable
33:58ones. Even though both are observable,
34:01however, this one is observable in an
34:05active market. So, let us know before I
34:07explain. I think you are not getting me,
34:08so let me just Let's read what the
34:10provisions are in the standard. From
34:13there, I'll come back to explain to you.
34:15So, let's come to what is here. Now,
34:18so as you can see on your screen, there
34:20are three levels
34:22for the measurement. Level one inputs
34:24are
34:26quoted prices in active market for
34:28identical assets or liabilities that the
34:31entity can access at the measurement
34:34date. Now, these quoted prices are
34:37unadjusted, sorry. Unadjusted quoted
34:40prices in active market
34:44for identical assets and liabilities
34:48that the entity can access at the
34:51measurement date. The level one input is
34:53about quoted prices. So, if you want to
34:56price or find the fair value of this
34:58asset, you go to the market and find
35:01the quoted price of an identical. When
35:04we say identical asset, it means that it
35:06is the same type, the same brand,
35:09the same quality. Everything is the
35:12same. So, you go to the market and you
35:14find the quoted price unadjusted. So,
35:17when we say unadjusted quoted prices, we
35:19are trying to say that these prices are
35:21not adjusted adjusted based on the
35:24seller's preference, but these are the
35:26prices that are fair.
35:28That is supposed to be used or
35:31the standard price for all the the the
35:34identical asset. So, unadjusted quoted
35:36prices of identical asset in an active
35:41market. So, in this case, if the market
35:44is not an active one, then it will not
35:46be under level one input. So, before you
35:49call level one input an asset a level
35:52one input or you want to price or fair
35:55value your asset based on level one,
35:57then it means that you should get an
35:58identical asset in an active market, and
36:02you find the price unadjusted quoted
36:04price of an identical asset
36:08in an active market.
36:10In an active market. So, even if it's an
36:13identical asset, but not in an active
36:16market, it will come down to level two.
36:18So, the key thing is that there should
36:20be the quoted price unadjusted of
36:24an identical asset, not a similar. There
36:26is a difference between identical asset
36:28and a similar asset. Identical asset
36:30means everything is the same, including
36:32quality. A similar asset means that it
36:34looks like, but they are not the same.
36:37Okay? So, here we are not talking about
36:39similar asset because similar asset will
36:41come down to level two. So, level one
36:43inputs are quoted prices of identical
36:47asset in an active market, and the
36:49prices should not be adjusted. So, let
36:51us go back to the screen and read this.
36:53Level one input: quoted prices
36:55unadjusted in active market for
36:58identical assets or liabilities that the
37:00entity can access at the measurement
37:03date. So, this should be assets that the
37:05entity can get hold of today if they
37:07want. It's not a imaginary. So that when
37:11you say quoted price of an identical
37:13asset in an active market, today today
37:15if I want to go and buy it from the
37:17market, I can access it. That is what we
37:20mean by level one input. Now, it will
37:23make sense as we go on. Don't worry.
37:25Let's look at level two input.
37:27Level three input,
37:29look at what the standard is saying.
37:31Inputs other than quoted prices included
37:34within level one that are observable.
37:37So, it's also observable for the asset
37:39or liability either directly, that is in
37:42pricing, or indirectly derived from the
37:45pricing.
37:46This may include So, they are making it
37:48clear. This may include one, quoted
37:51prices for similar assets in active
37:53market. So, you see that quoted price
37:56for identical asset in an active market
37:58is a level one input, but quoted asset
38:01for similar prices
38:03similar. So, here we have
38:07quoted price for identical
38:11assets
38:13in an active market.
38:19The same thing comes here, but this time
38:22it is the quoted
38:25price of a similar
38:31asset also in an active market. So,
38:35there is a difference between identical
38:37asset and similar asset both in an
38:41active market.
38:44So, when it comes to level one, it
38:47should be the quoted price that is
38:48unadjusted of an identical asset in an
38:51active market. When it comes to level
38:53two, it's also observable. Observable
38:56quoted price of a similar asset also in
38:59an active We are not yet in an inactive
39:01market, too. We are still in an active
39:03market. However, the only thing that is
39:05changing here is that level one has to
39:07be an identical asset, level two has to
39:09be a similar asset.
39:11They are not the same. Now, let's look
39:13at the next one.
39:14So, we have quoted prices of similar
39:17assets in an active market. Then, quoted
39:19price for identical asset in less active
39:22market. So, you see that aside that
39:26quoted price of a similar asset in an
39:28active market comes to level two, we
39:30also have quoted price of the same
39:33identical asset, but now in a less
39:35active market. So, WHEN THE ASSETS ARE
39:38identical and the prices are quoted,
39:40please when you are reading the
39:41question, you need to be very careful
39:43because we are going to use this to
39:44advise company. Now if the quoted price
39:48of the identical asset is an is in an
39:50active market is a level one input.
39:55If it is in an inactive or a less active
39:58market it comes to level two. So we have
40:00quoted price
40:02of
40:04or an identical
40:08asset
40:09in
40:10a less
40:13active market.
40:15So this time around
40:17it is identical not similar but the only
40:20change is that level one is an active
40:22market level two is a less active or
40:25inactive market.
40:27It will make sense when we are solving
40:29the question after this. After this you
40:30are solving a question you understand.
40:32Then
40:34we look at the third one.
40:36On this one is also observable sorry.
40:39Observable input that are not prices
40:42such as interest rate. So here I told
40:45you that everything here is observable
40:47everything level two is also observable.
40:50Level one is observable level two is
40:52also observable. Here we are saying that
40:54observable inputs that are not prices.
40:58For example interest rates
41:00exchange rates. There are so many things
41:02that could affect pricing of an asset on
41:04the market. Most of them are economic
41:06factors. So observable
41:10inputs
41:12that
41:13are not
41:15prices. So you could see that all that
41:18we have already written are prices. This
41:20is a price. This is also price of
41:22similar asset. This is also price of
41:24identical everything we have looked at
41:26is about price price price. The first
41:28time we are coming to something that is
41:30not price is the third point under the
41:33level two input. Observable inputs that
41:36are not prices. For example interest
41:38rates.
41:40So those ones also affect the price of a
41:43market
41:45asset or liability.
41:47So this is a level one input this are
41:49level two inputs.
41:51When the question comes you'll be able
41:52to identify when to look at level one
41:55and level two. Now let's come to level
41:57three inputs which is the final one.
42:00Here
42:02the key word is that it is
42:04unobservable.
42:07So and we have said that the general
42:09rule is that we should focus more on the
42:11observable ones and pay less attention
42:13to the unobservable except the
42:15observable ones are not available. So
42:17here the key word is that is
42:19unobservable.
42:21So let's read.
42:24Unobservable input for the asset or
42:27liability.
42:29Example discounting estimate of future
42:32cash flows.
42:34So level three inputs are only used when
42:37relevant observable inputs are not
42:39available or where the entity determines
42:41that transactions price or quoted prices
42:44does not represent fair value. So we are
42:46saying that we only use the level three
42:48input when prices do not reflect fair
42:51values. Other than that we always have
42:54to give preference to and this one we
42:55are saying that it's unobservable input
42:58and they give an the standard give us an
43:00example of
43:01forecast
43:04future flows or forecast cash flows. So
43:07value in use can be used there. So I
43:10mean these are
43:12three levels. Now I'm going to solve a
43:14question with you right now
43:17and then it will help us to understand
43:19these three levels of input very well
43:21and how to
43:23do valuation for your
43:28fair value.
43:30So what we are going to do now is that
43:32we are going to take a very simple
43:33question that will introduce our
43:35understanding on this. Okay? So we solve
43:38that and then afterwards I'll introduce
43:40other concepts in the part two and then
43:42we'll solve complex questions. So this
43:44is a very simple question that is
43:46testing our knowledge on the levels of
43:48input for measurement. So let's begin.
43:53Dacra Limited has an investment property
43:56that is measured at fair value.
43:58This property is rented out on
44:01short-term lease.
44:03The directors wish to fair value the
44:06property by estimating the present value
44:08of the net cash flows
44:12that the property will generate for
44:14Dacra Limited.
44:16They argue that this is the
44:20They argue that this best reflects the
44:22way in which the building will generate
44:25economic benefits for Dacra Limited.
44:29The building is unique.
44:31Although there have been many sales of
44:34similar buildings in the local area.
44:37Required
44:39Discuss whether the valuation techniques
44:41suggested by the directors complies with
44:44international financial reporting
44:46standards. Now this is a very simple but
44:48tricky question.
44:50We are testing our knowledge on the
44:52levels of input and we are saying
44:53remember that we have said that to value
44:56any asset or liability you need to give
44:59preference to level one input. When
45:01level one inputs are not available then
45:03you move to level two input. When level
45:05two inputs are not available before you
45:07consider level three. Now going back to
45:10the question we are told
45:12Dacra has an investment property
45:14that is measured at fair value.
45:17This property is rented out on
45:19short-term leases. So that is
45:21introduction. Now this next point is
45:24important.
45:25The directors wish to fair value the
45:27property by estimating the present value
45:30of the cash net cash flows that the
45:33property will generate for Dacra
45:34Limited. So they want to fair value this
45:37asset by estimating the present value of
45:40the net cash flows.
45:42What level of input is this?
45:45This is a level three input. This is an
45:47unobservable you cannot observe it is
45:49just an estimate. You don't know how the
45:51future cash flows will be and we are
45:53saying that that is a level three input.
45:54Anytime they try to estimate a forecast
45:57of future cash flows like we said it's a
45:59level three input. And so they can only
46:02do that when level one and level two
46:04inputs are not available. But are they
46:05not really available? Let's continue to
46:07read. So that is what they have chosen
46:10and your job is to advise the company.
46:12So you need you need to explain to the
46:14company and that is normally how these
46:16standards questions are given.
46:19Now let's continue reading.
46:21They argue that this best reflects the
46:24way in which the building will generate
46:25economic benefits for Dacra Limited. So
46:27you see the argument.
46:32The last sentence is very important. I'm
46:34going to show you some two important
46:37things from the last sentence here. Now
46:39the building is unique comma although
46:42there have been let me pause there. The
46:44building is unique. Now listen
46:46carefully.
46:48When we say the building is unique it
46:49means there there are no identical
46:51buildings anywhere.
46:53And remember that for level one input
46:55there there there should be identical
46:59buildings that have quoted prices that
47:01are unadjusted. But once the question
47:03says the building is unique it means
47:05there are no identical assets anywhere
47:08as or anywhere close to where we are.
47:10And once there are no identical assets
47:12it means there are no level one input
47:14here. There is no level one input. Take
47:16note.
47:17Once look at what they are saying the
47:19building is unique. And once the
47:21building So here you need to really
47:23understand that once you see a unique
47:25building if there are identical ones on
47:28an active market then it's not unique.
47:30So the moment you are told that the
47:32building is unique it means there are no
47:33identical buildings in the active
47:35market. So level one input is out now.
47:38Now remember that the directors are
47:40proposing to use a level three input as
47:43a means of doing the valuation but we
47:45don't have a level one input now. Do we
47:47have a level two? If we don't have a
47:49level two they are justified. But if we
47:51have a level two then we need to switch
47:54and advise them. So let's continue
47:55reading again.
47:57The building is unique although there
48:00have been many sales of similar
48:02buildings in the local area.
48:05There have been sales of similar
48:07buildings. The sale of similar buildings
48:10is what? A level two input. So we need
48:12to now go and find a price that was used
48:15to sell those similar. Remember that I
48:17have told you from what I explained that
48:18there is a difference between identical
48:20and similar. Identical is a level one
48:22input similar is a level two input. So
48:25therefore once there is a level two
48:27input how are you going to advise the
48:29directors? So you start your write-up by
48:32saying that because the building is
48:34unique please don't just say they should
48:36use level two because they are similar.
48:38You need to build your point. This is a
48:40standard question I've told you. So you
48:42need to write English. So you start by
48:44saying that because the building is
48:46unique in your exam or answer booklet
48:49when you are writing the exam. Because
48:51the building is unique it means that
48:53there are no identical buildings on the
48:55market. Therefore level one inputs are
48:58absent.
49:00Then
49:01because there are similar buildings on
49:04the market it means that there are level
49:06two inputs present and therefore the
49:08company or the directors can go and find
49:11prices of the similar
49:14buildings that were sold and then use
49:16that price as a valuation. Now the
49:18alternative that you are I'm showing you
49:21how to write your answer. The
49:22alternative that has been adopted by the
49:24directors is level three input. That is
49:28the forecasting of the cash flows and
49:30according to IFRS 13 level three inputs
49:33can only be used when there is no level
49:36one or level two inputs.
49:37So, therefore, because there are level
49:39two inputs in this question or present,
49:42then you advise the director to switch
49:45or move away from using the forecast
49:47cash flows, but rather using the prices
49:50of similar buildings that have been sold
49:52to do the fair value measurement, and
49:54then you can conclude. That is how you
49:56write your answer for this The question
49:58looks very small, but you need to touch
50:00on everything. So, when you get a
50:01question, my advice is that whether
50:03there are level one or not or level two
50:05or whatever. You need to touch on every
50:07level. If there are no level one, write
50:09that there are no level one. And what
50:11should have been the case if there was
50:12level one. So, indirectly, you are
50:14writing the rules. If there is no level
50:16two input, write and what you think
50:18should have been if there was. If there
50:20is, you show. If there is level three,
50:22you tell us and tell us why they cannot
50:25use or why they can use because you are
50:27always standing in an advisory position
50:29when it comes to fair value measurement.
50:32I hope you understand this very well.
50:34Okay, so, this will bring us to the end
50:36of part one of our video on IFRS 13. In
50:40the part two, we are going to look at
50:41other concepts like principal markets,
50:44advantageous markets, and then we solve
50:46a question relating to that, and then
50:48we'll come back and then now solve other
50:50complex questions relating to IFRS 13.
50:54Remember to subscribe to this channel if
50:56this is your first time. Share this
50:57video and let others also have a
50:59benefit. And until we meet again for the
51:01part two, it's bye for now. Thank you.

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Use the transcript to take notes, quote the speaker, build a study guide, generate a summary with ChatGPT or Claude via the YouTube Summary tool, or export it as a timed subtitle file with YouTube to SRT. You can also re-open it in the transcriber to choose a caption track available on the video.

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YouTube2Text is a free YouTube transcript generator — no signup, no daily limit. Paste any YouTube link and get the full transcript instantly, with timestamps, click-to-jump, caption language selection, AI prompts for ChatGPT, Claude, and Gemini, and exports to TXT, SRT, VTT, or Markdown.