The Financial Reporting Workshop Comfy Hotel, Eldoret November 10, 2014

1. The Financial Reporting Workshop Comfy Hotel, Eldoret November 10, 2014 Fair Value Measurement- IFRS 13 ICPAK

2. Introduction • Sets out in a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. • It does not introduce any new requirements to measure an asset or a liability at fair value, change what is measured at fair value in IFRSs or address how to present changes in fair value. • IFRS 13 is effective from 1 January 2013. Early application is permitted. ICPAK

3. Old definition of Fair Value The old definition of fair value Its weaknesses The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. It did not specify whether an entity is buying or selling the asset. It was unclear about what settling meant because it did not refer to the creditor. It was unclear about whether it was market-based. It did not state explicitly when the exchange or settlement takes place. ICPAK

4. Fair Value Definition 4 4 4 • Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction (not a forced sale) between market participants (market-based view) at the measurement date (current price). • Fair value is a market-based measurement (it is not an entity-specific measurement) • Consequently, the entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. IFRS 13 Fair Value Measurement ICPAK

5. Assets: Classification, recognition and measurement 5 5 CM or RM CM or RM Nil Cost Cost Nil Lower of C or NRV some FVM CM or FVM PP&E Intangible Cost Cost Inv Property Inventory Assets Financial Etc Fair value Biological assets Defined Benefit Various AmC or FVM Various Fair value less costs to sell FV plan assets less PUC plan obligation & arbitrary rules FV plan assets less PUC plan obligation & arbitrary rules Fair value less costs to sell ICPAK

6. ICPAK

7. Application guidance 7 • When measuring fair value use assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. • Characteristics of a particular asset or liability that a market participant would take into account when pricing the item at the measurment date, include: • age, condition and location of the asset • restrictions on the sale or use. ICPAK

8. Transaction and Price 8 8 • Measured using the price in the principal market for the asset or liability (ie the market with the greatest volume and level of activity for the asset or liability) or, in the absence of a principal market, the most advantageous market for the asset or liability. ICPAK

9. Non-financial assets 9 9 • Must reflect the use of a non-financial asset by market participants that maximises the value of the asset • physically possible • legally permissible • financially feasible • Highest and best use is usually (but not always) the current use. ICPAK

10. Measurement The Concept of highest and best use Reconsider methods, assumptions , processes / procedures Under IFRS 13, an entity’s current use of an asset is generally taken to be its highest and best use, unless market or other factors suggest that a different use of that asset by market participants would maximise its value. If such factors exist, management is required to consider all relevant information in determining whether the highest and best use of a property is different from its current use at the measurement date. ICPAK

11. Measurement Highest and best use non financial assets • “A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. ICPAK

12. Measurement Highest and best use for non-financial assets • Fair value considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use. • Highest and best use considers a use that is: • Physically possible • Legally permissible –Town and Country Planning Act • Financially feasible • Highest and best use is always considered when measuring fair value, even if the entity intends a different use. ICPAK

13. Measurement Highest and best use for non-financial assets (cont.) Can be either:(valuation premise) • On a stand-alone basis • In combination with other assets • Assumed the complementary assets are available to market participants • Assumptions must be consistent for all assets of the relevant group ICPAK

14. Measurement Example : highest and best use • Land acquired in a business combination is currently developed for industrial use as a site for a manufacturing facility. Nearby sites were recently developed for residential high-rise flats. It was determined that the land could be used to develop residential high-rise flats. • How is highest and best used determined? • In this case, the highest and best use is determined from the higher of: • The value of the land used in the manufacturing operation • The value of the land as a vacant site for residential use • Note that transformation costs (e.g., costs to demolish the manufacturing facility) would be considered in the value of land as a vacant site. ICPAK

15. Measurement Valuation techniques • Use valuation techniques that: • Are appropriate in the circumstances • Have sufficient available data • Maximise use of relevant observable inputs • Minimise use of unobservable inputs • IFRS 13 describes three valuation techniques • Market approach (prices and other information for identical or comparable assets) • Income approach (present value i.e discounted future cash flows; option pricing models e.g Black Scholes Merton or binomial; excess earnings) (IFRS 13) • Cost approach (current replacement cost) • One or several valuation techniques might be used • If a range of values are indicated, select the point within that range most representative of fair value ICPAK

16. Measurement Valuation techniques (cont.) • Apply valuation techniques consistently • Change in valuation technique needed if: • New markets develop • New information becomes available • Information previously used is no longer available • Valuation techniques improve • Market conditions change • Change in valuation technique = change in estimate ICPAK

17. The fair value hierarchy Is there a quoted price in an active market for an identical asset or liability? (Level 1 input) Yes No Are there any observable inputs* other than quoted prices for an identical asset or liability? Use the Level 1 input = Level 1 measurement Must use without adjustment Yes No * Maximise the use of relevant observable inputs. Observable inputs include market data (prices and other information) that is publicly available ‡ Unobservable inputs include the entity’s own data (eg budgets, forecasts), which must be adjusted if market participants would use different assumptions No use of significant unobservable (Level 3) inputs‡ = Level 2 measurement Use of significant unobservable (Level 3) inputs‡ = Level 3 measurement ICPAK

18. Disclosure 18 18 • Information about an entity’s valuation processes is required for fair value measurements categorised within Level 3 of the fair value hierarchy. • A narrative discussion is required about the sensitivity of a fair value measurement categorised within Level 3. • Quantitative sensitivity analysis is required for financial instruments measured at fair value. ICPAK

19. Judgements and estimates 19 19 • An entity must take all information that is reasonably available to search for a principal market. • determining fair value and the highest and best-use.for a non-financial asset. • Assumptions that a market participant would use (including assumptions about risk). • Determining the correct valuation technique to use and the inputs to the techniques, particularly on the income approach, require a wide range of estimates as: • discount rates • future cash flows • risks and uncertainty ICPAK

20. Judgements and estimates Cont… 20 20 • The inputs used in the valuation techniques should primarily be based on observable inputs (where possible) to minimise the use of unobservable inputs. ICPAK

21. Thank you ICPAK 21