News regarding the measurement of fair value for financial reporting according to IFRS

In the meeting held on March 2013 IASB discussed about measuring the fair value, and also about other bases of value measurement, namely measuring the value using cash flows.

Fair value measurement – about the reporting unit

IASB discussed about the reporting unit regarding  investments in subsidiaries, joint ventures and associated entities. IASB has received two letters in which the question is whether the reporting unit for such investments is considered to be an investment as a whole, or individual financial instruments that make up the investment. IASB also discussed the interaction with the unit reporting these investments and their fair value measurement. IASB decided provisionally that reporting unit for investments in subsidiaries, joint ventures and associates is investment as a whole. New members IASB agreed.

IASB decided provisionally that the fair value measurement of financial instruments comprised of quoted investments should be equal with the offer price of the financial instrument (P) and quantity (Q) of securities held (i.e. P × Q). IASB noted that the prices quoted in an active market provides the most reliable evidence of fair value. Eight members of the IASB agreed.

In the same way, the IASB has also decided provisionally that the fair value measurement of cash-generating units (CGUs) for impairment testing when these CGUs corresponds to a listed entity must be equal to the product of their price quoted (P ) and quantity (Q) of securities held (ie P × Q). Eight members of the IASB agreed.

Although eight IASB members supported this decision for measuring fair value, and the IASB two members expressed their intention to present an alternative view in future exposure draft project which will include such proposals.

Other bases of measurement value – cash flows

The IASB tentatively agreed that the Conceptual Framework discussion paper includes an analysis of the factors that should be considered when building a measurement technique based on the value of cash flows.

IASB suggested that these questions should be considered:

  1. Measuring value based on cash flows should reflect uncertainty about the amount and while achieving cash flow, or a single amount?
  2. Measurement obligations should reflect the possibility that an entity may not be able to pay its debts when they are due to its?
  3. Cash flows should be updated and, if so, at what rate or rates?
  4. Measurement value based on cash flows should reflect the amount that market participants would

require it to incur the risk posed by uncertain cash flows?

  1. Measurement value based on cash flows should reflect the effects of other factors, such as discounts for illiquidity or other discounts if they are identified?
  2. Estimates and assumptions underlying the estimate of cash flows should reflect the viewpoint of the reporting entity or prospects of market participants?
  3. All the above estimates should be updated at each reporting date or should some or all of them may not be current?

IASB Update (PDF)

*Hyperlink to: http://media.ifrs.org/2013/IASB/March/IASB-Update-March-2013.pdf

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