What are the valuations techniques that can used to determine fair value?
IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except for: [IFRS 13:5-7] Show
Additional exemptions apply to the disclosures required by IFRS 13. Key definitions[IFRS 13:Appendix A] Fair valueThe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement dateActive marketA market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basisExit priceThe price that would be received to sell an asset or paid to transfer a liabilityHighest and best useThe use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be usedMost advantageous marketThe market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costsPrincipal marketThe market with the greatest volume and level of activity for the asset or liabilityFair value hierarchyOverview IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. [IFRS 13:72] If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the fair value measurement is categorised in its entirety in the level of the lowest level input that is significant to the entire measurement (based on the application of judgement). [IFRS 13:73] Level 1 inputs Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. [IFRS 13:76] A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions. [IFRS 13:77] If an entity holds a position in a single asset or liability and the asset or liability is traded in an active market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity, even if the market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. [IFRS 13:80] Level 2 inputs Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. [IFRS 13:81] Level 2 inputs include:
Level 3 inputs Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86] Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available. [IFRS 13:87-89] Measurement of fair valueOverview of fair value measurement approach The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. A fair value measurement requires an entity to determine all of the following: [IFRS 13:B2]
Guidance on measurement IFRS 13 provides the guidance on the measurement of fair value, including the following:
Valuation techniques An entity uses valuation techniques appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. [IFRS 13:61, IFRS 13:67] The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants and the measurement date under current market conditions. Three widely used valuation techniques are: [IFRS 13:62]
In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation techniques will be appropriate. [IFRS 13:63] DisclosureDisclosure objective IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both of the following: [IFRS 13:91]
Disclosure exemptions The disclosure requirements are not required for: [IFRS 13:7]
Identification of classes Where disclosures are required to be provided for each class of asset or liability, an entity determines appropriate classes on the basis of the nature, characteristics and risks of the asset or liability, and the level of the fair value hierarchy within which the fair value measurement is categorised. [IFRS 13:94] Determining appropriate classes of assets and liabilities for which disclosures about fair value measurements should be provided requires judgement. A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position. The number of classes may need to be greater for fair value measurements categorised within Level 3. Some disclosures are differentiated on whether the measurements are:
Specific disclosures required To meet the disclosure objective, the following minimum disclosures are required for each class of assets and liabilities measured at fair value (including measurements based on fair value within the scope of this IFRS) in the statement of financial position after initial recognition (note these are requirements have been summarised and additional disclosure is required where necessary): [IFRS 13:93]
'*' in the list above indicates that the disclosure is also applicable to a class of assets or liabilities which is not measured at fair value in the statement of financial position but for which the fair value is disclosed. [IFRS 13:97] Quantitative disclosures are required to be presented in a tabular format unless another format is more appropriate. [IFRS 13:99] Effective date and transition[IFRS 13:Appendix C] IFRS 13 is applicable to annual reporting periods beginning on or after 1 January 2013. An entity may apply IFRS 13 to an earlier accounting period, but if doing so it must disclose the fact. Application is required prospectively as of the beginning of the annual reporting period in which the IFRS is initially applied. Comparative information need not be disclosed for periods before initial application. What are the valuation techniques for fair value measurement?The Standard notes that there are three widely used valuation techniques: the market approach, the cost approach and the income approach (table no. 1). These techniques are consistent with the going-concern assumption and they may be used for fair value measurement of entities or specialized assets and liabilities.
What are the 3 approaches of valuation the fair value?There are three approaches to valuing a company: the asset approach, income approach, and market approach. Within each approach, there are several commonly accepted methods that the valuator may choose to employ in valuing the business.
What are some valuation techniques?Methods of Valuation. Market Capitalization. Market capitalization is the simplest method of business valuation. ... . Times Revenue Method. ... . Earnings Multiplier. ... . Discounted Cash Flow (DCF) Method. ... . Book Value. ... . Liquidation Value.. What are the 5 methods of valuation?This module examines the traditional property valuation methods: comparative, investment, residual, profits and cost-based.
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