IFRS No. 13 Fair value measurement (nuances)

Fairness in pricing is a somewhat ambiguous term. Correct assessment of a company's assets is very important for many aspects of its activities. It is important that the assessment is not only correct, but also meets the requirements for a particular asset, because they can be different. Each method of determining value has its own characteristics and scope of application, which does not always allow anyone interested in this information to draw an unambiguous conclusion. A fair assessment may be a way out of the situation.

How this type of asset valuation differs from others, what its characteristic features are and, in general, how to deal with fair value, we analyze in this article.

What are the problems in the practical application of fair value for the valuation of accounting objects? View answer

Fair value as an economic concept

Asset valuation is needed in many business situations. It must reliably reflect the state of affairs at the current time, although the market situation is constantly changing. The results of the assessment should be easily interpreted in relation to the interests of different categories of persons. You can evaluate different fixed assets:

• individual objects;
• assets;
• obligations.

IMPORTANT! The determination of fair value has no connection with the mandatory valuation provided for by law and regulations in certain cases, such as, for example, privatization or non-cash contribution to the authorized capital. The state does not regulate fair assessment procedures.

Fair value is the amount that theoretically interested parties can pay for assets or liabilities (IFRS Standard 13).

Fair value characteristics:

• a specific object is assessed;
• categories of this object that are important for market participants are taken into account (for example, the place, time of the transaction, the condition of the asset, the credit risks of the debtor for the obligation);
• Fair valuation is affected by possible restrictions on the sale or purchase of the asset or its use.

Fair, liquidation and collateral value: how do these concepts relate ?

Purpose of using fair value

Reflection in reporting according to international standards (IFRS) of the actual current price of the company’s assets and liabilities is necessary for:

• activities in international markets;
• attracting foreign investors;
• lending from foreign banks;
• creation of joint ventures;
• acquisitions and mergers;
• increasing the cost of capital of the company.

Fair value measurement in accordance with International Financial Reporting Standards .

Changes in approach choice

According to paragraph 65 of IFRS 13, valuation methods (approaches) used to determine fair value must be applied consistently in each reporting period. However, using a different approach or changing the application of an old approach is acceptable if the change results in a more accurate and appropriate measurement of fair value in the circumstances. Such a need may arise, for example, when new markets emerge, new information appears, or market conditions change. Changes resulting from the application of a different measurement method are accounted for as changes in accounting estimates in accordance with IAS 8.

In conclusion, it is important to reiterate that the selection and proper use of a fair value measurement method requires a high level of valuation skill, in-depth knowledge of the asset, liability or business being valued, and extensive exercise of professional judgment. Therefore, it is advisable to involve professional appraisers when assessing expensive assets, liabilities or businesses. Also, other departments of the company should take part in the assessment process, depending on its structure - for example, the department responsible for the acquisition of assets and development of the company, budget and other departments.

When does fair value apply?

Clause 1 Art. 11 of the Federal Law of the Russian Federation dated November 21, 1996 No. 129-FZ “On Accounting” as amended on March 28, 2002 approves the parameters for assessing assets for entering them on the balance sheet separately for each type. For assets acquired for compensation, you must apply:

• measurement at fair value if the asset was paid for in non-cash form;
• market valuation - for standard purchase and sale.

A more accurate translation from the IFRS Standard from English into Russian would be to use the word “measurement” instead of “assessment”, since we are initially talking about non-financial assets.

IMPORTANT! If the value of non-monetary assets transferred as payment for an asset cannot be estimated, a fair valuation will become difficult, then they will have to be valued at current market value.

Fair or market value?

These concepts are largely similar; sometimes a fair valuation coincides with the market value (for example, for real estate, land plots, equipment). Market value is most often considered the most expected price that would be paid for it in the presence of free competition.

However, there are significant differences between these concepts. Let's compare fair and market values ​​using different indicators in the table. In this case, other conditions will be considered equal by default:

• awareness of the seller and buyer of the asset;
• they make a transaction of their own free will, without coercion;
• Their market positions are approximately equal.

Determination of the market and fair value of the collateral property

Today, credit institutions are increasingly faced with the need to evaluate collateral and find its market and fair value. To minimize risks when lending against collateral, it is necessary to develop and implement measures to evaluate the collateral, which in the future, under unfavorable circumstances, may become compensation. Also, an acute issue of valuation arises when revaluing fixed assets, since in Appendix 9 to the Regulation of the Central Bank of the Russian Federation dated July 16, 2012 N 385-P “On the rules of accounting in credit institutions located on the territory of the Russian Federation” (hereinafter referred to as Regulation N 385- P) states that a credit institution has the right no more than once a year (at the end of the reporting year (as of January 1 of the year following the reporting year (hereinafter referred to as the new year)) to revalue groups of similar fixed assets at current (replacement) cost in accordance with the legislation of the Russian Federation.

This raises questions: how does the current value differ from the market value and is it possible to independently determine the market value?

Despite the importance of this topic, the Central Bank of the Russian Federation does not provide practical recommendations on this issue. Therefore, banks have to rely on accumulated practical experience.

First, let's understand the various concepts of value that arise during valuation.

The current (replacement) cost of objects is the amount of money that must be paid by a credit institution on the date of revaluation if it is necessary to replace any object (Regulation No. 385-P).

Market value is the most probable price at which the valuation object can be alienated on the valuation date on the open market in a competitive environment, when the parties to the transaction act reasonably, having all the necessary information, and the transaction price is not affected by any extraordinary circumstances (federal standard estimates N 2).

Fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13).

It can be concluded that the market and current values ​​are identical. However, there is a difference between fair and market value: market value is not always possible to determine, but fair value, on the contrary, can be determined in all cases.

Let us consider this issue based on the approaches used in the activities of appraisers.

There are three approaches: cost, income and comparative (market).

When writing a methodology for assessing market value, the bank must find a middle ground between the required labor costs and the objectivity of the results. Let us analyze these approaches in order.

It is based on cost. First, information is collected about the internal structure of the object, its structure and composition of the main elements. The object is further divided into elements that can be assessed separately. At the last stage, the previously obtained costs of the elements are summed up and the cost of the object is derived. Information for calculating market value using the cost approach depends on the type of valuation object, for example, for real estate - preserved estimates of construction work, market prices for building materials, wages of builders, equipment costs, etc. This approach is labor-intensive, which makes the use of a cost-based approach to assessing the value of property almost impossible for bank employees. However, the use of a cost approach to assessing the value of property is justified in cases where the use of a comparative approach is impossible or the possibility of its application is limited. However, such collateral is quite rare, for example, a small sawmill complex in the taiga.

The approach is based on the expected income from the use of the property being assessed. To begin with, the sum of all receipts from the valued object is calculated, which is adjusted for all possible shortfalls. Then we subtract the expenses associated with the object of evaluation and obtain net income, which, in turn, is converted into the current value. Information for calculating market value using the income approach depends on the type of valuation object, for example, for real estate, the average market rental rate for similar objects is required. The analyzed approach is most relevant when assessing intangible assets. The income approach can be applied to the valuation of collateral property under certain conditions: the property is income-generating; this property is liquid, i.e. the presence of sufficient grounds to believe that the corresponding collateral can be sold within a period not exceeding 180 calendar days from the moment the basis for foreclosure on the collateral arises (Chapter 6 of the Regulations of the Central Bank of the Russian Federation dated March 26, 2004 N 4 “On the procedure for the formation by credit institutions of reserves for possible losses on loans, on loan and similar debts”).

If we talk about collateral, then most often the bank has real estate, vehicles and standard equipment as collateral, so the need for the above approaches may rarely arise.

The approach is based on bringing comparable parameters of analogues to the parameters of the object being assessed. The number of necessary analogues depends on the object of assessment, preferably at least three objects. The reduction of object parameters can be percentage or cost. Information for calculating market value using a comparative approach is taken from the purchase and sale market; You must take at least three trades. This approach is the most universal, easy to use, and informative, because it makes it possible to study the current liquidity of the valuation object to a greater extent, since the value is determined based on a comparison of transactions.

Applying the calculation of all three approaches to assessing collateral is most often not optimal from the point of view of labor costs. However, to determine the cost of fixed assets, on the contrary, the use of all approaches is highly effective, since we have complete information for the assessment.

Example 1

Let us calculate the cost using a comparative approach (sales comparison method) of the most popular collateral - office space, which is the property of part of a separate building with a total area of ​​56.2 square meters. m (located on the 5th floor of a 7-story building, in good condition).

The calculation consists of three stages:

1) market analysis and selection of analogues of the object being assessed;

2) adjusting the parameters of analogues to the parameters of the object of evaluation;

3) calculating market value using adjusted values.

At the first stage, a search for analogues of the object of evaluation is carried out on advertisement sites, databases of real estate companies, and in any other source in which advertisements for purchase and sale are posted. The analogue is found according to the following principles:

• properties put up for sale as close as possible to the date of the property valuation, no more than six months from the date the advertisement was posted;
• the object should not differ in area from the object being assessed by more than three times;
• the object should not have large differences in price per 1 sq. m - more than 50% of the minimum price.

At the second stage, the following adjustments are calculated:

• adjustment to date of sale;
• location correction;
• adjustment for the technical condition of the premises’ finishing;
• adjustment to the volume of transferred rights to the property;
• adjustment for terms of sale;
• adjustment to floor location;
• area correction;
• adjustment to the purpose of the object.

At the third stage, the market value of the object is calculated.

The adjusted value is taken as the market value of one square meter of the valuation object. Next, the market value is adjusted for a discount upon sale, the so-called bargaining. The generally accepted size of this adjustment is 5%.

On the “sell-buy” advertisement site, five analogues for our object of evaluation were found. The object being assessed is quite popular on the market, so there were no difficulties with analogues:

— 1st office — 4900 thousand rubles, area 69.4 sq. m, in good condition, on the 4th floor of a 6-storey building;

— 2nd office — 2450 thousand rubles, area 35 sq. m, in excellent condition, on the 4th floor of a 5-story building;

— 3rd office — 4098 thousand rubles, area 68.3 sq. m, in poor condition, on the 6th floor of a 7-storey building;

— 4th office — 3296 thousand rubles, area 41.2 sq. m, in good condition, on the 5th floor of a 6-storey building;

— 5th office — 3536 thousand rubles, area 41.6 sq. m, in good condition, on the 2nd floor of a 6-storey building.

We make the following adjustments to the prices of analogues:

- area correction. Let us construct an equation for the dependence of the cost of 1 square meter on the area of ​​the room; for this we need to consider new offers on the market and construct an equation for the dependence. We correct the second, fourth and fifth analogues with a minus sign. This adjustment is very labor-intensive, so it is more profitable to select more identical analogues;

— an adjustment for the technical condition of the room’s finishing, which is calculated by direct analysis of the characteristics. First, we are looking for a company engaged in repairs, we find out the average cost of repairs for 1 sq. m. m. We correct the second and fourth analogues (2500 rubles per 1 sq. m).

For convenience and speed, we will compile and fill out a table (see Table 1).

Fair value calculation

The fair value standard divides the information on which it is based into three levels.

Level 1, market. The most reliable and obvious. A non-financial asset is valued at the same value in an active market at a given point in time (the moment of valuation).

Level 2, adjustment. When an asset or liability is not constant, but relates to a certain period, then its value can only be determined during this period by comparing it with current quotes. Therefore, the fair value will no longer be unconditional, but adjusted for time, place, condition of the asset and market characteristics.

Level 3, unobservable. Sometimes the data to determine the value of an asset or liability cannot be determined directly (they are unobservable); in this case, it is necessary to analyze the maximum available information about the asset.

A fair valuation of an asset will fall into one of these levels:

• the first level determines the undoubted assessment;
• the second and third require additional methods of evaluation and conditioning of choice;
• at the third level, it is necessary to provide information accompanying the assessment: changes in the reporting period, the amount of costs and profits on this asset for the assessed period, a description of the assessment process.

How to account for acquired claims measured at fair value?

Choosing an approach to measuring fair value

1. Comparison with similar assets on the market according to defining indicators: during the period under evaluation, in the same volume, etc.
2. The discounted cash flow method is to determine the ability for a stable profit from an asset in the forecast for the estimated period.
3. Cost method - based on the analysis of the latest balance sheet values.

Choosing an approach to measure fair value

When choosing one approach or another to measure fair value, the following factors must be considered.

First, the decision to choose an approach depends on the nature of the object being assessed.

Second, the company must consider the advantages and disadvantages of each approach, as well as the level of assumptions involved. For example, the assumptions used in one approach may be more objective due to the use of market indicators or require fewer subjective adjustments than in another approach.

Third, it is advisable for a company to use multiple approaches to estimate fair value and compare the results obtained across multiple approaches. Using at least two approaches when estimating fair value allows for additional verification of the results obtained and a more accurate estimate of fair value. If a company has used multiple approaches and obtained significantly different results, it may mean that the company made an error in the calculations or in the assumptions used in the calculations and needs to conduct additional analysis. Typically, if a company uses the correct data and assumptions to calculate fair value under the market approach and the income approach, the results obtained are within approximately the same range.

Example 4 Choosing an approach for valuing fixed assets

The Company conducts an annual impairment test for property, plant and equipment. The equipment the company is testing was purchased from an external supplier but was later reconfigured for production use. The reconfiguration did not lead to significant changes in the technical characteristics of the equipment, and the equipment can be easily returned to its original state.

Analysis

When choosing valuation methods, the company concludes that it has enough data to evaluate the equipment using a cost approach. In addition, the company decides to take a market approach since the equipment can be easily returned to its original condition. The company cannot apply the income approach because the equipment does not generate separately identifiable cash flows.

The cost approach determines the cost of replacing similar equipment in a given industry, taking into account physical, functional and economic wear and tear. The fair value of the equipment using the cost approach amounted to RUB 520 thousand.

The market approach determines the cost of equipment using market prices for similar equipment and adjusting for differences in equipment settings. Fair value reflects the price that an entity could receive for the equipment in its current condition and location (installed and configured for use), thereby including installation and transportation costs in the calculation. The fair value of the equipment using the market approach was RUB 480 thousand.

Conclusion

Based on the results of a comparison of the two approaches, the company decided that the fair value obtained using the market approach was more appropriate, since the main assumptions of this approach were based on market data (for example, prices for similar equipment), required less subjective estimates, and also included in-depth analysis of comparable equipment. The company determined that the fair value of the equipment being valued was RUB 480 thousand.

Example 5 Choosing an approach for valuing intangible assets

The Company conducts an annual impairment test for a group of intangible assets. This group includes software that was specifically developed for the company by an external supplier.

Analysis

When choosing valuation methods, the company decided that it had enough data to evaluate the software using both the revenue and cost approaches. The market approach cannot be applied, since the software was developed specifically for the company and there are no comparable analogues on the market.

The income approach determines the value of the asset being valued by discounting future cash flows. The cash flows involved in the calculation represent the future revenues that the company expects to receive from using the software over its useful life. The fair value of the software under the income approach was RUB 150 thousand.

The cost approach determines the cost of replacing (recreating) similar software in a given industry, taking into account physical, functional and economic wear and tear. The fair value of the software using the cost approach was RUB 100 thousand.

Conclusion

Although the cost and income approaches were chosen to determine the fair value of the software, the company determined that the cost approach did not comply with the requirements of IFRS 13, which requires that the estimates and assumptions the company uses in its calculations should be available to any market participant when determining the price of an asset or liability. Since the software was developed specifically for the company and contains unique functions and properties, a market participant will not be able to independently determine the replacement cost of a similar asset. Therefore, the company determined that the fair value of the software should be determined using the income approach. And that means it will be 150 thousand rubles.

Examples of fair value applications

Example 1. A woodworking company currently has an abundance of boards. She is in dire need of milling equipment and has agreed to exchange it for surplus raw materials. How to determine the amount that needs to be transferred as payment for the machine? To do this, you need to “add the price” of this asset. This would be his fair assessment. To evaluate, you need to take into account the cost of raw materials for this particular company. If the company has regular suppliers, then the fair value will be the sum of the costs of purchasing a batch of boards of similar size from these suppliers. In fact, this will be the quantity that the owner of the milling equipment will agree to accept in exchange.

Example 2. Company 1 has a stake in company 2, which is not currently operating. Previously, they were highly valued on the market. At what price can the company sell them now? A fair valuation does not depend on the previous, no longer current quotes (market valuation), but on other factors, in particular, whether firm 2 is going to resume its activity and how successful the forecasts are.

Example 3. A company is going to enter into a transaction with specialized property - part of the enterprise’s property complex. Such property is almost never sold separately on the market, so fair value will have to be determined differently from market value.