IFRS 13, or International Financial Reporting Standard 13, is a global accounting standard developed by the International Accounting Standards Board (IASB) that provides guidance on how to measure and disclose fair value in financial statements.

Fair value refers to the 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 date. IFRS 13 establishes a framework for determining fair value and sets out the disclosure requirements to provide users of financial statements with better information about the methods and assumptions used in estimating fair values.

PRICE: The determined price, known as an exit price, is based on the current market conditions at the measurement date. This price is not limited to being directly observable but can also be estimated using alternative valuation techniques.

ASSET OR LIABILITY: Fair value takes into account the unique aspects of an asset, including its condition and location, as well as any potential limitations on its sale.

TRANSACTION: The transaction is expected to occur in either the primary market, which is the market with the highest volume and level of activity, or in the event that there is no primary market, it will take place in the most advantageous market. This refers to the market that maximizes or minimizes the amount received or paid after considering transaction and transportation costs.

MARKET PARTICIPANTS: When determining the fair value of an asset or liability, we take into consideration the assumptions that market participants would use when pricing these items, assuming they are acting in their own economic best interest. It is important to note that the identification of market participants is not required.

There are many instances where IFRS requires or allows entities to measure or disclose the fair value of assets, liabilities or their own equity instruments. Examples include (but are not limited to):

  • IASs16/38 (PPE/Intangible Assets) – Allows the use of a revaluation model for the measurement of assets after recognition. Under this model, the carrying amount of the asset is based on its fair value at the date of the revaluation.
  • IAS40 (Investment Property) – Allows the use of a fair value model for the measurement of investment property. Under this model, the asset is fair valued at each reporting date.
  • IFRS9 (Financial Instrument) – All financial instruments are measured at their fair value at initial recognition. Financial assets that meet certain conditions are measured at amortized cost subsequently. Any financial asset that does not meet the conditions is measured at fair value. Subsequent measurement of financial liabilities is sometimes at fair value.
  • IFRS7 (Financial Instrument) – If a financial instrument is not measured at fair value that amount must be disclosed.
  • IFRS3 (Business Combination) – Measuring goodwill requires the measurement of the acquisition date fair value of consideration paid and the measurement of the fair value (with some exceptions) of the assets acquired and liabilities assumed in a transaction in which control is achieved.
  • IASs36 (Impairment) – Recoverable amount is the lower of value in use and fair value less costs of disposal.
  • IFRS5 (Non-Current Asset HFS)- An asset held for sale is measured at the lower of its carrying amount and fair value less costs of disposal.

EXAMPLE: Company ABC has a factory building that it classifies as a fixed asset. The building was acquired 5 years ago at a cost of N2,000,000, and its useful life is estimated to be 25 years. At the end of the current reporting period, the company’s management decided to measure the fair value of the building, and an independent valuation expert estimated its fair value to be N2,800,000.

  1. Calculate the carrying amount of the building under the cost model before considering fair value measurement.                                  Carrying amount under the cost model: The carrying amount of the building under the cost model is the original cost minus accumulated    depreciation. Given the useful life of the building as 25 years, and the building was acquired 5 years ago, the accumulated depreciation is calculated as follows:

Annual depreciation = Cost of the building / Useful life

= N2,000,000 / 25 = N80,000

Accumulated depreciation = Annual depreciation * Number of since the acquisition.

Accumulated depreciation = N80,000 * 5 = N400,000

Carrying amount = Cost of the building – Accumulated depreciation

= N2,000,000 – N400,000 = N1,600,000

 2. Calculate the fair value gain or loss.

Fair value gain or loss is the difference between the fair value of the building and its carrying amount.

Fair value gain or loss = Fair value – Carrying amount

= N2,800,000 – N1,600,000

= N1,200,000 (gain)

3. How should the fair value gain or loss be recognized in the financial statements? 

According to IFRS 13, gains and losses arising from fair value measurements are generally recognized in profit or loss, unless they are specifically allowed or required to be recognized in other comprehensive income(OCI) or directly in equity. In this scenario, there is no indication that the fair value gain or loss on the building should be recognized in OCI or equity, it should be recognized in profit or loss.

In the income statement, gain on fair value measurement of fixed asset(Factory building) = N1,200,000

Conclusively, IFRS 13 has a significant impact on how companies value and report their assets and liabilities in financial statements. It ensures that financial statement users have a better understanding of the fair value measurements and the judgments made by entities in arriving at those values.

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