ACCY201 FINANCIAL ACCOUNTING IIB

SUMMER SESSION 2019-2020

WEEK 3A

Fair value measurement and reporting

3/01/2020 1
3/01/2020 Slides prepared by S Chapple 2

Mid-Session Exam - Wednesday

• Venue: Room 67-302
• Time: During the lecture time: 10.30-12.30
• Please be punctual. Exam time is 90 minutes, and
we only have the room booked for 2 hours
• Students have been notified if other arrangements
apply.
• No tutorials following the exam.
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Outline of lecture
• “Fair value” definition and the various components

• Application of fair value measurement

• 4 steps

• Advantages and disadvantages, questions re FVA

• Carnegie & West 2005, Making accounting accountable

in the public sector
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Learning outcomes
• On completion of this topic, you should:

• Have a reasonable understanding of fair value accounting

(FVA) and fair value

• Be able to determine the fair value of non-financial assets

and liabilities

• Appreciate the issues and problems associated with fair value

accounting and reporting

• Note: FVA is used to cover fair value accounting and measurement

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The importance of measurement

• Measurement is fundamental to accounting and financial
reporting

• Measurement determines the amounts in the financial

statements and accordingly how the company is perceived
- net assets, profits, return on assets, gearing, solvency

• As such it is significant to any decisions based on the

financial statements numbers
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The importance of measurement

• Measurement is guided by the CF and the Standards

• Elements of financial statements need to be:

• Defined – eg. what is an asset or revenue
• Recognised – capable of being measured
• Measured – a value must be placed on the elements (although
the CF does not specify one method)
• Disclosed/ reported – how and where the element is disclosed in
the financial statements
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Measurement options?
• Up to now you have been exposed to a few different types
of measurement:
•

• Historical cost – this is the default measurement basis, and will

often allow for depreciation or amortisation of assets eg. Inventory
(lower of cost or NRV), PPE

• Present value – eg. leases - PV of future lease payments (this is

supposed to reflect the lease’s fair value)

• Revaluation – eg. property plant and equipment, goodwill

• Impairment – eg. some assets are subject to regular impairment

testing (goodwill of cash generating units).
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Measurement options?
• IFRS (and AASBs) adopt a mixed measurement model

• This means that the most appropriate basis is selected for

assets and liabilities based on:
• their nature,
• their cash conversion cycle,
• the nature of the business
• the basis that will provide the most relevant and
representationally faithful information to users (these
are qualitative characteristics of the CF)?
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Fair value measurement

• Fair value measurement increasingly advocated in
IFRS – eg.

• Financial instruments (AASB139)

• Assets held for disposal (AASB5)
• Impairment of assets (AASB136)
• Investment properties (AASB140)
• Biological assets and agricultural produce (AASB141)
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Fair value measurement

• AASB 13 Fair Value Measurement – issued Sept 2011

• Consistent definition of fair value to be applied across all other

accounting standards

• Prior to the introduction of AASB 13 different standards had

their own definition of fair value

• The main objectives of AASB 13 are:

• To define fair value
• To establish a framework for measuring fair value
• To require disclosures about fair value measurement
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Fair value definition

• “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”
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Fair value definition

• “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”

▪The transaction does not have to occur – it may be

hypothetical

▪Estimate of price that would be received (or paid for a

liability) if the transaction did in fact happen - even
when there is no observable transaction at that date.
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Fair value definition

• “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”

▪Price received if asset were to be sold

▪Price is based on exit price – it is current and specific, it
is based on expectations about the future cash flows
that would be generated by the asset subsequent to its
sale
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Fair value definition– exit prices

• There has been much discussion about the use of exit
prices

• Ernst & Young (as cited Leo et al, 2015,p201)

• “Value in use” would in many instances provide more relevant and
decision useful information.

• G100 (as cited Leo et al, 2015,p201)

• Exit price does not give sufficient weight to the intentions of
management and directors about the circumstances in which the
valuation is made – it should be made in the context of a going
concern, not in terms of a hypothetical market participant
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Fair value definition – exit prices

• The exit price is based on Even when an entity
expectations about future intends to hold an
cash flows generated by asset, its FV is
the asset subsequent to its measured as an exit
price by reference to
hypothetical sale a hypothetical sale of
the asset to a market
• These cash flows may be participant who will
generated from use of the use it or sell it
asset by the acquiring
entity or its sale by the Consider the logistics of
acquiring entity doing this
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Fair value definition

• “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”

▪ Orderly market – between market participants

▪ A transaction that assumes exposure to the market
for a period before the measurement date to allow for
marketing activities that are usual and customary for
transactions involving such assets or liabilities
▪ Excludes forced or liquidation sales
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Fair value definition – an efficient market

• FV measurement is based on the assumption of:

• An efficient market
• All information impounded into the price of an item

• There is sufficient information for the market participants to assess

the likely future economic benefit to be derived from an asset (or
sacrificed for a liability) and this is reflected in the value for which
they are prepared to buy/sell the item

• In an efficient market the price accepted by the current owner and

the maximum price the buyer is prepared to pay will come
together (Rankin, 2012, p281)
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Fair value definition - An inactive market

Valuation based on an inactive market is not appropriate.

An inactive market would be characterised by:

a) Few recent transactions.
b) Price quotations are not developed using current information.
c) Price quotations vary substantially.
d) Indices that previously were highly correlated with the fair values of
the asset or liability are demonstrably uncorrelated.
e) The market has gone toxic.
f) There is a wide bid-ask spread.
g) There is a significant decline in the activity.
h) Little information is publicly available. (AASB13 App B para B37)
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Fair value definition

• “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”

▪Market participants
▪ Must be independent from each other (not related parties)
▪ Must be knowledgeable about the asset or liability
▪ Must have the ability to enter into the transaction
▪ Must be willing to transact and not be forced or compelled
ie. FV is not entity specific
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Determining fair value – 4 steps

• Four step process to make a fair value measurement:

• Step 1 - Determine the asset or liability that is the subject of

the measurement

• Step 2 - Determine the valuation premise that is appropriate

• Step 3 - Determine the principal or most advantageous

market

• Step 4 - Determine the appropriate valuation technique

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Step 1 – What is the asset or liability that is

being measured ?
• A fair value measurement is for a particular asset or
liability or a group of assets (eg. a cash generating unit)

• This step involves considering characteristics that market

participants would take into account when pricing an
asset or liability.

• Relevant questions to consider include:

• What is the location of the asset?
• What is the condition of the asset?
• Are there any restrictions on sale or use of the asset?
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Step 2 –What is the appropriate valuation

premise?
• An asset may be used in a number of different ways
• eg. Land can be used for residential purposes or for locating a
production facility.
• This means that the fair value may be determined in
a number of different ways.

What is the highest and best use of an asset?

“...the use of an asset by market participants that would

maximise the value of the asset, or the group of assets …
(e.g. a business) within which the asset would be used.”
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Step 2 – appropriate valuation premise ?

• The use must be physically possible, legally permissible and
financially feasible.
• The highest and best use is not based on how the entity is
currently using it.

• It is based on the perspective of the market participant

• Eg. the valuation of a block of land. Generally the land would
be valued based on the zoning of the land, the size of the
block, the area that it is in and the surrounding land values.

• The valuation may not have anything to do with how the

existing owner is using the land. It is about how the market
perceives the value of the land.
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Step 2 - appropriate valuation premise ?

• The valuation will depend on how the asset would be
best used:

By itself In conjunction
with other assets

STAND – ALONE IN – COMBINATION

VALUATION VALUATION
PREMISE PREMISE
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Step 2 - appropriate valuation premise ?

• Stand-alone valuation premise
• this premise is used when market participants would
obtain maximum benefit principally through using the
asset on a stand-alone basis.
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Step 2 - appropriate valuation premise ?

• In-combination valuation premise

• This premise is used when market participants would

obtain maximum benefit principally through using the
asset in combination with other assets

• Even if the asset is best used in-combination with other

assets, it can still be valued individually or sold
separately
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Step 2 - appropriate valuation premise ?

• In-combination valuation premise
• The critical issue is whether the “market participant” has the
other assets necessary to use the first asset to provide a benefit.

• eg. a machine used in conjunction with other assets, say as part

of a manufacturing process. If market participants do not have
these other assets (or cannot obtain them), then the first asset
is worthless / obsolete.
work in progress
• eg. WIP to be converted into FG –If sold as WIP, the
assumption is that the (hypothetical) market participant has
the appropriate other assets to finish production.
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Step 3 - What is the principal or most

advantageous market ?
• FV measurement assumes that the transaction takes
place in either:

• Principal market
▫ The market with the greatest volume and level of activity

• Most advantageous market

▫ The market that would maximise the amount received/paid
after deducting transaction and transport costs.
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Step 3 - principal or most advantageous

market ?
• An entity doesn’t have to make an exhaustive
search. It is assumed that the market it usually
enters to sell the asset in is the principal market,
unless contrary evidence exists

• If you are valuing an item which produces output,

say a machine that produces plastic buckets, you
are concerned with the market for the machine,
not the market for the plastic buckets
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Step 4 - What is the most appropriate valuation

technique ?
• Three possible valuation techniques:

Market Cost Income

approach approach approach

FV does not always mean market price. Sometimes it might

be cost, and other times it might be a valuation such as
discounted cash flows. Choice will depend on the
circumstances, the data available and the reliability of that
data (observable or non-observable)
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Step 4 - valuation technique ?

Market Income Cost
▪uses prices o converts future oreflects the amount
amounts (e.g. cash currently required to
and other flows or income and
relevant replace the service capacity
expenses) to a single
information current amount (e.g. of the asset (replacement
discounted CF). cost). If valuing a used
generated by
asset, the cost of a new
market oFV measurement is
version would be adjusted
transactions based on values
indicated by current for physical deterioration,
involving market expectations decrease in functionality,
identical or about those future technological obsolescence
comparable amounts (eg. via depreciation
transactions charge)
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Example 1 - software
• An entity acquires a group of assets which includes an
income producing software asset, internally developed for
licence to customers.

• The highest and best use of the software asset is

determined to be in its use in combination with other assets
(so this means that the “market participant” would need to
have the relevant associated assets to use the software).

• Information about market transactions for comparable

software is unavailable.

• Adapted from Leo et al (2015), page 210 Illustrative example 5.5

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Example 1 - software o Step 1 - the asset being

• Step 1 – what is the asset? measured is the software

• Step 2 – Valuation o Step 2 – the software is

premise: Stand-alone or used in-combination with
in-combination? other assets

• Step 3 – principal or most o Step 3 – info not given

advantageous market?

• Step 4 – Valuation o Step 4

technique • Market – information not
• Market ? available for this. Refer
• Income ? • Income - maybe next
• Cost ? • Cost - maybe slide
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Example 1 - software
The income approach – The cost approach -
what is the PV of the how much would it cost
future cash flows from to develop a substitute
the software? piece of software?

• Companies are required to make valuation decisions all the time. eg.

▪ Which method should be used for inventory valuation (FIFO,

Weighted average, specific identification)?

▪ Which method should be used for valuation of PPE (cost or

revaluation)?

▪ In this case how does the company choose between the two
options?
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Step 4 - valuation technique ?

• How should the technique be chosen?

• Judgement is required to select the most appropriate technique for

the situation. AASB 13 does not give preference to any of the
techniques.

• The technique must:

• Be appropriate to the circumstances
• Provide sufficient data to apply technique
• Be consistently applied

• Maximise the use of observable inputs and minimise use of

unobservable inputs
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Step 4 - valuation technique ?

• Inputs are the numbers and assumptions that are used
when determining fair value. They are classified into:

Observable inputs – these Unobservable inputs –

are obtained using market are those where market
data, such as publicly data is not available and
available information are developed using the
about actual events or best information
transactions, and reflect available about the
the assumptions that assumptions that
market participants would market participants
use. would use.

To achieve consistency and comparability AASB 13 provides a

hierarchy of inputs.
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Fair value hierarchy

• Inputs are prioritised into three levels (Levels 1, 2 and 3)

• Highest priority is given to quoted market prices in active markets (level

1) and lowest priority is given to unobservable inputs (level 3)

• When using observable inputs, they must be relevant inputs

• Availability / subjectivity of inputs could affect choice of technique BUT

the FV hierarchy prioritises inputs not the technique itself

• Once determined, a FV measure is categorised according to the lowest

level input to the technique (and this must be disclosed in the financial
statements – via notes)
• If an asset is valued using level 2 and level 3 inputs, it must be
disclosed in the financial statements as a level 3 valuation
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Fair value hierarchy – level 1

• Defined as:
• “...quoted prices in active markets for identical assets or
liabilities that the entity can access at the measurement
date.”

• Commonly used for assets such as motor vehicles, plant &

equipment, publicly traded shares.

• A market is not active if there are few recent transactions or

price quotes vary substantially over time (refer slide 17).

• Level 1 inputs must be for identical items – for buildings,

items may be similar, but it is unlikey that they will be
identical.
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Fair value hierarchy – level 2

• Defined as:
• “...inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly.”
• Included within this definition are:
• Quoted prices for similar assets in active markets

• Quoted prices for identical items in inactive markets (perhaps only a few recent
transactions)

• Inputs other than quoted prices that are observable – e.g. interest rates, credit
risks, rental price per square metre

• Inputs that are derived from or corroborated by observable market data by

correlation or other means

• That is, the inputs can be verified by reference to external information

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Fair value hierarchy – level 3

• Defined as:
“...unobservable inputs for the asset or liability.”

• In this case the data may be drawn from the entity itself, and
adjusted for factors that market participants might consider

• Examples of where level 3 inputs would be used include when

valuing:
• Cash generating units
• Trademarks
• Accounts receivable
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Fair value hierarchy

Level 1
– Quoted market prices in active market for identical assets

Level 2
- Quoted market prices for similar assets in active market
- Quoted prices for same/similar assets in non-active market
- Other observable inputs such as interest rates or yield curves

Level 3
– unobservable inputs – internal forecasts, modelling
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Example 2 – valuation techniques

• Jasper Ltd bought a block of land 10 years ago on the
Perth foreshore for $500,000.

• Over the next 2 years the company constructed an

apartment block at a cost of $5,000,000.

• The apartments are currently leased out to tenants on a

variety of lease agreements.

• The land and buildings have to be valued

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Example 2 – additional information

1. Two valuations have been received from two different valuers.
o One for $9m ($1m for land and $8m for building).
o The other $6m ($750k for land and $5.25m for building).

Both valuers say valuation is difficult as there have not been any
sales of similar properties in the area for some time.

2. The current cost of replacing the building is estimated at $7.5m.

o This is based on the current design and taking into account
today’s construction costs, including labour, materials and
overhead.
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Example 2
3. Average net cash flows over 20 years is estimated to be $650k
per year.
o After 20 yrs the building will need to be replaced, and the
land will be worth $1m. The current borrowing rate for
Jasper Ltd is 12%.

4. Depreciation is currently being charged on a straight line basis

using the same assumptions as items 3.
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Example 2

• Required:
• Based on the information provided:
• What valuation technique should be used?
• At what amount will the property be valued?

• Source: Rankin et al (2012, Q10.8)

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Example 2
1. Market valuations: Should the market approach be used?
• One for $9m ($1m ▪ The market valuations are
for land and $8m for superficial.
building).
▪ The evidence seems to suggest that
• The other, $6m there is an inactive market, and
($750k for land and AASB13 is clear that valuation
$5.25m for building). based on an inactive market is not
preferable.
Both valuers say valuation
is difficult as there have ▪ Also, this method would bring in
not been any sales of Level 3 inputs, which increase scope
similar properties in the for misstatements. AASB13 makes
area for some time – ie. it clear that averaging a number of
An inactive market. valuations is not appropriate.
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Example 2
2. The current cost of Should the cost approach be used?
replacing the building
is estimated at $7.5m. ▪ In this case current replacement
cost is available.
This is based on the ▪ This may be appropriate for
current design and determining the value of the
taking into account building in its current condition
today’s construction (based on level 2 inputs).
costs, including ▪ With this method we would still
labour, materials and need to obtain a value for the
overhead. land. This might be done based
on value per square metre of
land in the immediate area
(level 2 inputs)
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Example 2
3. Future net cash Should the income approach be
flows over 20 years are used?
estimated to be $650k ▪ If this technique was used a
per year. number of assumptions would
be required to estimate the
present value of future lease
After 20 years the receipts (time frame, market
building will need to rates, occupancy, outgoings,
be replaced, and the discount rate etc) and future
land will be worth outgoings.
$1m. The current
borrowing rate for ▪ These would be either level 2 or
Jasper Ltd is 12%. level 3 inputs. Possible but very
complex and subjective.
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Example 2
4.Depreciation is currently This suggests opting for
being charged on a straight valuation based on historical
line basis using the same cost and not fair value.
assumptions as items 3.

Fair value?
Given the limited information, the most appropriate
approach would be that of 2 – ie. the cost approach.
The building would be valued at $7.5m, but adjusted
for depreciation over 10 years. This would be added
to the current value of the land to give a total
valuation for land and buildings.
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Determining fair value – not a buy/sell

decision
• It is important to note that determining the FV of an
asset is for purposes of financial statement presentation

• It is NOT about a buy/sell decision

• So, if you are asked to determine the FV of an asset (or

liability) you do not have to make recommendations
about whether or not to sell the asset.
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Application to liabilities
• Traditionally the measurement of a liability was commonly
based on the amount required to settle the present obligation.

• In AASB 13, fair value is the amount paid to transfer a liability.

• The fair value measurement thus assumes that:

• The liability is transferred to another market participant at the
measurement date.
• The market participant transferee would be required to fulfil the
obligation
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Application to liabilities
• Many of the principles relevant for non-financial assets
also apply to measuring the FV of liabilities.

• Only 3 steps (identify liability, principal or most

advantageous market, appropriate valuation technique)
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Application to liabilities
• For some financial liabilities there is an observable market
and a quoted price may be obtained to measure the FV of
the liability (eg. debentures).

• In most cases, a liability of one entity represents an asset

of another entity (e.g. a bank loan)

• AASB 13 requires that measurement of the financial

liability be calculated from the perspective of the market
participant that holds the corresponding asset (refer next
slide)
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Application to liabilities
Corresponding asset

• Measurement should be in the following order:

• the quoted price of the asset in an active market
• the quoted price for the asset in an inactive market
• a valuation under a technique such as the income approach (e.g. a
PV technique) or the market approach
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Example 3
• On 1/1/16 Kangaroo issues fixed rate debentures at par
value
• Total issue $2 m
• 5 year, Coupon (interest) rate 10%

• At 31/12/16 Kangaroo is required to value these

instruments:
• They are trading as an asset in an active market
• $929 per $1000 par value
• Fair value of liability = 929/1000 * $2m = $1,858,000

• Adapted from example 5.7 in Leo et al (2015, p215).

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Application to liabilities
• How can a liability be valued if there is not a
corresponding asset?

• Measurement must be done by applying a valuation

technique from the perspective of a market participant.

• A present value technique could be applied.

• See next slide for an example

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Example 4
• As part of a business combination, an entity acquired a
liability that related to the decommissioning of an oil
platform (on cessation of drilling)
• The entity has to determine the fair value of this liability,
with reference to “market participants”
• The entity has to decide on the most appropriate valuation
technique and inputs to the valuation process
• The entity decides that the income approach is the most
appropriate valuation technique, and a present value
calculation is done.
• Adapted from Leo et al (2015, p216 illustrative example 5.9)
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Example 4
• Estimated costs / cash flows (labour,
materials overheads etc) adjusted for $419,637
inflation (10yrs @ 4%)

• Market risk premium - $419,637* 5% $20,982

• Expected cash flows adjusted for $440,619

market risk premium

• Discount the expected cash flows using $194,879

discount rate of 8.5% for 10 years.
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Application to liabilities
Non performance risk

• The fair value of a liability will reflect the effect of non-

performance risk.

• Defined as:
“...the risk that an entity will not fulfil an obligation. Non-
performance risk includes, but may not be limited to, the entity’s
own credit risk.”
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Example 5
• Non performance risk

• Wallaby and Dingo both enter into a loan agreement

with Bandicoot – $500 repayable in 5 years time

Wallaby Dingo
AA credit rating BBB credit rating
Able to borrow at 6% Able to borrow at 12%
PV of loan is $374 PV of loan is $284
($500 discounted at 6%) ($500 discounted at 12%)
Adapted from Leo et al (2015) Illustrative example 5.10
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Application to equity instruments

• Measurement of equity instruments is needed where an
entity issues its own equity instruments in exchange for a
business as part of a business combination

• The principles in relation to liabilities also apply to equity

instruments.
▫ The FV measure assumes the entity’s equity instruments are
transferred to a market participant at measurement date

▫ The company must measure the fair value of the equity instrument
from the perspective of a market participant who holds the instrument
as an asset.
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Disclosure
AASB 13 requires an entity to disclose information that enables
users to assess both of the following:
a) for assets and liabilities that are measured at fair value on a
recurring or non-recurring basis in the statement of financial
position after initial recognition - the valuation techniques and
inputs used to develop those measurements.

b) for recurring fair value measurements using significant

unobservable inputs (Level 3) - the effect of the
measurements on profit or loss or other comprehensive
income for the period.
Details on disclosures shown in section 3.7 of Loftus et al (2018)
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FVA - advantages
▪Reflects current market conditions
▪ provision of timely information – as opposed to historical
cost information (dated)

▪ increased transparency (directors cannot hide behind

historical cost accounting or valuations based on models)

▪ early warning of problems – if the market value of an

asset is low (or zero), that may be a good indication that
the asset should be written down now, rather than wait
until the future (relevant to asset values during the GFC)
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FVA - disadvantages
▪Not relevant and potentially misleading for assets that are
held for long periods of time, in particular when they are
held to maturity

▪Prices can be distorted by market inefficiencies, investor

irrationality or liquidity problems (this is particularly the
case in times of crisis when the market reacts to hysteria
rather than reflecting the underlying fundamental value of
an asset).
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FVA - disadvantages
▪FVs based on models (mark-to-model accounting) may
be unreliable (too many subjective estimates).
▪Reduced ability of financial statement users to monitor
the actions of managers (at least market values can be
verified by reference to the market – management
estimations can’t be)
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Questions about fair value

1. How reliable are the FV numbers?

▫ Quite reliable where FV based on market prices, but,

▫ sometimes FV taken from observable prices in the

market may bear little relation to the underlying
value of the asset (or liability). The market is often
driven by a variety of very subjective factors

▫ Use of unobservable data – FV estimates often use a

number of assumptions
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Questions about fair value

2. Does past experience warn us against the extensive use of FV?
▫ Enron
▫ An example of how FVA can be manipulated and used to hide an
underperforming company (group)

▫ Enron used mainly level 2 and level 3 inputs – but these were
inflated and presented a misleading picture of the state of the
company

▫ Management compensation was based on inflated fair values

▫ Revenue was inflated

▫ In 1992, Enron signed a 20yr contract to supply natural gas to the
developer of a large electronic generating plant under
construction. Enron immediately recorded the NPV of that
contract as current earnings. A loss was not recorded on this
contract until after Enron declared bankruptcy
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Questions about fair value

2. Does past experience warn us against the extensive use of
FV?

▫ The Global Financial Crisis

▫ FVA in times of crisis can lead to widely fluctuating
numbers on the balance sheet (usually downward) and
in the P&L (ie. losses), particularly for companies that
hold financial assets and liabilities (shares, bonds,
derivatives).

▫ During the GFC banks argued that FVA “exacerbated

the crisis by creating a downward spiral and that
observed prices were significantly below the assets’
fundamental values” (Laux and Leuz, 2009,p831).
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Questions about fair value

2. Does past experience warn us against the extensive use of FV? (cont)

▫ The Global Financial Crisis

▫ Banks argued to switch from FVA (based on the mark-to-market
prices) to models using the underlying fundamentals of assets or
expected cash flows (ie. mark-to-model accounting).

▫ Or, to reclassify assets from “trading” to “held to maturity” so

they could use a different basis of measurement (historical cost
as opposed to M-to-Mkt).

▫ In 2009, the Financial Crisis Advisory Board (set up by the IASB)

established that FVA did not exacerbate the GFC, however there
were problems with how FVA was applied (FCAG, 2009).
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Questions about fair value

3. How costly is it to determine FV when there are not
directly observable market prices to refer to?
▫ Expensive exercise for management

4. Should measurements based on unobservable inputs

even be called FV?
▫ Unobservable inputs are highly subjective. How
relevant and reliable are they?
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Questions about fair value

5. Can FV be prescribed before the finalisation of the Conceptual
Framework?

▫ The CF is supposed to come before the standards. One

of the components of the CF relates to measurement,

▫ but standard setters have been discussing

measurement for decades and still cannot come to
consensus.

▫ There were too many differing rules so IFRS13 needed.

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Carnegie & West 2005 “Making accounting accountable

in the public sector”
• Assets – unique; no active market; often donated; heritage
& cultural value; relics – no intrinsic value but priceless in
nature; irreplaceable
• Examples: Australian War Memorial; Sydney Harbour
Bridge; botanical gardens; museums; art galleries; public
libraries; parks; public roads
• Entrance usually free (except for SHB Tolls), and
unrestricted
• Education centres; recreational centres; social centres
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Carnegie & West (2005)

• Primary objective of private sector = profit

maximisation
• Standards written for the private/for-profit
sector
• Focus on financial accountability to shareholders
and investors
• Decision-usefulness in investment decisions
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Carnegie & West (2005)

• Primary objective of public sector = stewardship

• Qualitative information [eg report on storage conditions

within a museum] and quantitative data [extent of public
usage] would provide information regarding the distinctive
nature of accountability and management issues in public
institutions, etc.

• “The assigning of dollar values to non-financial resources,

however, is a misplaced endeavour as it invokes an irrelevant
and inappropriate language of accountability” (Carnegie &
West 2005, p917)
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Carnegie & West (2005)

• In private sector, accountability equated to monetary values
• Public assets’ true value usually = social benefit: cultural,
heritage, historic, educational, recreational
• Attempts to measure non-financial assets in purely monetary
terms = attempt to align public attributes to private sector
business organisations
• Fails to recognise that usefulness of monetary quantification is
not universal but confined to certain contexts, and these
contexts must be determined with reference to relevance,
availability and fitness for purpose of monetary values (Barton
1999, cited in C&W 2005, p917).
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Carnegie & West (2005)

• What ‘assets’ are we talking about?

• Museum/art collections
• Phar Lap’s heart
• Eureka Stockade Flag
• Historical library collections
• Donated artefacts (war medals)
• Unique/irreplaceable heritage/cultural items
• Public infrastructure
• Botanical gardens
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Carnegie & West (2005)

Why is applying private sector objectives and language to public sector
organisations problematic?
• Conventional accounting’s idea of accountability is the application of
funds within an organisation, to provide profits for
shareholders/investors
• Public sector accounting = accountability to the general public –
taxpayers for stewardship in protecting public assets
• Increasing pressure on public sector organisations for productivity,
efficiency:
• privatisation; staffing cuts; reduced budgets
• Means that cash-strapped governments have to source funds when
and where they can ….
• If they see arbitrary valuations of public good such as the ports or
heritage items or art works on the balance sheet, they may have
an incentive to sell public assets, rather than preserving them for
future generations
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Conclusion
• IFRS13/AASB13 Fair Value Measurement introduced to
facilitate consistency across standards

• It aims to provide accounting information that is useful and

relevant

• FVA privileges the information needs of capital market

participants – interested in future cash flows

• There are problems with fair value measurement in times of

crisis or volatile markets, as well as in the valuation of
government infrastructure assets that are long-lived, used for
specific purposes and where active markets do not exist.
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References
• Carnegie C, and West, B 2005, “Making accounting accountable in the public sector”,
Critical Perspectives on Accounting, Volume 16, pp 905-928
• Dean, G, and Clarke, F. 2010, "Commentary: Business Black Swans and the Use and
Abuse of a Notion", Australian Accounting Review, Vol. 20, Issue 2, pp185-194.
• FCAG, 2009 “Financial Crisis Advisory Group, Report to the Members of the International
Accounting Standards Board and the US Financial Accounting Standards Board”, 28 July,
online at: http://www.ifrs.org/News/Press-
Releases/Documents/FCAGReportJuly2009.pdf
• Laux, C., and C. Leuz, 2009, “The crisis of fair-value accounting: making sense of the
recent debate”, Accounting, Organizations and Society, Vol. 34, pp. 826-834.
• Leo K. et al, 2015, ‘Company Accounting’, John Wiley and Sons, Australia (and associated
resources – ppt slides)
• Loftus et al 2018, ‘Financial Reporting’ Second Edition, John Wiley and Sons, Australia
• Rankin, M., Stanton.P., McGowan, S., Ferlauto, K. and Tilling. M. (2012) ‘Contemporary
Issues in Accounting’, John Wiley and Sons, Australia