Many accounting standards require or permit the use of fair values in measuring assets and liabilities. However, there has not always been consistency between these standards regarding the method of arriving at fair value. IFRS 13 Fair Value was issued in May 2011 as an attempt to remedy this problem. The IFRS aims to define fair value, sets out a framework for measuring fair values, and standardizes disclosures about the use of fair values by entities in their financial statements. It does not attempt to give guidance regarding the use of the resulting fair value figures, leaving this to the relevant standard for dealing with the asset or liability in question.
IFRS 13 makes it clear that fair value is market-based as opposed to being entity-specific. Hence, the intentions of an entity regarding an asset or liability are not relevant when determining fair value.
Crannog plc is an investment company that holds a portfolio of securities linked to the real estate market in Ruritania. The following information is available on 31 July 2013 regarding this portfolio:
• The portfolio cost €13 million 2 years ago.
• Real-estate prices in Ruritania are generally accepted to have dropped by 20-30% in the past 2 years.
• The portfolio of securities held by Krannog is difficult to value, as there is no active market. However, it has received an offer of €2.6 million for this portfolio from an investor. It has no intention of accepting this offer although some similar companies have accepted offers from this investor due to financial difficulties.
• A normal sale in the present climate could be reasonably expected to yield €6 million, based on an analysis of transactions in similar assets.
• Krannog’s valuation models suggest that the real estate market in Ruritania will recover, and it expects that the portfolio will generate €12 million (at present value) over the next three years.
(a) Discuss the meaning of the term “Fair Value” as defined by IFRS 13 Fair Values.
(b) Outline the 3 level hierarchy proposed by IFRS 13 to evaluate informational inputs into the measurement of fair values.
(c) Advise the amount at which Krannog plc should state its investment portfolio in its financial statements to 31 July 2013, assuming it wishes to use fair value as measured in accordance with IFRS 13 principles.