Samenvatting Applying International Financial Reporting Standards

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ISBN-10 1119159229 ISBN-13 9781119159223
136 Flashcards en notities
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Dit is de samenvatting van het boek "Applying International Financial Reporting Standards". De auteur(s) van het boek is/zijn Ruth Picker. Het ISBN van dit boek is 9781119159223 of 1119159229. Deze samenvatting is geschreven door studenten die effectief studeren met de studietool van Study Smart With Chris.

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Samenvatting - Applying International Financial Reporting Standards

  • 3 Fair value measurement

  • How do many accounting standards define the term 'fair value'?
    Many accounting standards defined the term fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length.
  • Fair value defined in appendix A of IFRS 13
    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.
  • Current exit price
    The current exit price is defined as the price that would be received to sell an asset or paid to transfer a liability
  • An orderly transaction is not a forced or distressed sale, such as occurs in liquidations.
  • The price used to measure fair value is not adjusted for transactions costs, but would consider transportation costs.
  • When determining the most advantageous market (in absence of a principle market), an entity takes into consideration the transactions costs and transportation costs it would incur to sell the asset or transfer the liability. However, the price in that market that is used to measure the faire value of an asset or liability is not adjusted for transaction costs. The reason for that is that transaction costs are not considered t be a characteristic of the asset or liability.
  • When measuring faire value, paragraph B2 of IFRS requires an entity to determine all of the following:
    - the particular asset or liability that is the subject of the measurement (consistent with its unit of account)
    - for a non-financial asset, the valuation premise that is appropriate for the measurement (consistent with its highest and best use)
    - the principle (or most advantageous) market for the asset or liability
    - the valuation technique(s) appropriate for the measurement, consideration the available inputs that represent market participants assumptions and their categorization within the fair value hierarchy.
  • Which of the key questions that need to be asked when terminating the asset or liability to be measured?
    - What is the unit of account? Is the asset a stand-alone asset or is it a group of asset?
    - Are there any restrictions on sale or use of the asset or transfer of the liability?
    - What is the condition of the asset?
    - What is the location of the asset?
  • When measuring fair value an equity si required to assume that the hypothetical transaction to sell the asset or transfer the liability takes place either:
    A. In the principal market for the asset or liability
    B. In the absence of a principal market, in the most advantageous market for the asset or liability
  • Principal market
    The principal market is the market with the greatest volume and level of activity for the asset or liability. The principal market is, therefore, the deepest and most liquid market for the non-financial asset.
  • Most advantageous market
    The most advantageous market is the one that offers the highest return when selling an asset or requires the lowest payment when transferring a liability, after taking into consideration transportation and transaction costs. Please note that although transaction costs are used to determine the most advantageous market, the are not used in the measurement of fair value.
  • Who are the market participants?
    - They are independent of each other. That is, they are not related parties.
    - The are knowledgeable, having a reasonable understanding about the asset or liability using all available information.
    - The are able and willing to enter into a transaction for the asset or liability
  • What are the appropriate valuation techniques for the measurements?
    - The market approach
    - The income approach
    - The cost approach
  • Market approach
    Based on market transactions involving identical or similar assets or liabilities.
  • Income approach
    Based on future amounts (e.g. cash flows or income and expenses) that are converted (discounted) to a single present amount
  • Cost approach
    Based on the amount required to replace the service capacity of an asset (often referred to as current replacement cost)
  • According to appendix A of IFRS 13, inputs are:
    The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as following:

    - the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model)
    - the risk inherent in the inputs to the valuation technique
  • Observable inputs
    Observable inputs are inputs that are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use when pricing the asset or liability.
  • Unobservable inputs
    Unobservable inputs are inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.
  • How are the inputs prioritized?
    Into three levels; level 1, level 2 and level 3
  • What is the fair value hierarchy?
    The fair value hierarchy gives the highest priority to quoted market prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs.
  • The availability of inputs and their relative subjectivity potentially affects the selection of the valuation technique, however, the fair value hierarchy priorities the inputs to the valuation techniques, not the techniques themselves.
  • Level 1 inputs
    Level 1 inputs are defined as quoted prices (unadjusted) in active markets for identical assets (no similar) or liabilities that the entity can access at the measurement date.
  • Active market
    a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
  • A market may no longer be considered active if:
    - There has been a significant decrease in the volume and level of activity for the asset or liability then compared with normal market activity
    - The are few recent transactions
    - Price quotations are not based on current information
    - Price quotations vary substantially over time or among market-makers
  • Level 2 inputs
    Level 2 inputs are any inputs, other than level 1 inputs, that are directly or indirectly observable. These inputs like level 1 inputs are observable. Level 2 inputs include:
    - Quoted prices for similar assets or liabilities in active markets
    - Quoted prices for identical or similar assets or liabilities in markets that are not active
    - Inputs, other than quoted prices, that are observable for the asset of liability such as interest rates and yield curves.
    - Inputs that are derived from, or corroborated, by observable market data by correlation of other means.
  • Examples of level 2 inputs
    - Finished goods inventory at a retail outlet
    - Building held and used
    - Cash-generating unit
  • Level 3 inputs
    Level 3 inputs are not observable. The data used may be that of the entity itself, which may be adjusted of factors that market participants would build into the valuation, of to eliminate the effect of variables that are specific to this entity, but not relevant to other market participants.
  • Examples of level 3 inputs
    - Cash generating unit
    - Trademark
    - Accounts receivable
  • Non-financial asset
    In addition to the general fair value framework, the fair value of a non-financial asset must take into consideration the highest and best use of the asset from a market participant perspective. The concepts of rights and best use and valuation premise are only relevant for non financial assets because:
    - Financial assets have specific contractual terms; they do not have alternative uses
    - The different ways by which an entity may relieve itself of a liability are not alternative uses.
  • Highest and best use
    The highest and best use is defined as the use of a non-financial asset by market participants that would maximize the value of the asset or the groep of assets and liabilities (e.g. a business) within which the asset would be used.
  • The highest and best use must be:
    - Physically possible, taking into account the physical characteristics of the asset
    - Legally permissible, considering any legal restrictions
    - Financially feasible, in hat the use or the asset mus result in the market participant obtaining an appropriate return from the asset.
  • Stand-alon valuation premise
    Under this premise, the fair value of the asset is the price that would be received in a recent transaction to sell the asset to market participant who would use the asset on a stand-alone basis.
  • In-combination valuation premise
    The highest and best use of the asset is where the market participants obtain maximum value through using the asset in combination with other assets and liabilities.
  • Transfer of a liability
    A liability would remain outstanding and the market participant transferee would be required to fulfill the obligation.
  • Non-performance risk
    The risk that an entity will not fulfill an obligation. Non-performance risk includes, but may not be limited to, the entity's own credit risk.
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Laatst toegevoegde flashcards

Non-performance risk
The risk that an entity will not fulfill an obligation. Non-performance risk includes, but may not be limited to, the entity's own credit risk.
Transfer of a liability
A liability would remain outstanding and the market participant transferee would be required to fulfill the obligation.
In-combination valuation premise
The highest and best use of the asset is where the market participants obtain maximum value through using the asset in combination with other assets and liabilities.
Stand-alon valuation premise
Under this premise, the fair value of the asset is the price that would be received in a recent transaction to sell the asset to market participant who would use the asset on a stand-alone basis.
The highest and best use must be:
- Physically possible, taking into account the physical characteristics of the asset
- Legally permissible, considering any legal restrictions
- Financially feasible, in hat the use or the asset mus result in the market participant obtaining an appropriate return from the asset.
Highest and best use
The highest and best use is defined as the use of a non-financial asset by market participants that would maximize the value of the asset or the groep of assets and liabilities (e.g. a business) within which the asset would be used.
Non-financial asset
In addition to the general fair value framework, the fair value of a non-financial asset must take into consideration the highest and best use of the asset from a market participant perspective. The concepts of rights and best use and valuation premise are only relevant for non financial assets because:
- Financial assets have specific contractual terms; they do not have alternative uses
- The different ways by which an entity may relieve itself of a liability are not alternative uses.
How do you measure when an entity acquires shares in another entity, rather than the net assets of that entity?
Fair value + transaction costs
A bargain on purchase
When the acquirer's interest in the net fair value of the acquiree's identifiable assets and liabilities is greater than the consideration transferred, the difference is called a bargain on purchase. (usual or rare event)
Core goodwill
Core goodwill consists of going-concern goodwill and combination goodwill. Control of core goodwill is provided by means of the acquirer's power to direct the policies and management of the acquiree.