Fair Value Measurement – A Step Forward on Valuations

INTRODUCTION

On June 2011, the Hong Kong Institute of Certified Public Accountants issued a new accounting standard - Hong Kong Financial Reporting Standard 13 Fair Value Measurement (HKFRS 13).  This new accounting standard:

(a) Defines fair value;
(b) Sets out in a single HKFRS a framework for measuring fair value; and
(c) Requires disclosures about fair value measurements.

It applies to other HKFRSs that require or permit fair value measurements or disclosures about fair value measurements such as fair value less costs to sell.  The HKFRS 13 is to be applied for annual periods beginning on or after 1 January 2013. Earlier application is permitted.

SCOPE

The HKFRS 13 applies when another HKFRS requires or permits fair value measurements or disclosures about fair value measurements.  However, the measurement and disclosure requirements of the HKFRS 13 do not apply to:

(a) Share-based payment transactions within the scope of HKFRS 2 Share-based Payment;
(b) Leasing transactions within the scope of Hong Kong Accounting Standards (HKAS) 17 Leases; and
(c) Measurements that have some similarities to fair value but are not fair value, such as net realizable value in HKAS 2 Inventories or    value in use in HKAS 36 Impairment of Assets.

MAIN FEATURES

The HKFRS 13 defines fair value as 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 (i.e. an exit price).  This definition of fair value emphasizes that fair value is a market-based measurement, not an entity-specific measurement. When measuring fair value, an entity uses the same assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle, or otherwise fulfill a liability is not relevant when measuring fair value.

FAIR VALUE MEASUREMENT APPROACH

The HKFRS 13 explains that a fair value measurement requires an entity to determine:

(a) The particular asset or liability being measured;
(b) For a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a stand-alone basis;
(c) The principal or most advantageous market for the asset or liability; and
(d) The appropriate valuation technique(s) to use when measuring fair value. The valuation technique(s) used should maximize the use of relevant observable inputs and minimize unobservable inputs. Those inputs should be consistent with the inputs a market participant would use when pricing the asset or liability.

The Asset or Liability

When measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics can include the following:

(a) The condition and location of the asset; and
(b) Restrictions, if any, on the sale or use of the asset

The effect on the measurement arising from a particular characteristic will differ depending on how that characteristic would be taken into account by market participants.