IFRS Accounting Considerations of the COVID-19 Related to Fair Value Measurement
The objective of fair value measurement is to estimate the price at which an orderly transaction sells an asset or to transfer a liability between market participants at the measurement date under current market conditions (i.e., to estimate an exit price). The impact on fair value measurement (FVM) arising from the coronavirus pandemic and the ensuing economic and market disruptions varies across countries, markets, and industries. Uncertainty is likely to continue, even as some jurisdictions begin to ease the restrictions and open up their economies. When valuations are subject to significant measurement uncertainty due to the current environment, and there is a broader range of possible estimates of FVM, the entity must apply judgment to determine the point within that range most representative of FVM in the circumstances.
Below are key FVM considerations within IFRS 13 Fair Value Measurement that can help entities navigate challenges in volatile and uncertain markets. The definition of fair value contemplates an orderly transaction, which is 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. It is not a forced transaction (e.g., a forced liquidation or distress sale). While volatility in the financial markets may suggest that the prices are aberrations and do not reflect fair value, it would not be appropriate for an entity to disregard market prices at the measurement date unless those prices are from transactions that are not orderly. Evidence of whether a transaction is orderly must be evaluated when deciding the weight that is placed on the transaction price when estimating FVM or market risk premiums. If the observed price is based on a transaction determined to be forced or disorderly, little, if any, weight should be placed on it compared with other indications of value.
The determination of whether a transaction is orderly is made at the individual transaction level and requires the use of judgment based on the available evidence from all relevant factors. While market factors such as an imbalance in supply and demand and liquidity constraints can affect the prices at which transactions occur in a given market, such an imbalance does not automatically indicate that the parties to a transaction were not knowledgeable and willing market participants or that a transaction was not orderly. The entity’s conclusion that it would not sell its asset (or transfer its liability) at prices currently observed in the market does not mean these transactions should be presumed to be distressed. IFRS 13 clarifies that fair value is a market-based measurement, not an entity-specific measurement, and notes that the reporting entity’s intention to hold an asset or liability in a market downturn is irrelevant.
An active market is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The level of activity of a market is determined based on the weight of available evidence, such as the number of transactions taking place, widening bid-ask spreads, and significant increases in implied liquidity risk premiums. IFRS 13 is clear that, while observable prices from inactive markets may not be representative of fair value in all cases, this data should not be ignored. Additional analysis is required in these instances to assess the relevance of observed transactions or quoted prices in these markets, including analysis to determine whether the transaction is orderly (as discussed above) and factors specific to the asset or liability being measured, as well as facts and circumstances surrounding the price (e.g., size of the transaction, proximity of the transaction to the measurement date and significant developments of the subject and market conditions between these dates). Suppose the quoted price is based on a transaction that is determined to be orderly. In that case, this data point should be considered in the estimation of fair value, albeit adjustments to observable prices (which could be significant) may be necessary, or the weight placed on that price in the FVM changed.
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- Deloitte. (2022). IFRS 13 — Fair Value Measurement. https://www.iasplus.com/en/standards/ifrs/ifrs13
- Ernest & Young. (2021). Applying IFRS IFRS accounting considerations of the Coronavirus pandemic.