A Global Guide To Fair Value Measurements
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This publication has been prepared for general information on matters of interestonly, and does not constitute professional advice on facts and circumstancesspecific to any person or entity. You should not act upon the information containedin this publication without obtaining specific professional advice. No representationor warranty (express or implied) is given as to the accuracy or completeness ofthe information contained in this publication. The information contained in thismaterial was not intended or written to be used, and cannot be used, for purposesof avoiding penalties or sanctions imposed by any government or other regulatorybody. PricewaterhouseCoopers LLP, its members, employees and agents shall notbe responsible for any loss sustained by any person or entity who relies on thispublication.The content of this publication is based on information available as of May 15,2013. Accordingly, certain aspects of this publication may be superseded as newguidance or interpretations emerge. Financial statement preparers and other usersof this publication are therefore cautioned to stay abreast of and carefully evaluatesubsequent authoritative and interpretive guidance that is issued.This publication has been updated to reflect new and updated authoritative andinterpretive guidance since the 2012 edition.“The FASB material is copyrighted by the Financial Accounting Foundation, 401Merritt 7, Norwalk, CT 06856, and is reproduced with permission.”
Dear Clients and Friends:PricewaterhouseCoopers is pleased to offer you the 2013 edition of A Global Guide toAccounting for Fair Value Measurements, the inaugural global edition. This guide helpsreporting entities meet the challenges of applying the key accounting and reporting standardsunder both U.S. Generally Accepted Accounting Principles (U.S. GAAP) and InternationalFinancial Reporting Standards (IFRS) related to fair value measurements, AccountingStandards Codification 820, Fair Value Measurement (ASC 820) and IFRS 13, Fair ValueMeasurement (IFRS 13).Fair value accounting continues to be a topic of significant interest and debate. Withunprecedented market events, turmoil in the credit markets and a downturn in the globaleconomy in recent years, discussion of fair value has intensified among the preparers andusers of financial information. This discussion has made clear the need for consistent fair valuemeasurements in a global market. To that end, the FASB and IASB have primarily convergedthe fair value measurement and disclosure guidance through the issuance in May 2011 ofAccounting Standards Update 2011-4, which amends ASC 820, and IFRS 13. These standardscreated a global framework for applying consistent fair value measurements and we haveresponded with our first global version of this guide.The fair value standards, the focus of this guide, are principles-based standards that, with fewexceptions, impact all fair value measurements in a reporting entity’s financial statements. Inthis guide, we describe the key concepts and requirements of these standards and includespecific discussion of the impact of the fair value measurement requirements in significantaccounting areas such as investments, impairments, and business combinations. The purposeof this guide is to provide an overall framework for the application of fair value measurements;to highlight key questions and answers; and to offer our perspectives throughout, based on ouranalysis of the guidance and experience in applying it.While this guide is intended to clarify the fundamental principles of fair value measurementsand to highlight key points that should be considered when determining the fair value offinancial statement items, it is not a substitute for a thorough analysis of the facts andcircumstances surrounding specific fair value measurements, nor should it be read in place ofthe relevant accounting literature. Nonetheless, we trust that you will find in these pages theinformation and insights you need to work with greater confidence and certainty when applyingfair value measurements.PricewaterhouseCoopers LLP
Table of ContentsChapter 1:Overview1.1Why is Fair Value Important?.1 - 21.2What Authoritative Guidance Governs Fair Value MeasurementsUnder U.S. GAAP and IFRS?.1 - 21.3How Do ASC 820 and IFRS 13 Impact Fair Value Measurements?.1 - 31.4What are the Differences Between ASC 820 and IFRS 13?.1 - 7Chapter 2:Scope2.1Scope.2 - 22.22.2.12.2.22.2.2.12.2.32.2.3.12.2.3.2Scope Exceptions.2 - 3Share-Based Payments.2 - 4Impact on Measurements Similar to Fair Value.2 - 4Fair Value Measurements of Alternative Investments Using NAV.2 - 5Lease Accounting.2 - 7Application in Measuring Impairment of Nonfinancial Assets.2 - 7Application to Exit or Disposal Cost Activities.2 - 82.3When Cost May Be Used in Place of Fair Valueor as an Estimate of Fair Value .2 - 8Chapter 3:Framework for Application of the Fair Value StandardsChapter 4:Concepts4.14.1.14.1.2Definition of Fair Value.4 - 2The Asset or Liability and the Unit of Account.4 - 2The Transaction and Determination of the Principalor Most Advantageous Market.4 - 4No Observable Markets or No Access to Markets.4 - 5Market Determination—Other Considerations.4 - 6Market Participants.4 - 7The Price.4 - 8Transaction Costs.4 - 8Transportation Costs.4 - 9Application to Nonfinancial Assets - The Valuation Premiseand Highest and Best Use.4 - 10Interaction of Unit of Account and Valuation Premisefor Nonfinancial Assets.4 - 10Application to Liabilities and Instruments Classifiedin a Reporting Entity’s Shareholders’ Equity.4 - 13Liabilities.4 - .14.1.64.1.6.1Table of Contents / 1
4.1.6.24.1.7Shareholders’ Equity.4 - 16Application to Financial Assets and Financial Liabilities with OffsettingPositions in Market Risks or Counterparty Credit Risk.4 - 174.2Fair Value at Initial Recognition.4 - 174.34.3.14.3.24.3.34.3.3.1Valuation Techniques.4 - 18Market Approach.4 - 18Cost Approach.4 - 18Income Approach.4 - 19Application of Valuation Techniques.4 - 194.44.4.14.4.1.14.4.1.2Inputs to Valuation Techniques.4 - 22Observable Inputs Are Market-Based.4 - 22Different Types of Markets with Observable Inputs.4 - 24Fair Value Measurements and Inactive Markets.4 - 5.4Fair Value Hierarchy.4 - 27Level 1 Inputs.4 - 28Level 1 Inputs—Large Number of Similar Assets and Liabilities.4 - 29Level 1 Inputs—Post-Market Close Events.4 - 29Level 1 Input—Blockage Factors.4 - 30Level 1 Inputs—Control Premiums.4 - 30Level 2 Inputs.4 - 30Level 3 Inputs.4 - 31Inputs Based on Bid and Ask Prices.4 - 374.6Restricted Assets.4 - 39Chapter 5:Disclosures5.15.1.1Disclosures—Public Companies.5 - 2Main Requirements.5 - 25.2U.S. GAAP-Only Disclosures.5 - 75.3IFRS-Only Disclosures.5 - 85.4Questions & Interpretive Responses.5 - 8Chapter 6:Fair Value Option6.16.1.16.1.2Scope.6 - 3U.S. GAAP Scope.6 - 3IFRS Scope.6 - 66.26.2.16.2.1.16.2.1.26.2.1.36.2.2Application.6 - 9U.S. GAAP.6 - 9Accounting Election.6 - 9Timing.6 - 10Presentation.6 - 11IFRS.6 - 132 / Table of Contents
6.2.2.1Accounting Election.6 - 136.3Fair Value Option and Hedge Accounting.6 - 226.46.4.16.4.2Disclosure Requirements.6 - 23U.S. GAAP.6 - 23IFRS.6 - 24Chapter 7:Application to Financial Assets & Financial .27.1.2.37.1.2.47.1.2.5Non-Derivative Financial Assets.7 - 2Loans.7 - 3Loans—U.S. GAAP.7 - 3Loans—IFRS.7 - 5Investments in Equity and Debt Securities.7 - 5Investments in Equity and Debt Securities—U.S. GAAP. 7 – 5Investments in Equity and Debt Securities—IFRS. 7 – 6Restricted Securities.7 - 7Investments Held by Not-for-Profit Entities—U.S. GAAP.7 - 8Fund Investments Using NAV as Practical Expedient—U.S. GAAP.7 - 87.2Insurance Contracts.7 - 107.37.3.17.3.2Servicing Assets and Servicing Liabilities.7 - 10Servicing Assets and Servicing Liabilities—U.S. GAAP.7 - 10Servicing Assets and Servicing Liabilities—IFRS.7 - 117.4Derivative Assets and Derivative Liabilities.7 - 117.5Measuring Portfolios of Financial Instruments.7 - 137.67.6.1.17.6.1.2Changes in Market Participation Assumptions .7 - 19OIS Discounting.7 - 19Funding Valuation Adjustment (FVA).7 - 197.77.7.17.7.2Hedge Accounting Considerations.7 - 20Hedge Accounting Considerations—U.S. GAAP.7 - 20Hedge Accounting Considerations—IFRS.7 - 217.8Margin Deposits and Collateral—U.S. GAAP.7 - 247.97.9.1Long-Term Debt.7 - 25Long-Term Debt—Valuation Considerations.7 - 267.107.10.17.10.2Employee Benefits Plans.7 - 27Employee Benefits.7 - 27Postemployment Benefits—U.S. GAAP.7 - 27Chapter 8:Application to Nonfinancial Assets, Nonfinancial Liabilities,and Business Combinations8.1Measuring Nonfinancial Assets and Nonfinancial Liabilities.8 - 2Table of Contents / 3
8.1.18.1.1.18.1.28.1.38.1.4Use of Market Participant Assumptions.8 - 2Identifying Market Participants.8 - 3Determining the Appropriate Market.8 - 4Highest and Best Use.8 - 5Application of Valuation Techniques.8 - 78.2Measuring the Fair Values of Nonfinancial Assetsand Nonfinancial Liabilities.8 - 8Fair Value of Tangible Assets.8 - 8Fair Value of Intangible Assets.8 - 10Income Approach for Intangible Assets.8 - 10Income Approach for Intangible Assets—The Multi-Period Excess Earnings Method.8 - 10MEEM—Discount Rates for Intangible Assets.8 - 12MEEM—Reconciliation of Rates of Return.8 - 13Leading Practices in Determining Contributory Asset Charges.8 - 15MEEM—Tax Amortisation Benefits.8 - 16Income Approach for Intangible Assets—Relief-From-Royalty Method.8 - 17Income Approach for Intangible Assets—Greenfield Method.8 - 18Income Approach for Intangible Assets—With or without Method.8 - 19Market Approach for Intangible Assets.8 - 20Cost Approach for Intangible Assets.8 - 20Leading Practices when Measuring the Fair Value of Intangible Assets.8 - 21Asset Retirement Obligations (U.S. GAAP only).8 - 22Periods Subsequent to Initial Measurement of AROs (U.S. GAAP Only).8 - 23Decommissioning Costs (IFRS only).8 - 24Investment Property.8 - 24How to Fair Value Investment Property.8 - 24The Market Approach—Investment Property.8 - 25The Income Approach—Investment Property.8 - 26Commodity Broker-Trader Inventory (IFRS only).8 - 26Biological Assets.8 - 26Location of the Asset.8 - 26Market-Based Valuation Techniques.8 - 27Fair Value of Biological Assets in the Absenceof Market Based Prices or Values.8 - nts of Indefinite-Lived Intangible Assets,Including Goodwill, and Long-Lived Assets.8 - 30Overview of Impairment Testing under ASC 350,ASC 360-10, and IAS 36.8 - 30Impairment Tests—Key Considerations.8 - .48.4.4.18.4.4.1.18.4.4.2Business Combinations.8 - 34Business Combination—Example.8 - 35Business Combination—Financial Liabilities.8 - 39Debt.8 - 39Fair Value of NonControlling Interest.8 - 40NCI—Market Approach.8 - 40NCI—The Income Approach.8 - 41Business Combination—Nonfinancial Liabilities.8 - 42Contingent Liabilities and Liabilities.8 - 44Subsequent Measurement of Contingent Assets and Liabilities.8 - 44Deferred Revenue.8 - 458.3.14 / Table of Contents
8.4.5Accounting for Costs Associated with Exit or Disposal Activities.8 - 46Chapter 9:Consideration of Credit Risk9.19.1.19.1.1.19.1.1.29.1.2Overview.9 - 2Incorporating Credit Risk.9 - 2Other Considerations.9 - 4Timing.9 - 5Market Participant Perspective.9 - tion to a Credit Risk Measurement Framework.9 - 8Step One: Determine Unit of Measurement for Credit Risk.9 - 9Step Two: Apply a Market Participant Perspectiveto Available Credit Information.9 - 14Evaluating Credit Information.9 - 15Comparing Sources of Credit Information.9 - 18Other Considerations.9 - 19Approaches to Assessing Available Information.9 - 20Step Three: Calculate the Credit Risk Adjustment.9 - 22Examples—Calculation of a Credit Risk Adjustment.9 - 24Step Four: Allocate the Credit Risk Adjustmentto Individual Fair Value Measurements.9 - 29Allocation Methods.9 - 29Example—Allocation of Portfolio-Level Credit Risk Adjustment.9 - 31Balance Sheet Classification.9 - 33Allocation Between the Income Statement and Other Comprehensive Income.9 - 349.3Classification in the Fair Value Hierarchy . .9 - 34Appendix A:Definition of Key Terms. A - 2Appendix B:Index of Questions and Examples. B - 2Appendix C:Abbreviations. C - e of Contents / 5
Chapter 1:OverviewOverview / 1 - 1
Chapter 1: Overview1.1Why is Fair Value Important?Fair value continues to be an important measurement basis in financial reporting. Itprovides information about what an entity might realise if it sold an asset or mightpay to transfer a liability. In recent years, the use of fair value as a measurement basisfor financial reporting has been expanded, even as the debate over its usefulness tostakeholders continues.Determining fair value often requires a variety of assumptions as well as significantjudgment. Thus, investors desire timely and transparent information about how fairvalue is measured, its impact on current financial statements, and its potential toimpact future periods.There are numerous items for which fair value measurements are required orpermitted. The following are some of the more significant items (measured at fairvalue or an amount based on fair value) under U.S. GAAP, IFRS, or both: derivatives and non-derivative financial assets and liabilities assets and liabilities in a business combination, goodwill, contingentconsideration, and intangible assets asset retirement obligations impairments of intangible or long-lived assets liabilities for exit and disposal activities assets of pension and other postretirement benefit plans guarantees consideration received that should be recognized as revenue real estate held for sale disclosures of long-term debt and other financial instruments not carried at fairvalue on the balance sheet, and instruments eligible for the fair value option under both U.S. GAAP and IFRS,which is discussed in FV 2: Scope.The full scope of the fair value guidance is discussed in FV 2: Scope.1.2What Authoritative Guidance Governs Fair Value Measurements Under U.S.GAAP and IFRS?In May 2011, the Financial Accounting Standards Board (FASB) and the InternationalAccounting Standards Board (IASB) (the “Boards”) substantially converged theguidance for measuring and disclosing fair value under U.S. GAAP and IFRS throughthe issuance of two standards: Accounting Standards Update (ASU) No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair ValueMeasurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”)and IFRS 13, Fair Value Measurement (“IFRS 13”)(“the fair value standards”). Thesestandards are the current authoritative guidance on fair value measurements.This Global Guide to Fair Value Measurements includes current guidance under bothU.S. GAAP and IFRS.1 - 2 / Overview
1.3How Do ASC 820 and IFRS 13 Impact Fair Value Measurements?The fair value standards define how fair value should be determined for financialreporting purposes. They establish a fair value framework applicable to all fair valuemeasurements under U.S. GAAP and IFRS (except those measurements specificallyexempted; see further discussion in FV 2: Scope).The standards require that fair value be measured based on an “exit price” (not thetransaction price or entry price) determined using several key concepts. Preparersneed to understand these concepts and their interaction. They include the principal(or most advantageous) market, the highest and best use for non-financial assets,the use and weighting of multiple valuation techniques, and the fair value hierarchy.Preparers also need to understand valuation theory to ensure that fair valuemeasurements comply with the accounting standards.Key concepts include the following:Fair Value is Based on the Price to Sell an Asset or Transfer (not Settle) a LiabilityFair value is defined as “the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participants at themeasurement date.”In many cases, the price to sell an asset or transfer a liability (the exit price) and thetransaction (or entry) price will be the same at initial recognition; however, in somecases, the transaction price may not be representative of fair value. In those cases, areporting entity under U.S. GAAP (and less frequently under IFRS—see below) mayrecognise an initial gain (or loss) as a result of applying ASC 820. The fact that the fairvalue measurement is based on a valuation model that uses significant unobservableinputs does not alter the requirement to use the resulting value in recording thetransaction.The initial (or “Day One”) gain or loss is the unrealised gain or loss, which is thedifference between the transaction price and the fair value (exit or transfer price) atinitial recognition. The recognition of that unrealised gain or loss depends on theaccounting model for the asset or liability, as specified in other GAAP (e.g., the gainor loss on available-for-sale securities reported in other comprehensive income vs.the gain or loss on trading securities reported in income). ASC 820 describes someof the conditions that may give rise to a Day One gain or loss (e.g., different entry andexit markets).Reporting entities may only recognise Day One gains and losses under IFRS incertain circumstances. This is a recognised difference between U.S. GAAP and IFRS,which is discussed in FV 1.4 below.Under the fair value standards, a liability’s fair value is based on the amountthat would be paid to transfer that liability to another entity with the same creditstanding. The transfe
under both U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) related to fair value measurements, Accounting Standards Codification 820, Fair Value Measurement (ASC 820) and IFRS 13, Fair Value Measurement (IFRS 13).
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