The Accounting Adviser

February 2013

Time for Transition: Will IFRS 13 affect your business?
New fair value definition, New considerations 

By Mahesh Narayanasami, Partner, Accounting Advisory Services

The January 1, 2013 effective date of IFRS 13 Fair Value Measurement is upon us. Many old concepts regarding fair value have been changed. Above all, the new standard requires fair value to be measured as an exit price from the perspective of market participants in the 'principal' market, even if you normally transact in a different market.

While some of the changes in the new fair value measurement standard are subtle, the impact on your business may not be. These impacts which are now effective require your immediate attention.  

How does this affect you?

• You might have hedge accounting relationships that may  be affected on adoption of the new standard. Changes in the fair value of derivatives could lead to ineffectiveness in hedge accounting relationships that didn't exist before.
  
  
• You might have transactions that are measured by reference to one market, but alternative markets exist that need to be considered under the new definition of fair value. Under the new standard, you are generally required to assume that the transaction takes place in the 'principal' market – i.e. the market with the greatest volume and level of activity; this might be a change from the market you currently use for pricing, which is likely the market in which you normally transact. You need to consider all reasonably available information about volumes and levels of activity of the relevant markets for determining whether the principal market is different from your current reference market.
  
  
• You might have investments in portfolios of financial assets and liabilities with offsetting risks, or a large holding in particular equity instruments that are measured at fair value. You need to determine whether your portfolio or holding should be measured as a single position or as the sum of the fair values of the individual instruments. This will drive whether adjustments to fair value measurements, such as control premiums or marketability or liquidity discounts, are justified or required and how they are determined, which may be different from your current practice. 
  
  
• You might have assets or liabilities measured at fair value that have a bid and an ask price. Under the new standard, you may use the price within the bid-ask spread that is most representative of fair value rather than having to use only bid prices for asset positions and ask prices for liability positions. In some cases, a practical expedient such as mid-market pricing may be appropriate. Therefore, you should re-assess how you measure the fair value of assets and liabilities subject to a bid-ask spread. 
  
  
• You need to disclose more extensive fair value information. Even if a fair value measurement itself does not change, the new standard includes new disclosure requirements. You need to disclose more information that may require additional data collection about unobservable inputs used for fair value measurements, sensitivity to these inputs and interrelationships between them and unrealized gains and losses and about the fair value measurement levels in the fair value hierarchy. The last requirement also includes fair value measurements used only for disclosure purposes. Some of this information may not be captured under your current processes and systems.

Please contact us if you would like to discuss how the new standard on fair value measurement will affect your organization. Determining the appropriate accounting is the first step to determining the wider impacts on your organization. Our team understands that implementing a new standard is more than an accounting exercise – it will have significant impacts on your entire organization, including P&L volatility, tax implications, systems and processes and the potential need to recalculate internal management information, KPIs and forecasts.

AAS@kpmg.ca
www.kpmg.ca/accountingadvisory