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Fair value – detailed legislation starts in 2013

The year 2013 is significant in terms of valuation of assets and liabilities in the International Financial Reporting Standards (IFRS). Impact on other valuation areas can also be expected.

What is happening in the area
The IFRS are important for companies whose securities (shares, bonds) are admitted to trading on public markets situated in the European Union, and that are also valid for other markets. The IFRS rules are also essential for non-traded companies, especially if they are part of large multinational groups.
At the end of 2012, the European Union adopted IFRS 13 – “Fair Value Measurement”, which regulates application of the fair value standard in the IFRS effective as of 2013. The more detailed regulation of the fair value standard filled a major gap in applying the standard, for example in large ownership transactions related to sales of companies.

What fair value means
Fair value is simply a perspective on the value of an asset. The standard accounting concept tracks the value of assets / liabilities from the perspective of their building and later wear and tear (decrease in the value). Fair value measures the value from the perspective of selling an asset / liability to another entity. As many assets are not for sale separately, it is necessary to have rules to measure fair value.

What the fair value standard covers
The fair value standard must cover all imaginable assets / liabilities. No matter whether it is valuation of a fully leased property or recently developed software the potential of which needs not be well known for the present. This comparison implies that fair value application is very wide.

When you have to consider the fair value standard
The fair value standard is included in many particular IFRSs. Therefore, when drawing up financial reports / statements in accordance with the IFRS, it is always good to check whether the fair value standard could be one of the criteria which must be considered for a group of assets / liabilities. Fair value application is absolutely essential in the case of purchase of companies and also if a controlling interest is purchased. In such case the assets and liabilities of the purchased company must be re-valued using the fair value standard and new, often exotic, assets and liabilities must be identified.

What are the main changes in the fair value standard?
IFRS 13 brings primarily more detailed regulation of methods applied earlier. For example, the following is exactly specified: 

• Fair value is measured from the perspective of sale options available to a current asset holder, considering the markets (even in the very broad sense) they trade in 
• Fair value may be measured both from the perspective of the value of the asset as well as on the assumption of using the valued asset with other assets that are available to other market participants. From the valuation point of view, we can see that this rule has great significance in valuation of intangible assets. 
• IFRS 13 describes the hierarchy of inputs used to measure the value of a given asset. The highest priority is given to information from active markets for identical assets (stock exchange market, if possible), then information which is observable for example for similar assets, and finally, inputs that cannot be observed in markets and that are in accordance with the fair value standard definition. 

As is usual for the IFRS, the standard is rather extensive. Only a basic list is provided above.

With what RSM TACOMA can help you
Our company deals primarily with valuation of assets and liabilities in transactions including a whole company (whether in the form of sale of assets or purchase of shares). In the case of the IFRS, application of the fair value standard is indispensable for this area. We will be very pleased to discuss your questions with you, including questions related to other transactions.

For more information, please contact:
Rudolf Hájek, Senior Consultant
Phone: +420 226 219 000
E-mail: rudolf.hajek@rsm-tacoma.cz