1 Discuss briefly about fair value measurement and impairment

Overview of fair value measurement

IFRS 13 Fair Value Measurement applies to IFRSs that require or permit fair value measurements or
disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about
fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and uses a
'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement.IFRS 13
was originally issued in May 2011 and applies to annual periods beginning on or after 1 January 2013.
Fair value accounting helps businesses survive during a financially difficult time because it allows asset
reduction (or the act of declaring that the value of an asset that is included in a sale was overestimated).

Fair value measurement is made up of one or more inputs, which are the assumption that market
participant would make in valuing the assets or liability. The most reliable evidence of fair value is a
quoted price in an active market. When this is not available, entities use valuation approach to measure
fair value, maximizing the use of relevant observable input and maximizing use of unobservable input.
These input also form basis of fair value hierarchy, which is used to categorize affair value measurement
in to one of the three level

What is fair value?

Fair value is a broad measure of an asset's worth and is not the same as market value, which refers to the
price of an asset in the marketplace. In accounting, fair value is a reference to the estimated worth of a
company's assets and liabilities that are listed on a company's financial statement. 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.

How is fair value measured?

Fair value is focused on the assumptions of the marketplace and is not entity-specific. It therefore takes
into account any assumptions about risk. It is measured using the same assumptions and taking into
account the same characteristics of the asset or liability as market participants would.

What is the objective of fair value measurement?

When measuring fair value, the objective is to estimate the price at which an orderly transaction to sell
an asset or to transfer a liability would take place between market participants at the measurement date
under current market conditions (i.e. to estimate an exit price).
What Is Impairment?

In accounting, impairment is a permanent reduction in the value of a company asset. It may be a fixed
asset or an intangible asset, so as to reflect a decline in the quality, quantity, or market value of the asset.
It’s an accounting concept based on the idea that an asset shouldn’t be carried in your business’s financial
statements at more than the highest amount that could potentially be recovered from selling it. When the
carrying amount does exceed the fair market value of the asset, it’s referred to as an “impaired asset.”

When testing an asset for impairment, the total profit, cash flow, or other benefit that can be generated
by the asset is periodically compared with its current book value. If the book value of the asset exceeds
the future cash flow or other benefit of the asset, the difference between the two is written off, and the
value of the asset declines on the company's balance sheet.

Impairment is most commonly used to describe a drastic reduction in the recoverable value of a fixed
asset. The impairment may be caused by a change in the company's legal or economic circumstances or
by a casualty loss from an unforeseeable disaster.

Measurement of fair value

Overview of fair value measurement approach

The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants at the measurement date
under current market conditions. A fair value measurement requires an entity to determine all of the
following: [IFRS 13:B2]

 the particular asset or liability that is the subject of the measurement (consistently with its unit of
account)
 for a non-financial asset, the valuation premise that is appropriate for the measurement
(consistently with its highest and best use)
 the principal (or most advantageous) market for the asset or liability
 the valuation technique(s) appropriate for the measurement, considering the availability of data
with which to develop inputs that represent the assumptions that market participants would use
when pricing the asset or liability and the level of the fair value hierarchy within which the inputs
are categorised.

The generally accepted accounting principles (GAAP) define an asset as impaired when its
fair value is lower than its book value.

To check an asset for impairment, the total profit, cash flow, or other benefit expected to be
generated by the asset is compared with its current book value.

If it is determined that the book value of the asset is greater than the future cash flow or benefit
of the asset, an impairment is recorded.
 2 Discuss fair value hierarchy

Fair value hierarchy

Overview

IFRS 13 seeks to increase consistency and comparability in fair value measurements and related
disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation
techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in
active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the
fair value measurement is categorised in its entirety in the level of the lowest level input that is significant
to the entire measurement (based on the application of judgement).
Definition. The Fair Value Hierarchy categorises the inputs used in Valuation techniques into three
levels. The hierarchy gives the highest priority (Level 1) to (unadjusted) quoted prices in active markets
for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs.

The Fair Value Hierarchy categorises the inputs used in Valuation techniques into three levels.
The hierarchy gives the highest priority (Level 1) to (unadjusted) quoted prices in active markets
for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs.

IFRS 13 seeks to increase consistency and comparability in fair value measurements and related
disclosures through a 'fair value hierarchy'.

If multiple inputs used to measure fair value are categorised into different levels of the fair value
hierarchy, the Fair Value Measurement (the final valuation) is categorised in its entirety in the
level of the lowest level input that is significant to the entire measurement (based on the
application of judgement).
Level 1 inputs

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can
access at the measurement date. [IFRS 13:76]

A quoted market price in an active market provides the most reliable evidence of fair value and is used
without adjustment to measure fair value whenever available, with limited exceptions. [IFRS 13:77]

If an entity holds a position in a single asset or liability and the asset or liability is traded in an active
market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price
for the individual asset or liability and the quantity held by the entity, even if the market's normal daily
trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a
single transaction might affect the quoted price. [IFRS 13:80]

Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly. [IFRS 13:81]

Level 2 inputs include:

 quoted prices for similar assets or liabilities in active markets

 quoted prices for identical or similar assets or liabilities in markets that are not active
 inputs other than quoted prices that are observable for the asset or liability, for example
o interest rates and yield curves observable at commonly quoted intervals
o implied volatilities
o credit spreads
 inputs that are derived principally from or corroborated by observable market data by correlation
or other means ('market-corroborated inputs').

Level 3 inputs

Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86]

Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not
available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date. An entity develops unobservable inputs using the best information
available in the circumstances, which might include the entity's own data, taking into account all
information about market participant assumptions that is reasonably available. [IFRS 13:87-89]

What is a fair value hierarchy?

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for
identical assets or liabilities (Level 1), and the lowest priority to unobservable inputs (Level 3).

3 Explain the valuation approach of fair value measurement

The three widely used valuation techniques cited by IFRS 13 are: market approach, cost approach,
and. income approach.

Market Approach – A valuation technique that uses prices and other relevant information
generated by market transactions involving identical or comparable (i.e., similar) assets,
liabilities, or a group of assets and liabilities, such as a business.

Income Approach – A valuation technique that converts future amounts (e.g., cash flows, or
income and expenses) to a single current (i.e., discounted) amount. The fair value measurement
is determined on the basis of the value indicated by current market expectations about those
future amounts.

Cost Approach – A valuation technique that reflects the amount that would currently be
required to replace the service capacity of an asset (i.e., current replacement cost).
 4 Discuss the nature of investement property
What Is an Investment Property? An investment property is real estate property purchased with the
intention of earning a return on the investment either through rental income, the future resale of
the property, or both. The property may be held by an individual investor, a group of investors, or a
corporation.

What is the definition of an investment property?

Investment Property Definition

An investment property is real estate purchased to generate income (i.e., earn a return on the
investment) through rental income or appreciation. Investment properties are typically
purchased by a single investor or a pair or group of investors together.

Summary of IAS 40

Definition of investment property

Investment property is property (land or a building or part of a building or both) held (by the owner or
by the lessee under a finance lease) to earn rentals or for capital appreciation or both. [IAS 40.5]

Examples of investment property: [IAS 40.8]

 land held for long-term capital appreciation

 land held for a currently undetermined future use
 building leased out under an operating lease
 vacant building held to be leased out under an operating lease
 property that is being constructed or developed for future use as investment property

The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and
40.9]

 property held for use in the production or supply of goods or services or for administrative
purposes
 property held for sale in the ordinary course of business or in the process of construction of
development for such sale (IAS 2 Inventories)
 property being constructed or developed on behalf of third parties (IAS 11 Construction
Contracts)
 owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for
future use as owner-occupied property, property held for future development and subsequent use
as owner-occupied property, property occupied by employees and owner-occupied property
awaiting disposal
 property leased to another entity under a finance lease
Investment Law

Definition and Nature of Investment

Tesfaye Abate Apr 08 2012

 Print
 Email

The term ‘investment’ may mean different things in different disciplines and contexts.
Thus, it may mean “expenditure to acquire property or assets to produce revenue”. [1]
Fisher and Jordan[2] define investment as commitment of funds made in the
expectation of some positive rate of return. According to them, the return will
commensurate with the risk the investor assumes if the investment is properly
undertaken. We observe from this definition that investment is a commitment of
funds. Thus, a person would commit fund on something. In addition, the commitment
is made with the expectation of some positive rate of return. This positive rate of
return is a profit gained from the commitment of the fund. However, it is important to
bear in mind that investment carries with it a risk, i.e. the commitment of the fund
might end up with no profit. Thus, the investor needs to properly manage the
investment to make sure that it will be profitable.

From the legal point of view, investment is defined as:

Every kind of asset and in particular shall include though not exclusively:

a) movable and immovable property and any other property rights such as mortgages,
liens and pledges;

b) shares, stocks and debentures of companies or interests in the property of such

companies;

c) claims to money or to any performance under contract having a financial value;

d) intellectual property rights and goodwill;

e) business concessions conferred by law or under contract, including concessions to

search for, cultivate, extract or exploit natural resources.[3]

Under a bilateral investment treaty to which Ethiopia is a party, investment is

defined as: “Any kind of asset and any direct or indirect contribution in cash, in kind
 or in services, invested or reinvested in any sector of economic activity.”[5 As per

this Agreement though not exclusively, it includes: 1[6] movable and immovable

property and rights in rem like mortgages, liens, pledges, and usufruct; shares;

bonds, claims to money and to any performance having an economic value;

copyrights, industrial property rights, technical processes, trade names and goodwill;

concessions granted under public law or contract to explore, develop, extract or

exploit natural resources.
. In general, investment may be defined as making an outlay of money or capital for
profit. The definition given under our investment law is in line with this definition.
The provision of Art 2(1) of Proclamation No. 280/2002 (as amended) reads as:

“Investment” means expenditure of capital by an investor to establish a new

enterprise or to expand or upgrade one that already exists.

5.Discuss recogintion and measurement of investement property

When to Recognize investment property

The rules for recognition of investment property are essentially the same as stated in IAS 16 for
property, plant and equipment, i.e. you recognize an investment property as an asset only if 2
conditions are met:

1. It is probable that future economic benefits associated with the item will flow to the
entity; and
2. The cost of the item can be measured reliably.

How is investment property measured?

An investment property is measured initially at cost. The cost of an investment property interest
held under a lease is measured in accordance with IAS 17 at the lower of the fair value of the
property interest and the present value of the minimum lease payments.

What are the conditions for the recognition of investment property?

1
The rules for recognition of investment property are essentially the same as stated in IAS 16 for
property, plant and equipment, i.e. you recognize an investment property as an asset only if 2
conditions are met: It is probable that future economic benefits associated with the item will
flow to the entity

RECOGNITION OF THE INVESTMENT PROPERTY

Once the immovable property is classified as the investment property, it should be recognized as
an object of accounting and reflected respectively in the financial statements.
The Standard offers the criteria of recognition of the assets as the investment property, which
correspond factually the criteria of recognition of the assets, in general.
The Investment property should be recognized as an asset when:
It is probable that the future economic benefits that are associated with the property will flow to
the entity, and the cost of the property can be reliably measured. The investment property is to be
recognized as the assets in the cases, if:
a) It is probable that the future economic benefits will flow to the entity; and
b) The cost of the investment property can be reliably measured.
An entity should recognize the expenses borne for all investment property jupon bearing thereof.
These expenses include the initial costs of purchase of the investment property and the costs
borne for its rehabilitation and startup. At the same time, an entity does not recognize in the
balance value of the investment property the costs for a daily maintenance of such the assets.
These costs should had to be recognized in the profit or the loss, immediately upon their
bearing .Such the costs cover mainly the expenses for repair and operation of the investment
property.
The Standard singles out the moments, which enables us to determine whether the main assets
are necessary to be accounted as the investment property.
For example:
 The company lets in lease its own building. The lease agreement envisages the costs of
maintenance and operation of the building. These services form an insignificant part of the
agreement, therefore, the company treats the building as the investment property.
 The company owns a hotel, which is managed by the company itself - providing the rooms to
the guests, etc. The agreement envisages also rendering services to the gusts and, such the
services form a significant part of the agreement. In this case, the hotel is not an investment
property, but the main asset.
4. MEASUREMENT OF THE INVESTMENT PROPERTY
Initial value of the investment property should be measured by the factual costs borne, which
cover the expenses associated to purchase and bring it into the useful conditions.
At the initial stage, the purchased or own investment property must be measured at its cost
The cost of the purchased investment property covers the costs of purchase and of the legal
services (if any, of course), as well as the dues for transfer of the property, and other costs of the
deal.
The cost of the own investment property of the entity should include the start-up costs, or initial
operating losses incurred before the investment property achieves the planned level of
occupancy.
Until the said date will come, the entity applies IAS 16: Property, Plant and Equipment”, while
Thereafter, the above mentioned property is transformed into the investment property and, IAS
40 starts operation.
For example, In March, 2016, the company purchased a land plot at 23500 GEL. According to
the expectations of the Company, after three years when a sporting facilities will have been built
on this land area, a value of the land will be increased considerably and, may be sold at several
times higher price. The company paid 1500 GEL for the legal transaction. The costs incurred vy
the companies are compensated in full.

Explain subsequent measurement of investement property

What is the subsequent measurement of investment property?
Investment properties are initially measured at cost and, with some exceptions. may be
subsequently measured using a cost model or fair value model, with changes in the fair value
under the fair value model being recognised in profit or loss.

For subsequent measurement an entity must adopt either the fair value model or the cost
model as its accounting policy for all investment properties. All entities must determine fair
value for measurement (if the entity uses the fair value model) or disclosure (if it uses the cost
model).

Subsequent measurement of investment property

After initial recognition, you have 2 choices for measuring your investment property (IAS 40.30
and following).

Once you make your choice, you should stick to it and measure all of your investment property
using the same model (there are actually exceptions from that rule).
Option 1: Fair value model

Under fair value model, an investment property is carried at fair value at the reporting date.
(IAS 40.33)

The fair value is determined in line with the standard IFRS 13 Fair Value Measurement.

A gain or loss from re-measurement to fair value shall be recognized in profit or loss.

Sometimes, the fair value cannot be reliably measurable after initial recognition. This can happen
in absolutely rare circumstances (e.g. active marked ceased existing) and in this case, IAS 40
prescribes (IAS 40.53):

 To measure your investment property at cost, if it’s not yet completed and is under
construction; or
 To measure your investment property using cost model, if it’s completed.

 
Option 2: Cost model

The second choice for subsequent measurement of investment property is a cost model.

Here, IAS 40 does not describe it in details, but refers to the standard IAS 16 Property, Plant and
Equipment. It means you need to take the same methodology as in IAS 16.

7. Discuss presentation and disclosure of fair value model and cost model

What is cost model and fair value model?

Fair value is the price at which the property could be exchanged between
knowledgeable, willing parties in an arm's length transaction, without
deducting transaction costs (see IFRS 13). Under the cost model, investment
property is measured at cost less accumulated depreciation and any accumulated
impairment losses.
What is fair value disclosure?
Fair value, as defined by the Fair Value Measurements and Disclosures Topic, is 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.
What does a cost model means?
A cost model is a method or framework for determining the total value invested to deliver a
product or service. The scope and detail of the process can vary depending on the situation, but
the goal of all cost modeling is to find an accurate way to assess value input for comparison
against value output.

Presentation and disclosure cost model and fair value model

What is presentation and disclosure?

Presentation and disclosure are the meta terms used to describe how information about
assets, liabilities, equity, income and expenses is provided in financial statements.
Presentation and disclosure have received a prominent combined place in the Conceptual
Framework for Financial Reporting 2018

An entity shall present and disclose information that enables users of the financial
statements to evaluate the financial effects of investment property held in accordance with
either the cost model or the fair value model

Disclosure

Both Fair Value Model and Cost Model [IAS 40.75]

  whether the fair value or the cost model is used
 if the fair value model is used, whether property interests held under operating leases are
classified and accounted for as investment property
 if classification is difficult, the criteria to distinguish investment property from owner-
occupied property and from property held for sale
 the extent to which the fair value of investment property is based on a valuation by a
qualified independent valuer; if there has been no such valuation, that fact must be
disclosed
 the amounts recognised in profit or loss for:
o rental income from investment property
o direct operating expenses (including repairs and maintenance) arising from
investment property that generated rental income during the period
o direct operating expenses (including repairs and maintenance) arising from
investment property that did not generate rental income during the period
o the cumulative change in fair value recognised in profit or loss on a sale from a
pool of assets in which the cost model is used into a pool in which the fair value
model is used
 restrictions on the realisability of investment property or the remittance of income and
proceeds of disposal
 contractual obligations to purchase, construct, or develop investment property or for
repairs, maintenance or enhancements

Additional Disclosures for the Fair Value Model [IAS 40.76]

 a reconciliation between the carrying amounts of investment property at the beginning and end of
the period, showing additions, disposals, fair value adjustments, net foreign exchange differences,
transfers to and from inventories and owner-occupied property, and other changes [IAS 40.76]
 significant adjustments to an outside valuation (if any) [IAS 40.77]
 if an entity that otherwise uses the fair value model measures an item of investment property
using the cost model, certain additional disclosures are required [IAS 40.78]

Additional Disclosures for the Cost Model [IAS 40.79]

 the depreciation methods used

 the useful lives or the depreciation rates used
 the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period
 a reconciliation of the carrying amount of investment property at the beginning and end of the
period, showing additions, disposals, depreciation, impairment recognised or reversed, foreign
exchange differences, transfers to and from inventories and owner-occupied property, and other
changes
o None