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KPMG Fair Value Measurement.

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130 views173 pages

KPMG Fair Value Measurement.

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Fair value

measurement
Handbook
US GAAP and IFRS® Accounting Standards

November 2023

kpmg.com
Contents

Contents
Measuring fair value in times of change 1
About the accounting standards 2
About this Handbook 4
A. An introduction to fair value measurement 7
B. Scope 9
C. The item being measured and the unit of account 19
D. Market participants 29
E. Principal and most advantageous markets 32
F. Valuation approaches and techniques 41
G. Inputs to valuation techniques 51
H. Fair value hierarchy 62
I. Fair value on initial recognition 72
J. Highest and best use 77
K. Liabilities and own equity instruments 81
L. Portfolio measurement exception 90
M. Inactive markets 96
N. Disclosures 100
O. Application issues: Derivatives and hedging 117
P. Application issues: Investments in investment
funds 138
Q. Application issues: Practical expedient for
investments in investment companies
[US GAAP only] 144
R. Application issues: Contractual sale restrictions
[US GAAP only] 153
Appendix: Index of questions and answers 157
Appendix: Effective dates – US GAAP 166
Keeping in touch 168
Acknowledgments 170
Measuring fair value in times
of change
In recent years, companies have needed to respond and adapt to major economic changes, such as
mounting inflation and interest rates, geopolitical events, the rise of artificial intelligence and climate-related
matters. Any of these events may have prompted companies to reevaluate the judgments, inputs and
critical assumptions underpinning their fair value measurements. In times of change, comprehensive
disclosures about a company’s fair value measurements – including significant sources of estimation
uncertainty – are critical to telling the company’s story effectively to users of the financial statements.
This edition of our Fair value measurement handbook includes a new series of questions and answers
on applying the new Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
2022-03 Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. Among
other things, the ASU clarifies that a contractual restriction on the sale of an equity security is an entity-
specific characteristic and is not considered in measuring the security’s fair value.
Looking forward, the FASB plans to issue an ASU on crypto asset accounting and reporting, requiring
in-scope crypto assets to be measured at fair value with fair value changes recorded in current-period
earnings. In-scope crypto assets would also be subject to the disclosure requirements in Topic 820, Fair
Value Measurement. The International Accounting Standards Board does not have a similar project in its
work plan.
We are pleased to share our insight and practical guidance in this latest edition of our handbook. This
publication will help you apply the principles of Topic 820 and IFRS 13 Fair Value Measurement, and
understand the key differences between the accounting standards.

Michael Hall and Mahesh Narayanasami Colin Martin and Avi Victor
Department of Professional Practice KPMG International
KPMG in the US Standards Group

© 2023 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,
a private English company limited by guarantee. All rights reserved.
© 2023 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2 | Fair value measurement handbook

About the accounting

standards
Chronology and objective
The FASB originally issued Topic 820 as FASB Statement of Financial Accounting Standards No. 157
(FASB Statement 157) in September 2006. The International Accounting Standards Board (IASB) issued
the IFRS Accounting Standards equivalent, IFRS 13, in May 2011. At the same time, the FASB issued
ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in US GAAP and IFRSs. The ASU amended US GAAP to achieve the FASB’s and IASB’s objectives of a
converged definition of fair value and substantially converged measurement and disclosure guidance.
Subsequently, the FASB has issued various amendments to Topic 820, most notably:
• ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or
Its Equivalent), issued May 2015;
• ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement, issued August 2018; and
• ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.
Certain of these amendments have resulted in further divergence between the accounting standards
(see the summary of key differences between US GAAP and IFRS Accounting Standards below).
Despite these differences, Topic 820 and IFRS 13 remain aligned in that they define fair value, establish
a framework for measuring fair value and a fair value hierarchy based on the source of the inputs used to
estimate fair value, and require disclosures about fair value measurements. The accounting standards do
not establish new requirements for when fair value is required or permitted, but provide a single source of
guidance on how fair value is measured. In general, this guidance is applied when fair value is required or
permitted by other applicable GAAP.

Summary of key differences between US GAAP and IFRS Accounting

Standards
Throughout this Handbook, we highlight what we believe are significant differences between US GAAP
and IFRS Accounting Standards. However, many of these differences do not arise from the fair value
measurement standards but because of the interaction of those accounting standards with other
requirements of US GAAP or IFRS Accounting Standards. For example, Question C90 discusses a
difference related to ‘unit of account’, which is prescribed by other US GAAP that requires or permits fair
value measurement.
Further, certain US GAAP requirements apply to nonpublic entities only. Unlike US GAAP, the requirements
of IFRS 13 apply to all entities, regardless of their public status.
Content in this book that is specific to nonpublic entities is marked with a and is not relevant to users
of IFRS Accounting Standards.

This table summarizes what we believe are the key differences in the measurement and disclosure of fair
value between US GAAP and IFRS Accounting Standards.

US GAAP IFRS Accounting Standards

Section N, Disclosures
ASU 2018-13 eliminated and modified certain fair value disclosure requirements under Topic 820. The ASU
also exempted nonpublic entities from certain disclosure requirements. Consequently, the ASU resulted
in further divergence in the fair value disclosure requirements under US GAAP and IFRS Accounting
Standards. These differences are highlighted throughout Section N, Disclosures, particularly in Question
N20, which summarizes the fair value disclosure requirements under the accounting standards.
Section Q, Application issues: Practical expedient for investments in investment companies
There is a practical expedient to measure the fair Unlike US GAAP, there is no practical expedient for
value of these investments at net asset value if these investments.
certain criteria are met.

Effective dates
Generally, new accounting standards and interpretations issued by the IASB have a single effective
date. In contrast, those issued by the FASB usually have at least two effective dates – e.g. one for public
business entities and another for all other entities. This may be further nuanced by requiring certain entities
(e.g. employee benefit plans that file or furnish their financial statements with the SEC) to follow the
effective date requirements for public business entities. This means that the implementation dates of new
accounting standards can be spread over two or even three years. Appendix: Effective dates – US GAAP
includes a table of effective dates to help you navigate new requirements that are not yet (fully) effective
and which may affect the commentary in this Handbook.

About this Handbook

Purpose
The purpose of this Handbook is to assist you in understanding the requirements of, and the differences
between, Topic 820 and IFRS 13.

Organization of the text

Each section of this Handbook includes a short overview, followed by questions and answers. The
questions and answers are numbered in steps of 10 so that future questions and answers can be added
without breaking the flow of our guidance. Our guidance is referenced to the FASB Accounting Standards
Codification® (or Codification) and to IFRS Accounting Standards, where applicable.
References to the Codification and IFRS Accounting Standards are included in the left-hand margin, with the
references to IFRS Accounting Standards in square brackets below the US GAAP references. For example,
820‑10‑35-9 is paragraph 35-9 of ASC Subtopic 820-10; and [IFRS 13.22] is paragraph 22 of IFRS 13.

In addition, we reference other literature where applicable. For example, AICPA PADA Q16 is Question 16
of the American Institute of Certified Public Accountants (AICPA) practice aid on accounting for digital
assets.
The main text is written in the context of US GAAP. To the extent that the requirements of IFRS Accounting
Standards are the same, the references in the left-hand margin include US GAAP and IFRS Accounting
Standards. However, if the requirements of IFRS Accounting Standards differ from US GAAP, or a different
wording might result in different interpretations in practice, a box at the end of that answer discusses the
requirements of IFRS Accounting Standards and how they differ from US GAAP.

November 2023 edition

This edition includes new and updated interpretations and examples based on our experience with
companies applying Topic 820. Items that are new to this edition have been marked with **. Items that
have been significantly updated or revised in this edition are marked with #.
Appendix: Index of questions and answers indicates the changes made in this edition.

Note on global reform of interest rate benchmarks

Public authorities in many jurisdictions have taken steps to implement interest rate benchmark reform
(IBOR reform), which includes the replacement of some interbank offered rates (IBORs) with alternative
benchmark rates. Notably, ICE Benchmark Administration Limited (LIBOR’s administrator) no longer
publishes LIBOR settings based on its historical panel methodology. Although it publishes certain LIBOR
settings using a synthetic methodology, these are expected to cease by the end of 2024.
A change in the interest rate benchmark of an existing contract or hedging relationship may have an impact
on fair value measurements because it may affect future cash flows and/or discount rates. In addition,
IBOR reform may affect the observability of the inputs used to measure the fair values of some financial
instruments – e.g. if market activity for instruments indexed to a particular interest rate benchmark
reduces.
The FASB and IASB each have issued guidance1 to address financial reporting issues arising from IBOR
reform, but neither has proposed amendments to Topic 820 or IFRS 13. Therefore, entities should continue
to apply existing accounting standards to address any potential fair value measurement issues arising from
IBOR reform.

Forthcoming requirements and future developments

Generally, when a requirement in Topic 820 or IFRS 13 is affected by a new accounting standard or
amendment that changes the requirement and has been issued as of November 2023, but is not yet
effective, it is highlighted as a forthcoming requirement.
When we anticipate a future change in Topic 820 or IFRS 13 as a result of a FASB or IASB project (i.e. no
amendments have yet been made), this may be highlighted as a future development.
These forthcoming requirements and future developments are directly relevant to either the application
of Topic 820 or IFRS 13, or to the specific question. They do not represent all forthcoming requirements
and future developments under US GAAP and IFRS Accounting Standards that deal with when a fair value
measurement is required.
In some cases, we have updated a question and answer in this Handbook for a US GAAP requirement that
is not yet effective for all entities because, at the time of publication, it was effective for most (if not all)
public business entities. See Appendix: Effective dates – US GAAP for further detail.

1. FASB Topic 848, Reference Rate Reform, is currently effective for all entities. Its optional expedients generally do not apply
after December 31, 2024.

The IASB issued Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) and Interest Rate
Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16). The Phase 2 amendments
became effective for annual periods beginning on or after January 1, 2021.

Abbreviations
We use these common abbreviations in this Handbook:
DCF Discounted cash flow
EBITDA Earnings before interest, taxes, depreciation and amortization
FV Fair value
IBOR Interbank offered rate
IPO Initial public offering
LIBOR London interbank offered rate
MD&A Management’s discussion and analysis
NAV Net asset value
OCI Other comprehensive income
SEC US Securities and Exchange Commission

Symbols used
Symbols used in this Handbook:
** Items that are new in this edition
# Items that have been significantly updated or revised in this edition
Content that is specific to nonpublic entities and is not relevant to users of
IFRS Accounting Standards

A. An introduction to fair value

measurement
This section provides a brief introduction to some of the key terms used in fair value measurement, as well
as a diagram that shows the flow of the publication in relation to the process of measuring fair value and
determining the appropriate disclosures.
The key term that drives this process is fair value: 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.
Fair value is an exit price (e.g. the price to sell an asset rather than the price to buy that asset). An exit
price embodies expectations about the future cash inflows and cash outflows associated with an asset
or liability from the perspective of a market participant (i.e. based on buyers and sellers who have certain
characteristics, such as being independent and knowledgeable about the asset or liability).
Fair value is a market-based measurement, rather than an entity-specific measurement, and is measured
using assumptions that market participants would use in pricing the asset or liability, including assumptions
about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfill a liability is not
relevant in measuring fair value.
Fair value is measured assuming a transaction in the principal market for the asset or liability (i.e. the
market with the highest volume and level of activity). In the absence of a principal market, it is assumed
that the transaction would occur in the most advantageous market. This is the market that would maximize
the amount that would be received to sell an asset or minimize the amount that would be paid to transfer
a liability, taking into account transaction and transportation costs. In either case, the entity needs to have
access to that market, although it does not necessarily have to be able to transact in that market on the
measurement date.
A fair value measurement is made up of one or more inputs, which are the assumptions that market
participants would make in valuing the asset or liability. The most reliable evidence of fair value is a quoted
price in an active market. When this is not available, entities use a valuation approach to measure fair value,
maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
These inputs also form the basis of the fair value hierarchy, which is used to categorize a fair value
measurement (in its entirety) into one of three levels. This categorization is relevant for disclosure
purposes. The disclosures about fair value measurements are extensive, with more disclosures being
required for measurements in the lowest category (Level 3) of the hierarchy.

Section
Determine whether the item is in scope B

Identify the item being measured C

Establish
Identify the unit of account C
parameters:

Identify market participants, and identify the market D, E

Approach: market
F
Select Example technique: quoted prices in an active market
appropriate
valuation Approach: income
F
approach(es) Example technique: discounted cash flows
and
technique(s): Approach: cost
F
Example technique: depreciated replacement cost

Level 1
G, H
Example: quoted price for an identical asset in an active market
Determine
inputs to Level 2 G, H
measure Example: quoted price for a similar asset in an active market
fair value:
Level 3
G, H
Example: discounted cash flows

Fair value on initial recognition I

Highest and best use J

Measure
Liabilities and own equity instruments K
fair value:

Portfolio measurement exception L

Inactive markets M

Disclose information about fair value measurements N

Application issues O, P, Q, R

B. Scope
Overview
• Topic 820 provides guidance on how to measure fair value when such measurement is
required by other Topics/Subtopics, and specifies the related disclosures to be made in the
financial statements. Topic 820 does not mandate when a fair value measurement is required.
• Topic 820 applies to the following, subject to certain exceptions:
- fair value measurements (both initial and subsequent) that are required or permitted by
other Topics/Subtopics;
- fair value measurements that are required or permitted to be disclosed by other Topics/
Subtopics, but which are not included in the statement of financial position; and
- measurements that are based on fair value, or disclosures of such measurements.

B10. What are some examples of assets and liabilities that are measured at
fair value based on Topic 820?#
The following are some examples of assets and liabilities that fall in the scope of Topic 820 for the purpose
of measurement and/or disclosure. The scope of the disclosure requirements, including the distinction
between recurring and nonrecurring fair value measurements, is discussed in more detail in Section N.

Topic Measurement Disclosure

Topic 320, Topic 825 Debt securities available-for-sale or held for trading (recurring fair value
measurements)  
Topic 320
 
2, 3, 4
Debt securities held-to-maturity subsequent to initial recognition

Topic 321, Topic 825 Equity securities (other than equity method investments and
 
5

consolidated investees)
Topic 946 Investments of investment companies  

2. The measurement requirements of Topic 820 do not apply to the measurement of financial instruments held-to-maturity in
the statement of financial position subsequent to initial recognition because they are measured at amortized cost. Similarly,
the measurement requirements of IFRS 13 do not apply to the measurement of financial instruments carried at amortized
cost subsequent to initial recognition. However, Topic 820/IFRS 13 do apply to measuring fair value for disclosure purposes.
320-10-35-34A-E 3. If a debt security held-to-maturity is other-than-temporarily impaired, an impairment loss should be recognized as the
difference between the investment’s amortized cost and its fair value. The fair value of the security becomes its new
amortized cost basis. (Only applicable to entities that have not adopted ASU 2016-13.)
320-10-50-5A 4. The requirement to disclose the fair value of debt securities held-to-maturity applies to public business entities only.
321-10-35-2 5. Entities are required to measure equity securities with a readily determinable fair value at fair value. Entities may measure
equity securities without a readily determinable fair value either (1) at fair value or (2) using a measurement alternative –
cost adjusted to fair value when there are observable transactions, less impairment.

Topic Measurement Disclosure

Topic 805 Nonfinancial assets and nonfinancial liabilities initially measured at

fair value in a business combination or other new basis event, but not
measured at fair value in subsequent periods (with limited exceptions,  
including contract assets and liabilities in revenue contracts acquired in
a business combination)6
Topic 350 Indefinite-lived intangible assets measured at fair value based on an
impairment assessment, but not necessarily recognized or disclosed
in the financial statements at fair value on a recurring basis (e.g. digital  
assets such as cryptocurrencies)
Topic 350 (after adopting Reporting units measured at fair value as part of the goodwill
ASU 2017-04) impairment assessment (i.e. measured at fair value on a nonrecurring
basis to determine the amount of goodwill impairment, but not  
necessarily recognized or disclosed in the financial statements at fair
value on a recurring basis)
Topic 350 (before Reporting units measured at fair value in the first step of a goodwill
adopting ASU 2017-04) impairment test  
Topic 350 (before Nonfinancial assets and nonfinancial liabilities measured at fair value
adopting ASU 2017-04) in the second step of a goodwill impairment test when an impairment
is recorded (i.e. measured at fair value on a nonrecurring basis to  
determine the amount of goodwill impairment, but not necessarily
recognized or disclosed in the financial statements at fair value)
Topic 360 Nonfinancial long-lived assets (asset groups) measured at fair value for
an impairment assessment (i.e. nonrecurring fair value measurements)  

6. ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers amends Topic
805, Business Combinations, requiring entities to use the principles in Topic 606, Revenue Recognition to recognize and
measure contract assets and liabilities in revenue contracts acquired in a business combination, rather than to measure
them at fair value.

IFRS Accounting Standards different from US GAAP

Like US GAAP, some fair value measurements may be in the scope of IFRS 13 only for measurement
or disclosure purposes, and others may be within its scope for both measurement and disclosure
purposes. The following are examples relevant to IFRS Accounting Standards. The examples in these
cases differ in some respects from US GAAP because of differences in the underlying literature.

Topic Measurement Disclosure

[IFRS 9] Financial instruments measured at fair value through OCI or fair value
through profit or loss (recurring fair value measurements)  
[IFRS 9, IFRS 7] Financial instruments measured at amortized cost subsequent to
 
2, page 9

initial recognition

[IFRS 1] Fair value used as deemed cost by a first-time adopter of IFRS

Accounting Standards (e.g. for property, plant and equipment) in  
the year of adoption

[IFRS 3] Fair value used to initially measure nonfinancial assets and

nonfinancial liabilities in a business combination (e.g. contract
assets and liabilities in revenue contracts acquired in a business  
combination)

[IFRS 13.7(c)] Measurements of the fair value less costs of disposal of cash-
generating units for impairment testing  
[IAS 16] Property, plant and equipment measured using the revaluation
model  
Investment properties measured using the fair value model
[IAS 40]  
[IAS 41] Biological assets measured at fair value  
[IFRS 5] Noncurrent assets/disposal groups held for sale, measured at fair
value less costs to sell  
[IAS 19] Plan assets in a defined benefit scheme
 
[IAS 26] Retirement benefit plan investments measured at fair value
 

Forthcoming requirements under US GAAP

In September 2023, the FASB reached its final decisions on its accounting for and disclosure of crypto
assets project and instructed the staff to draft a final ASU. Among other aspects, the final ASU will
require all entities to measure ‘in-scope’ crypto assets (e.g. bitcoin and ether) at fair value under Topic
820 and to recognize gains and losses resulting from fair value changes in current period earnings. In-
scope crypto assets will also be subject to the Topic 820 disclosure requirements.
We will update the table in Question B10 accordingly in a future edition once the final ASU becomes
effective.
As of our publish date, a final ASU was imminent. In the meantime, please refer to our web page, which
summarizes key project facts and impacts and will be updated once the final ASU is issued.

B20. Does Topic 820 apply to measurements that are similar to but not the
same as fair value?
820-10-15-2(b) No. Topic 820 does not apply to measurements that have similarities to fair value, but which are not fair
[IFRS 13.6(c)] value or are not based on fair value. These other terms have meanings different from fair value.
ASC Master Glossary, For example, Topic 820 does not apply to net realizable value used in measuring inventories at the lower
330-10-20 of cost and net realizable value. The ASC Master Glossary defines net realizable value as estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Because this definition is not consistent with the exit price notion in measuring fair value, it
is specifically excluded from the scope of Topic 820.
948-310-35-1 In contrast, the measurement of fair value in determining the lower of amortized cost basis or fair value of
mortgage loans held for sale is in the scope of Topic 820.

IFRS Accounting Standards different from US GAAP

[IFRS 9.4.1.1–4.1.5] Unlike US GAAP, there is no separate designation for mortgage loans held for sale. Such financial assets
would be measured at amortized cost or fair value depending on the circumstances. In the former case,
IFRS 13 does not apply to the measurement of such loans after initial recognition, although it does apply
in measuring fair value for disclosure purposes.

B30. Are cash equivalents that meet the definition of a security in the scope
of Topic 820?
ASC Master Glossary Yes. Many short-term investments that have been appropriately classified as cash equivalents, including
money market funds, meet the definition of a security. These types of investments are subject to the
accounting and disclosure requirements for debt securities.
320-10-45-12 If the securities are categorized as trading securities or as available-for-sale securities, they fall in the scope
of Topic 820 (for both measurement and disclosure purposes).

IFRS Accounting Standards different from US GAAP

[IAS 7.6, IFRS 9.4.1.1] Unlike US GAAP, although certain short-term investments may meet the criteria to be classified as cash
equivalents, their measurement basis may be different from US GAAP.
[IFRS 9.4.1.1] The measurement of the investments after initial recognition would be in the scope of IFRS 13 only if
they are measured at fair value subsequent to initial recognition.

B40. Does Topic 820 apply to impairment measurement of loans measured

using the practical expedient in the applicable Subtopic?

Interpretive response before adopting ASU 2016-13

Yes. The measurement and disclosure requirements of Topic 820 are applicable when a loan’s impairment is
measured using the practical expedient under the applicable Subtopic (i.e. based on the loan’s observable
market price, or the fair value of the collateral). Topic 820 applies even if the underlying collateral
is nonfinancial.
310-10-35-32 When a loan is impaired, a creditor measures impairment based on the present value of the expected
future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, a
creditor may measure impairment based on a loan’s observable market price, or the fair value of the
collateral if the loan is collateral-dependent (i.e. a loan for which the repayment is expected to be provided
solely by the underlying collateral).
310-10-35-23 If the fair value is used to measure impairment for a collateral-dependent impaired loan for which
repayment is dependent on the sale of the collateral, the fair value should be adjusted for the estimated
costs to sell. In addition, regardless of the measurement method used, a creditor measures impairment
based on the fair value of the collateral when the creditor determines that foreclosure is probable.

Interpretive response after adopting ASU 2016-13

Yes. The measurement and disclosure requirements of Topic 820 apply (1) when estimating expected
credit losses for collateral-dependent financial assets and (2) for assets with collateral maintenance
provisions when the practical expedient(s) is(are) applied under Topic 326, Credit Losses. A financial asset
is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to
be provided substantially through the sale or operation of the collateral.
326-20-35-4 – 35-6 When a financial asset is collateral-dependent and foreclosure is probable, an entity must use the collateral’s
fair value at the reporting date to estimate the financial asset’s expected credit losses. When a financial asset
is collateral-dependent and foreclosure is not probable, an entity can elect to apply a practical expedient to
use the collateral’s fair value at the reporting date to estimate the asset’s expected credit losses.
If an entity uses the practical expedient on a collateral-dependent financial asset and repayment or
satisfaction of the asset depends on the sale (rather than solely operation) of the collateral, then the fair
value of the collateral should be adjusted for estimated costs to sell. See Chapter 10 in the KPMG Credit
impairment handbook.

IFRS Accounting Standards different from US GAAP

Interpretive response before and after adopting ASU 2016-13

[IFRS 9.B5.5.54] Unlike US GAAP, IFRS 9 Financial Instruments does not contain a practical expedient that allows an entity
to measure impairment on the basis of an instrument’s fair value using an observable market price.
However, it requires an entity, as part of considering all reasonable and supportable information that is
available without undue cost and effort in estimating expected credit losses, also to consider observable
market information about credit risk.

[IFRS 9.B5.5.55] Unlike US GAAP, IFRS 9 requires the estimate of expected cash shortfalls on a collateralized financial
asset to reflect:
• the amount and timing of cash flows that are expected from foreclosure on the collateral; less
• costs of obtaining and selling the collateral.

This applies irrespective of whether foreclosure is probable – i.e. the estimate of expected cash flows
considers the probability of a foreclosure and the cash flows that would result from it.

B50. In a plan sponsor’s financial statements, does Topic 820 apply to

pension plan assets measured at fair value?
715-60-35-107, Yes. Plan assets measured at fair value in accordance with other applicable Topics/Subtopics are in the
960‑325-35-2 scope of Topic 820 for measurement purposes. Those measurements are not scoped out of the
[IFRS 13.5] measurement requirements of Topic 820.
715-60-35-107, The applicable plan sponsor guidance on the measurement of plan assets requires the fair value of an
960‑325-35-2 investment to be reduced by brokerage commissions and other costs normally incurred in a sale if those
costs are significant (similar to fair value less cost to sell). Therefore, Topic 820 applies only to the fair value
component of the measurement basis.
715-20-50-1(d)(iv), However, plan sponsors are not required to provide the disclosures of Topic 820. Instead, plan sponsors
50‑5(c)(iv), 820-10-50- follow the disclosures required under Topic 715, Compensation—Retirement Benefits for the fair value
10 [IFRS 13.7(a)] measurement of plan assets of a defined benefit pension or other postretirement plan.
820-10-15-1 In addition, the measurement and disclosure requirements of Topic 820 do not apply to a defined benefit
[IFRS 13.5] obligation, because the obligation is not measured at fair value.

IFRS Accounting Standards different from US GAAP

[IAS 19.113] Unlike US GAAP, the employee benefits standard requires plan assets to be measured at fair value
without a reduction for costs to sell.
[IAS 19.115, 119] Although the measurement of the fair value of plan assets is in the scope of IFRS 13, as an exception
from the fair value measurement basis, and unlike US GAAP, if the payments under a qualifying insurance
policy or a reimbursement right exactly match the amount and timing of some or all of the benefits
payable under a defined benefit plan, the present value of the related obligation is deemed to be the fair
value of the insurance policy or reimbursement right (subject to recoverability).

B60. Does Topic 820 apply to the financial statements of an employee

benefit plan?
960-325-50-1 Yes. The measurement and disclosure requirements of Topic 820 generally apply to the financial statements
of an employee benefit plan, and in particular to its investments that are measured at fair value. Employee
benefit plans encompass defined benefit plans, defined contribution plans, employee stock ownership
plans and health and welfare plans.
960-325-35-2 The Codification Subtopics applicable to benefit plans on the subsequent measurement of other
investments require fair value to be reduced by brokerage commissions and other costs normally incurred
in a sale if those costs are significant (similar to fair value less cost to sell). Therefore, Topic 820 applies only
to the fair value component of the measurement basis.
820-10-50-2 Because a plan’s investments are required to be measured at fair value at each reporting date, the recurring
disclosure requirements of Topic 820 are required to be included in the benefit plan’s financial statements
(see Section N, Disclosures).

IFRS Accounting Standards different from US GAAP

[IFRS 13.7(b),
Unlike US GAAP, investments held by retirement benefit plans and measured at fair value in accordance
IAS 26.32]
with IAS 26 Accounting and Reporting by Retirement Benefit Plans are in the scope of IFRS 13 for
measurement purposes, but not for disclosure purposes.

B70. Do the fair value concepts apply in measuring the change in the
carrying amount of the hedged item in a fair value hedge?
Yes; in our view, the concepts of fair value measurement in Topic 820 apply to measuring the change in the
carrying amount of the hedged item in a fair value hedge.
815-25-35-1 The hedged item in a fair value hedge is remeasured to fair value in respect of the risk being hedged.
[IFRS 13.5] Therefore, although the hedged item in a fair value hedge might not be required to be carried at fair value,
the measurement of changes in the fair value of the hedged item attributable to the hedged risk(s) should
be performed in accordance with the principles of Topic 820.
820-10-50-2 Although the determination of the change in fair value of the hedged item should be measured in
[IFRS 13.5, 93] accordance with the principles of Topic 820, the disclosure requirements of Topic 820 do not apply to the
hedged item unless the measurement basis in the statement of financial position is, or is based on, fair
value, independent of hedge accounting (e.g. financial assets measured at fair value through OCI). When the
hedged item has a hybrid carrying amount whose measurement is based on a measurement basis that is not
fair value, the requirements of Topic 820 would not apply.
Hedging is the subject of Section O.

Example B70: Applying the fair value concepts in a fair value hedge

Company B has a fixed interest liability denominated in US dollars and measured at amortized cost.
Company B enters into a pay-IBOR receive-fixed interest rate swap to hedge 50% of the liability in
respect of its benchmark interest exposure. The swap qualifies for hedge accounting. The proportion of
the liability that is hedged (50%) will be remeasured with respect to changes in fair value due to changes
in the designated benchmark interest rate from the beginning of the hedging relationship. The liability
will not be remeasured for any changes in its fair value due to changes in credit spread, liquidity spread or
other factors.
The fair value related to changes in benchmark interest rates is measured following the guidance in Topic
820. However, the related disclosures do not apply because the hedged item, the liability, is measured
on a hybrid basis (adjusted amortized cost) that is not fair value or based on fair value.

B80. Does Topic 820 apply to fair value measurements under Topic 842,
Leases?
820-10-15-1 Generally, yes. When applying Topic 842, all entities except those discussed below refer to Topic 820 for
[IFRS 13.5] guidance on measuring fair value (e.g. when measuring the fair value of the underlying asset for purposes
of assessing lease classification).
842-30-55-17A For lessors that are not manufacturers or dealers (typically, financial institutions), the fair value of the
underlying asset is its cost, reflecting any volume or trade discounts, which may be different from the
underlying asset’s fair value under Topic 820. Cost includes acquisition costs – e.g. sales taxes and
shipping, delivery or installation charges. An exception arises if there is a significant lapse of time between
asset acquisition and lease commencement. In these cases, the lessor determines fair value under Topic
820 (see Chapter 7 of KPMG’s Leases handbook).

IFRS Accounting Standards different from US GAAP

[IFRS 16.63(d)] A lessor applies the fair value definition in IFRS 16 Leases (e.g. when measuring the fair value of the
underlying asset for purposes of assessing lease classification). Unlike US GAAP, IFRS 16 does not
distinguish between lessors that are manufacturers or dealers and those that are not.
[IFRS 16.A] Under IFRS 16, fair value is defined differently than it is under IFRS 13. The IFRS 16 definition is: “For
the purpose of applying the lessor accounting requirements in this Standard, the amount for which an
asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length
transaction.”
A lessor uses the fair value definition in IFRS 16 to determine lease classification.
[IFRS 16.34–35, A lessee may apply the fair value definition in IFRS 13 for measurement when applying other accounting
101–102] standards (e.g. IAS 40 Investment Property).

B90. Under what circumstances would an entity look to Topic 820 when
applying the requirements under Topic 606, Revenue from Contracts
with Customers?
820-10-15-2(d), 606‑10- Topic 820 excludes from its scope recognition and measurement of revenue from contracts with
32-2, 606-10-32-29 customers under Topic 606. Revenue is recognized based on the transaction price, which is the
[IFRS 15.46, 76] consideration to which an entity expects to be entitled in exchange for transferring goods or services to
a customer. Allocation of transaction price to performance obligations is generally based on the relative
stand-alone selling prices of the goods and services, not their fair value.
606-10-32-21 – 32-24 However, there are limited circumstances under Topic 606 in which the consideration an entity expects to
[IFRS 15.66–67] receive is determined using fair value. For example, when a customer promises consideration in a form
other than cash – i.e. noncash consideration – it is measured at fair value. If a reasonable estimate of fair
value cannot be made, then the estimated stand-alone selling price of the promised goods or services is
used for reference.
606-10-32-26 Additionally, if consideration paid (or payable) to a customer is for a distinct good or service from the
[IFRS 15.70–71] customer, then an entity’s accounting for the purchase of the good or service cannot exceed fair value.
This means the amount paid (or payable) in excess of the fair value of the distinct good or service is
accounted for as a reduction of the transaction price. If the entity cannot reasonably estimate the fair value
of the good or service received from the customer, it accounts for all of the consideration payable to the
customer as a reduction of the transaction price.
ASU 2016-12.BC39 Topic 606 does not specify how fair value should be measured in the limited circumstances in which the
accounting standard references fair value measurements. In our view, it would be appropriate for an entity
to look to the fair value definition under Topic 820.
820-10-50-2, Although in these circumstances the consideration received is measured at fair value under Topic 820, the
606‑10‑50(a) disclosure requirements of Topic 820 discussed in Section N do not apply. This is because the disclosure
[IFRS 13.93, 15.126(a)] requirements under Topic 820 apply to assets and liabilities recognized in the statement of financial position
after initial recognition and revenue is not an asset or liability. However, Topic 606 requires the disclosure of
information about the methods, inputs and assumptions used for determining the transaction price, which
includes measuring noncash consideration.
See Chapter 5 of the KPMG US GAAP Handbook, Revenue recognition, and section 3 of the KPMG
Revenue – IFRS 15 handbook for further discussion and guidance on the accounting and disclosure of
noncash consideration and consideration payable to a customer.

B100. Does Topic 820 apply to the measurement of share-based payment

transactions?
820-10-15-2(a) It depends on the type of share-based payment transaction. Topic 820 excludes from its scope share-based
payment transactions except for those that relate to employee stock ownership plans (ESOPs) in the scope
of Subtopic 718-40.
718-10-30-11, 30-13 In many cases, the fair value measurement of an instrument granted in a share-based payment transaction
[IFRS 2.B2–B3] is not consistent with the requirements of Topic 820. For example, for an award of a share that vests
over a specified period, the grant-date fair value of the award under Topic 718, Compensation—Stock
Compensation is the unrestricted value of the share on the grant date. It does not consider either the
probability that the service condition will not be met or the effect of the non-transferability of the share
over the vesting period. This is different from the definition of fair value under Topic 820.

IFRS Accounting Standards different from US GAAP

[IFRS 13.6(a)] Unlike US GAAP, all share-based payment transactions are excluded from the scope of IFRS 13. Under
IFRS Accounting Standards, there is no specific guidance on ESOPs.

C. The item being measured and

the unit of account
Overview
• An entity takes into account characteristics of the asset or liability that market participants
would take into account in a transaction for the asset or liability at the measurement date. In
the case of an asset, these characteristics may include, for example:
- the condition and location of the asset; and
- restrictions, if any, on the sale or use of the asset.
• The unit of account is the level at which an asset or a liability is aggregated or disaggregated
for recognition purposes. It is also the level at which an asset or a liability generally is
aggregated or disaggregated for the purpose of measuring fair value. When these two units
differ, the term unit of valuation is used to describe the unit used for fair value measurement.
• For a discussion of how the unit of account interacts with the portfolio measurement
exception, see Section L.

C10. How should an entity determine the appropriate unit of account

(unit of valuation) in measuring fair value?
820-10-35-11A Generally, the unit being measured is determined based on the unit of account in accordance with the
[IFRS 13.14] Topics/Subtopics specific to the asset or liability. The unit of account for fair value measurement and the unit
of account for recognition generally are the same. For convenience, when the unit of account for fair value
measurement and the unit of account for recognition are different, we refer to the level at which an asset or
liability is aggregated or disaggregated to measure fair value as the unit of valuation.
820-10-35-10E, 35-18E There are two exceptions included in Topic 820 itself.
[IFRS 13.27, 32, 48,
• The unit of account (unit of valuation) for financial instruments generally is the individual financial
BC47]
instrument (e.g. a share). However, an entity is permitted to measure the fair value of a group of
financial assets and financial liabilities on the basis of the net risk position, if certain conditions are met
(see Section L).
• In certain circumstances, an entity is required to measure nonfinancial assets in combination with other
assets or with other assets and liabilities (see Section J).
350-20-35-1, 948-310- The following are examples.
35-3
• For goodwill impairment testing, the unit of account (unit of valuation) is the reporting unit.
• For loans (e.g. mortgage loans) held-for-sale, the unit of account and therefore the unit of valuation is an
accounting policy election determined based on the entity’s policy of measuring the loans on an aggregate
or individual loan basis (see Question F90).

820-10-35-9 In certain circumstances, when measuring fair value based on the unit of account, an entity may use a
[IFRS 13.22] valuation technique that determines the fair value by considering the fair values of the component parts
of the unit of account. This may be appropriate if market participants would consider these separate fair
values when pricing the item in its entirety.

Example C10.1: Measuring fair value based on component parts of the unit of account

Investment Fund A holds an investment in Company B that is accounted for at fair value. Company B
is a private holding company with two subsidiaries each operating in a different line of business. Both
subsidiaries have issued public debt and publish their financial statements.
Investment Fund A values its investment in Company B by valuing the two subsidiaries separately
and includes any potential holding company value effects. Because the subsidiaries have different
characteristics – i.e. growth prospects, risk profiles, investment requirements – this approach allows
separate consideration of the subsidiaries’ facts and circumstances and is consistent with the approach
that a market participant would consider in valuing an investment in Company B.

Example C10.2: Real estate property encumbered by mortgage debt

Company D holds an investment in a real estate property that is measured at fair value. The real estate
property is encumbered by mortgage debt that is not transferable. Company D measures the real estate
property at its fair value without considering the related mortgage debt because the real estate property
and mortgage debt are separate units of account. The transferability of mortgage debt does not impact
the unit of account for purposes of applying Topic 820.

IFRS Accounting Standards different from US GAAP

[IFRS 13.14, BC47] Although IFRS 13 has the same requirements as Topic 820 in determining the unit of account, the underlying
examples may differ from US GAAP because of differences in the underlying literature. The following are
examples relevant to IFRS Accounting Standards.

• For goodwill impairment testing, the unit of account (unit of valuation) is the (group of) cash-generating
unit(s).

• For financial instruments, the unit of account (unit of valuation) generally is the individual instrument
unless the portfolio measurement exception applies (see Section L). For investments in subsidiaries,
associates and joint ventures, see Question C90.
• Unlike US GAAP, IFRS Accounting Standards do not have specific guidance on the unit of account for
measuring the fair value of mortgage loans held for sale. Therefore, unless the portfolio measurement
exception applies, the unit of account is the individual loan (see Question F90).

C15. What is the appropriate unit of account for an investment held through
an intermediate entity?
820-10-35-2E It depends. If the intermediate entity was consolidated by the reporting entity, then the investment held by
[IFRS 13.14] the intermediate entity may represent a unit of account being measured at fair value when it is prescribed by
the Topic/Subtopic that requires or permits the fair value measurement.
However, if the intermediate entity was not consolidated then the direct investment in an intermediate entity
will represent the unit of account being measured at fair value, instead of investments held indirectly through
the intermediate entity (see Question C10).

Example C15: Investment held through an intermediate entity

Company C has a direct investment in Intermediate Entity ABC. Intermediate Entity ABC is a holding
company whose only purpose is to invest in the common stock of Public Company DEF. Therefore,
Company C has an indirect equity investment in Public Company DEF.
Scenario 1
Intermediate Entity ABC is a wholly owned subsidiary that is consolidated by Company C. The
consolidated financial statements of Company C and Intermediate Entity ABC are presented as those of
a single economic entity. As a result, the equity investment in Public Company DEF is a direct investment
of the consolidated entity. In this instance, the equity investment in Public Company DEF represents the
unit of account being measured at fair value.
Scenario 2
Company C is an investment entity that accounts for its investment in Intermediate Entity ABC at fair
value through profit or loss (net income). The direct investment in Intermediate Entity ABC represents
the unit of account being measured at fair value. Any investments held indirectly through Intermediate
Entity ABC, such as the equity investment in Public Company DEF, are not considered to be separate
units of account by Company C. Although those investments held indirectly may be used as valuation
inputs to measure the fair value of Intermediate Entity ABC, Company C should consider whether there
are other characteristics that a market participant would take into account when valuing an investment in
Intermediate Entity ABC as the unit of account.

C20. If an asset requires installation in a particular location before it can

be used, should the measurement of fair value of the installed asset
consider these costs?
820-10-55-3, Generally, yes. Installation costs generally are considered an attribute of the asset in measuring fair value if
55-36 – 55-37 the asset would provide maximum value to the market participant through its use in its current location in
[IFRS 13.B3, combination with other assets or with other assets and liabilities (see Section J).
IE11–IE12]

820-10-55-3, 55-37 Therefore, all costs (excluding transaction costs) that are necessary to transport and install an asset for
[IFRS 13.B3, IE12] future use should be included in the measurement of fair value. Examples include delivery and other costs
necessary to install an asset for its intended use. Installation costs are added to the estimated uninstalled
value indication (e.g. replacement cost) for the asset, which results in measurement of fair value on an
installed basis.
820-10-35-37A Many assets that require installation generally will require a fair value measurement based on Level 3
[IFRS 13.73] inputs. However, for some common machinery that is traded in industrial markets, Level 2 inputs may be
available. In this situation, the inclusion of installation costs in the measurement of fair value may result in a
Level 3 categorization of the measurement if the installation costs are significant (see Section H).

C30. Do restrictions on the sale or transfer of a security affect its fair value?
820-10-35-2B It depends. In measuring the fair value of a security with a restriction on its sale or transfer, judgment
[IFRS 13.11] is required to determine whether and in what amount an adjustment is required to the price of a similar
unrestricted security to reflect the restriction.
820-10-35-2B To make that determination, the entity should first analyze whether the restriction is security-specific or
[IFRS 13.11, IE28] entity-specific (i.e. whether the restriction is an attribute of the instrument or an attribute of the holder).
• For security-specific restrictions, the price used in the fair value measurement should reflect the effect of
the restriction if this would be considered by a market participant in pricing the security; this may require
an adjustment to the quoted price of otherwise similar but unrestricted securities.
• For entity-specific restrictions, the price used in the fair value measurement should not be adjusted to
reflect the restriction because it would not be considered by a market participant in pricing the security.
Factors used to evaluate whether a restriction is security-specific or entity-specific may include whether
the restriction is:
• transferred to a (potential) buyer;
• imposed on a holder by regulations;
• part of the contractual terms of the asset; or
• attached to the asset through a purchase contract or another commitment.

820-10-30-3A(d), 35-40 For restrictions determined to be entity-specific, fair value measurements for the security do not reflect
[IFRS 13.19–20, 76] the effect of such restrictions. As a result, securities that are subject to an entity-specific restriction are
considered identical to those that are not subject to entity-specific restrictions. Consequently, a quoted
price in an active market is a Level 1 input for the security that is subject to an entity-specific restriction.
This is the case even though the entity is not able to sell the particular security on the measurement date
due to an entity-specific restriction; an entity needs to be able to access the market, but it does not need
to be able to transact in the market at the measurement date to be able to measure the fair value on the
basis of the price in that market (see Section E).
820-10-55-52 For restrictions determined to be security-specific, the fair value adjustment will vary depending on the
[IFRS 13.IE28] nature and duration of the restriction. Generally, it is not appropriate to apply a discount that is a fixed
percentage over the entire life of the restriction period in measuring fair value. For example, if the security-
specific restriction is two years as of the measurement date and the discount is estimated to be 10%,
the following year’s discount would be less than 10% because only one year remains, assuming all else
remains equal. All relevant drivers of the discount, including but not limited to the length of the restriction,
the risk of the underlying security (e.g. its volatility), the float and market capitalization of the issuer,
liquidity of the market and other qualitative and quantitative factors specific to the security are evaluated in
determining the appropriate discount.
In our experience, measuring the discount generally is based on quantitative techniques (e.g. an option
pricing model) that explicitly incorporate duration of the restriction and characteristics of the underlying
security (e.g. risk, dividends, rights and preferences). When using these models to derive the discount, an
entity needs to consider the ability of the model to appropriately quantify the liquidity adjustment under the
specific facts and circumstances. For example, some option pricing models may not appropriately measure
the discount that a market participant would apply.
For a discussion of security-specific restrictions when the fair value of a liability or own equity instrument
is measured with reference to the identical instrument held as an asset by a market participant,
see Section K.

C40. What are some common restrictions on the sale or transfer of a

security?#
The following are some common restrictions on the sale or transfer of a security.

Restrictions on securities offered in a private offering under Rule 144A and Section 4(2) Transactions
(private placements) of the SEC
Restrictions on the transfer of securities obtained in a Rule 144A offering attach to the security itself as a
result of the securities laws applicable to these offerings.7 For these types of offerings, the securities can
only be sold (both initially and subsequently) to qualified institutional buyers (or accredited investors in the
case of Section 4(2) transactions).

7. Securities and Exchange Act Rule 144A, Persons Deemed Not to Be Engaged in a Distribution and Therefore Not
Underwriters.

The restriction on sale is specific to the security and lasts for the life of the security, barring subsequent
registration of the security or seasoning of the securities through sales outside of the US or under Rule
144; for further discussion, see Question C50. Therefore, these restrictions should be considered in
measuring the fair value of the security.
For securities initially obtained through a Rule 144A offering or a Section 4(2) transaction that subsequently
have become registered or seasoned and are therefore tradable without restriction, an adjustment related
to the restriction is no longer applicable to the fair value measurement because the restriction has been
removed.

Securities subject to a lock-up provision resulting from an underwriter’s agreement for the offering
of securities in a public offering
In many public offerings of securities, the underwriting agreement between the underwriter and the
issuing entity contains a lock-up provision that prohibits the issuing entity and its founders, directors and
executive officers from selling their securities for a specified period of time. The lock-up period is usually
180 days for initial offerings and shorter for secondary offerings. These provisions give underwriters a
certain amount of control over aftermarket trading for the lock-up period.
Based on our understanding of common lock-up agreements, these provisions may be based on a contract
separate from the security (i.e. resulting from the underwriting agreement) and apply only to those parties
that signed the contract (e.g. the issuing entity) and their affiliates. Therefore, these restrictions represent
entity-specific restrictions that should not be considered in the fair value measurement of the securities
(see Section R).

Securities owned by an entity where the sale is affected by blackout periods

An investment in the securities of another entity will sometimes result in the investor being subject to
blackout restrictions imposed by regulations on the investee (e.g. when the investor has a board seat on
the investee’s board of directors). When the blackout period of the investee coincides with the investor’s
periodic financial reporting dates, the investor is, in effect, restricted from selling its securities at its
own financial reporting date. These restrictions represent entity-specific restrictions that should not be
considered in measuring the fair value of the securities.

Securities pledged as collateral

In some borrowing arrangements, securities held by an investor are pledged as collateral supporting
debt, or other commitments, of the investor. In these situations, the investor is restricted from selling the
securities pledged during the period that the debt or other commitment is outstanding. Restrictions on
securities resulting from the securities being pledged as collateral represent entity‑specific restrictions that
should not be considered in measuring the fair value of the securities.

IFRS Accounting Standards compared to US GAAP

820-10-35-2B Similar to US GAAP, IFRS Accounting Standards require an entity to determine whether a restriction
[IFRS 13.11] on the sale or transfer of an asset should be considered when measuring its fair value (i.e. whether
the restriction is security-specific or entity-specific). US GAAP specifically indicates that a contractual
restriction on the sale of an equity security is an entity-specific characteristic and therefore should not
be considered in measuring fair value (see Section R). However, IFRS Accounting Standards do not
explicitly indicate that a contractual restriction on the sale of an equity security is an entity-specific
characteristic.

C50. SEC Rule 144 allows the public resale of certain restricted or control
securities if certain conditions are met. During the period before
the restrictions lapse, should the fair value measurement reflect
such restrictions?
Yes. However, the restrictions reflected in the fair value measurement should be limited to those that are
security-specific.
Restricted securities are securities acquired in unregistered or private sales from the issuer or from an
affiliate of the issuer. Control securities are restricted securities held by affiliates of the issuer. An affiliate is
a person, such as a director or large shareholder, in a relationship of control. However, securities acquired
by an affiliate in the public market are not subject to the requirements of Rule 144 (i.e. not restricted).
Generally, restricted securities acquired directly or indirectly from an issuer or its affiliate can be publicly
sold under Rule 144 if the following conditions are met.
(1) There is adequate current information about the issuer before the sale can be made. Generally
this means that the issuer has complied with the periodic reporting requirements of the Securities
Exchange Act of 1934 (1934 Act).8
(2) If the issuer is subject to the reporting requirements of the 1934 Act, the securities must be held for at
least six months. If the issuer is not subject to the requirements of the 1934 Act, the securities must be
held for more than one year.

8. Securities Exchange Act of 1934, available at www.sec.gov.

If the securities are control securities not obtained in a public market held by affiliates, the following
conditions, in addition to the conditions listed above, must be met.
(3) Sales. Sales must be handled in all respects as routine trading transactions, and brokers may not
receive more than a normal commission. Neither the seller nor the broker can solicit orders to buy the
securities.
(4) Volume limitations. The number of securities sold by an affiliate during any three-month period cannot
exceed the greater of 1% of the outstanding shares of the same class or, if the class is listed on a
stock exchange or quoted on NASDAQ, the greater of 1% or the average weekly trading volume during
the four weeks preceding the filing of a notice for sale on Form 144.
(5) Filing requirements. An affiliate must file a notice with the SEC on Form 144 if the sale involves more
than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period.
The sale must take place within three months of filing Form 144.
Conditions (1) and (2) generally are met only after a prescribed period of time has elapsed (and the
issuing entity has made information publicly available). Therefore, during the period before conditions
(1) and (2) are met, the securities have security-specific restrictions that may need to be reflected in
the measurement of fair value for those securities; this is because these restrictions are characteristics
of the security and would be transferred to market participants. Conditions (3), (4) and (5) only apply
to affiliates, and therefore these conditions are entity-specific and should not be reflected in the
measurement of the fair value.

C60. How should executory contracts be considered in measuring the fair

value of an asset that is the subject of an executory contract?
It depends. Some assets recorded in an entity’s financial statements are the subject of executory contracts
that directly affect the use of, and cash flows from, those assets. For example, an entity might acquire a
leasing company that has several airplanes recorded as fixed assets that are leased to third parties under
operating leases.
820-10-35-2E, 35-10E If the unit of account is the asset on a stand-alone basis, the effects of executory contracts, including any
[IFRS 13.14, 31] contractual cash flows, should not be included in measuring the fair value of the underlying asset. In these
cases, the fair value of the asset should be measured using the price that would be received from a market
participant to sell the asset at the measurement date.
820-10-35-2E, 35-10E Alternatively, if the unit of account is determined to be an aggregation of the contract with the underlying
[IFRS 13.14, 31] asset, the effects of the executory contract would be considered.
820-10-35-10E If the unit of valuation is determined to be on a stand-alone basis but the entity has evidence that suggests
[IFRS 13.31] that a market participant would sell both the executory contract and the underlying asset as a group, it may
be appropriate to measure fair value for the entire group. Once measured, the group fair value would be
allocated to the individual components required by other applicable accounting literature (e.g. in the same
way that an impairment loss is allocated to fixed assets).

C70. In measuring the fair value of a financial instrument, how should an

entity consider the existence of a separate arrangement that mitigates
credit risk exposure in the event of default?
820-10-35-16D, 35-18A If the unit of account is the individual financial instrument, a separate arrangement that mitigates credit
[IFRS 13.14, 69] risk exposure in the event of default is not reflected in the fair value of the individual financial instrument;
instead, the arrangement is measured as a separate financial instrument. Examples of such arrangements
include a master netting agreement or a credit support agreement that requires the exchange of collateral
on the basis of each party’s net exposure to the credit risk of a group of financial instruments.
In our experience, for individual instruments that are actively traded on an exchange, the actual
counterparty to the trade transaction is, in many instances, the exchange entity (e.g. the clearing house for
the exchange). For these exchange transactions, we understand that even when there is no master netting
agreement between the exchange and the entity, credit risk is usually deemed to be minimal because
the operating procedures of the exchanges require the daily posting of collateral, which is, in effect, an
arrangement that mitigates credit risk exposure in the event of default, and which is instrument-specific
(see Question C80).
For a discussion of fair value measurement under the portfolio measurement exception, see Question L70.

C80. Does a requirement to post collateral affect the fair value measurement
of the underlying instrument?
820-10-35-2B, 35-18, Yes. Because the asset or liability requires that collateral be posted, that feature is instrument-specific and
55-11 should be included in the fair value measurement of the asset or liability. Therefore, the asset or liability is
[IFRS 13.11, 69, B19] supported by posted collateral and the discount rate reflects these conditions. Any nonperformance
risk adjustment related to credit risk used in measuring the fair value of the asset or liability may be
different from the adjustment if the collateral was not present (i.e. a lower discount rate assigned to the
counterparty risk or lower loss severity when counterparty default is assumed to occur).

Example C80: Collateralized derivative instrument

Company C holds a collateralized derivative instrument where the parties to the derivative contract post
collateral on a daily basis, and the maximum exposure to the asset holder is the one-day change in the
asset’s fair value. The collateralization is required as a result of the terms of the instrument and not as a
result of separate arrangements that mitigate credit risk exposures in the event of default.
In this case, market participants apply an appropriate rate reflecting the reduced credit risk (e.g. an
overnight index swap rate; see also Question O30) as the discount rate used in the valuation of the asset
or liability. However, if the derivative instrument was not collateralized, the parties’ credit risk would be
included in the fair value measurement of the instrument. For further discussion on measuring the fair
value of liabilities, see Section K.
If the derivative would have had a separate arrangement that mitigates credit risk exposure in the event of
default (i.e. not within the requirements of the derivative contract), that agreement would not be included
in the fair value measurement of the derivative if the unit of valuation is the individual derivative. However,
if an entity applies the portfolio measurement exception to a group of financial assets and financial
liabilities entered into with a particular counterparty, the effect of such an agreement would be included in
measuring the fair value of the group of financial assets and financial liabilities if market participants would
do so.
Derivative instruments are the subject of Section O.

C90. What is the unit of account for investments in subsidiaries, equity method
investees and joint ventures?
820-10-35-2E It depends. The unit of account is prescribed by the applicable Topic/Subtopic that requires or permits the
fair value measurement. The measurement of investments in subsidiaries, equity method investees and
joint ventures at fair value may be required in a number of circumstances such as business combinations,
impairment assessments and the measurement of retained investments upon a loss of control, among others.

IFRS Accounting Standards different from US GAAP

[IFRS 13.14] Unlike US GAAP, there is uncertainty under IFRS Accounting Standards about the unit of account for
investments in subsidiaries, associates and joint ventures. The unit of account for such investments is
not clear because the investment held by the entity comprises a number of individual shares.
The following are examples of situations in which the unit of account (and therefore the unit of valuation)
for such an investment needs to be determined to measure fair value.

[IAS 27.10–11A] • An investment in a subsidiary, associate or joint venture accounted for in accordance with IFRS 9 in
separate financial statements.

[IFRS 10.31, A, • An investment in a subsidiary, associate or joint venture held by an investment entity.
BC250, IAS 27.11A]
[IAS 28.18] • Investments in associates and joint ventures that are accounted for in accordance with IFRS 9 by a
venture capital or similar organization.

[IFRIC 17.11, 13] • Shares in a subsidiary, associate or joint venture distributed to owners.

[IFRS 3.32(a)(iii), 42] • A previously held equity interest in an acquiree in accounting for a business combination achieved in
stages.

[IFRS 10.25(b), IAS • A retained interest following a loss of control, joint control or significant influence.
28.22]
In our view, an entity may choose an accounting policy, to be applied consistently, to identify the unit of
account of an investment in a subsidiary, associate or joint venture as:
• the investment as a whole; or
• the individual share making up the investment.
If the unit of account is the investment as a whole, it may be appropriate to add such a premium
in measuring the fair value of the investment – even if Level 1 prices exist for individual shares
(see Section H). However, if the unit of account is each individual share making up the investment, a
premium related to the whole investment cannot be added in measuring the fair value of the investment.
In applying a consistent accounting policy, an entity should choose the same policy for similar items.
The choice of accounting policy is important, because the value of an aggregate holding may be different
from the sum of the values of the components measured on an individual basis.

D. Market participants
Overview
Market participants are buyers and sellers in the principal (or most advantageous) market for the
asset or liability that have all of the following characteristics:
• they are independent of each other;
• they are knowledgeable, having a reasonable understanding about the asset or liability and
the transaction using all available information, including information that might be obtained
through due diligence efforts that are usual and customary;
• they are able to enter into a transaction for the asset or liability; and
• they are willing to enter into a transaction for the asset or liability (i.e. they are motivated but
not forced or otherwise compelled to do so).

D10. Does an entity need to specifically identify market participants?

820-10-35-9 No. An entity need not identify specific market participants even though the fair value of the asset or
[IFRS 13.22–23] liability is based on the assumptions that market participants would use in pricing the asset or liability when
acting in their economic best interest. Instead, the entity identifies characteristics that distinguish market
participants generally, considering factors specific to:
• the asset or liability;
• the principal (or most advantageous) market for the asset or liability; and
• market participants with whom the entity would transact in that market.

D20. Can a market participant be a related party?

820-10-20 No. By definition, market participants are independent of each other and therefore cannot be related
[IFRS 13.A, BC57] parties. However, the price in a related-party transaction may be used as an input into a fair value
measurement if the entity has evidence that the transaction was entered into at market terms.

D30. How should an entity determine what assumptions a market

participant would make in measuring fair value?
820-10-35-2B, 35-36B An entity selects inputs that are consistent with the characteristics of the asset or liability that market
[IFRS 13.11] participants would take into account in a transaction for the asset or liability. These characteristics include:
• the condition and location of the asset; and
• restrictions, if any, on the sale or use of the asset.
820-10-20 Market participants are assumed to be knowledgeable about the asset or liability, using all available
[IFRS 13.A, information, including information that would be expected to become available in customary and usual due
BC58–BC59] diligence. To the extent that additional uncertainty exists, it is factored into the fair value measurement.
820-10-35-36B In some cases, those characteristics result in the application of an adjustment, such as a premium or
[IFRS 13.69] discount (e.g. a control premium (or market participant acquisition premium) or a noncontrolling interest
discount; see Section G). However, a fair value measurement generally does not incorporate a premium or
discount:
• that is inconsistent with the item’s unit of account under the Topic/Subtopic that requires or permits the
fair value measurement (see Section C);
• that reflects size as a characteristic of the entity’s holding, such as a blockage factor (see Questions G30
and G40); or
• if there is a quoted price in an active market for an identical asset or liability unless one of the exceptions
allowing adjustments to Level 1 inputs applies (see Question G70).
820-10-35-37, 35-53 As discussed in Section H, the fair value hierarchy gives the highest priority to quoted prices (unadjusted)
[IFRS 13.72, 87] in active markets for identical assets or liabilities that the entity can access at the measurement date
(Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). Unobservable inputs also
reflect the assumptions that market participants would use when pricing the asset or liability, including
assumptions about risk.

D40. If the entity is unwilling to transact at a price provided by an external

source, should that price be disregarded?
820-10-35-3, 35-6B, No. Fair value measurements are market-based measurements, not entity-specific measurements. The
35-54H fair value of an asset or a liability is measured using assumptions that market participants would use in
[IFRS 13.3, 15, 20, 22] pricing the asset or liability, assuming that market participants act in their economic best interest. As a
result, an entity’s intention to hold an asset or to settle a liability is not relevant in measuring fair value.
Therefore, an entity cannot disregard a price reflecting current market conditions simply because the entity
is not a willing seller at that price.

D50. How should an entity adjust the fair value measurement for risk
inherent in the asset or liability?
820-10-35-54 An entity assumes that market participants have a reasonable understanding of the rights and obligations
[IFRS 13.88] inherent in the asset or liability being measured that is based on information that would be available
to them after customary due diligence (see Question D30). Therefore, it is assumed that the market
participant would apply any and all necessary risk adjustments to the price to compensate itself for market,
nonperformance (including credit), liquidity and volatility risks.

820-10-55-11 As a result, an entity applies a liquidity discount in measuring the fair value of a particular asset or liability
[IFRS 13.11, if market participants would apply this factor based on the inherent characteristics of the asset or liability
B14(a)–B14(b)] and the unit of valuation.9 Similarly, an entity uses a risk-adjusted discount rate that market participants
would use even when the entity has a different view of the inherent risk of the asset or liability because
the entity has specific expertise that leads it to conclude that the risk is lower than other market
participants would conclude.
820-10-35-54A In measuring fair value, an entity uses the best information available in the circumstances, which might
[IFRS 13.89] include its own data. In developing unobservable inputs, an entity may begin with its own data, but adjusts
it if reasonably available information indicates that market participants would use different data or there is
something particular to the entity that is not available to market participants (e.g. entity-specific synergies,
expertise or organizational differences that would not be available to other market participants).

9. A liquidity discount or adjustment is an adjustment to reflect the marketability of an asset or liability (see Question G40).

E. Principal and most

advantageous markets
Overview
• The principal market is the market with the greatest volume and level of activity for the asset
or liability.
• The most advantageous market is the market that maximizes the amount that would be
received to sell the asset or minimizes the amount that would be paid to transfer the liability,
after taking into account transaction costs and transportation costs.
• A fair value measurement assumes that the transaction takes place in the principal market for
the asset or liability. Only in the absence of a principal market does the entity assume that the
transaction takes place in the most advantageous market.

E10. If an entity identifies a principal market for the asset or liability, should
it disregard the price in that market and instead use the price from the
most advantageous market?
820-10-35-6 – 35-6A In general, no. If an entity identifies a principal market, it cannot consider prices from other, more
[IFRS 13.18–19] advantageous markets. Only if the entity does not have access to the principal market does it measure fair
value assuming a transaction in the most advantageous market.
820-10-35-6A – 35-6B In many cases, the principal market and the most advantageous market are the same. In either case, to
[IFRS 13.19–20, BC48] use pricing from a market, the entity needs to be able to access the market in which the transaction is
assumed to occur. However, the identification of a principal market is not limited to those markets in which
the entity would actually sell the asset or transfer the liability. Furthermore, although the entity has to be
able to access the market, it does not need to be able to buy or sell the particular asset (or transfer the
particular liability) on the measurement date in that market.
820-10-35-6A The determination of the principal market and the most advantageous market is an independent analysis
[IFRS 13.19, BC53] performed by each entity, allowing for differences between entities with different activities and between
different businesses within an entity. For example, when a swap transaction takes place between an
investment bank and a commercial entity, the former may have access to wholesale and retail markets
while the latter may only have access to retail markets.

Example E10: Principal versus most advantageous market

Company E holds an asset that is traded in three different markets but it usually buys and sells in Market
C. Information about all three markets follows.

Company E
Buys
and
sells in

Market A Market B Market C

Volume (annual) 30,000 12,000 6,000

Trades per month 30 12 10
Price 50 48 53
Transportation costs (3) (3) (4)
Possible fair value 47 45 49
Transaction costs (1) (2) (2)

Net proceeds 46 43 47

Company E identifies the principal market for the asset as Market A because it has the highest volume
and level of activity. It identifies the most advantageous market as Market C because it has the highest
net proceeds.
Company E bases its measurement of fair value on prices in Market A. Pricing is taken from this
market even though Company E does not normally transact in that market and it is not the most
advantageous market. Therefore, fair value is 47, considering transportation costs but not transaction
costs (see Question E40), even though Company E normally transacts in Market C and could maximize
its net proceeds in that market.
If Company E is unable to access Markets A and B, it would use Market C as the most advantageous
market. In that case, fair value would be 49.
The example highlights the presumption that the principal market is the market in which the entity
usually transacts may be overcome. The fact that Company E has information about Market A that it
cannot ignore results in Market A being the principal market, and not Market C.

E20. How should an entity identify the principal market, and how frequently
should it reevaluate its analysis?
There is no explicit guidance on how an entity should identify the principal market, over what period it
should analyze transactions for that asset or liability, or how often it should update its analysis.
820-10-35-5A An entity is not required to undertake an exhaustive search of all possible markets to identify the
[IFRS 13.17] principal market or, in the absence of a principal market, the most advantageous market. However, it
should take into account all information that is reasonably available. For example, if reliable information
about volumes transacted is publicly available (e.g. in trade magazines or on the internet), it may be
appropriate to consider this information to identify the principal market (see Question E25).

820-10-35-5A Absent evidence to the contrary, the principal (or most advantageous) market is presumed to be the
[IFRS 13.17, BC53] market in which the entity normally enters into transactions to sell the asset or transfer the liability.
In our view, an entity should update its analysis to the extent that events have occurred or activities have
changed in a manner that could change the entity’s determination of the principal (or most advantageous)
market for the asset or liability. For example, an entity may consider updating its analysis when:
• transactions for the asset or liability begin taking place on other markets accessible by the entity;
• available data indicates that the volume and level of activity in the market in which the entity normally
transacts has shrunk;
• other markets accessible to the entity have emerged with a greater volume and level of activity than the
market in which the entity normally transacts; or
• a previously inaccessible market becomes accessible to the entity.

E25. What common challenges might an entity encounter when identifying

the principal (or most advantageous) market for an asset?
Principal (or most advantageous) market assessments can be challenging, particularly for assets such as
cryptocurrencies and derivatives, and may vary from entity to entity. This table lists common challenges for
identifying the principal (or most advantageous) market and considerations for each.

Challenge Considerations
820-10-35-5A An entity may ‘normally transact’ Topic 820 permits an entity to presume that the market in which
[IFRS 13.17] in a market (e.g. a cryptocurrency it normally transacts is its principal market for an asset or, in the
or derivatives exchange) that has a absence of a principal market, the most advantageous market,
lower volume and level of activity unless there is evidence to the contrary (see Question E20).
for an asset relative to other
For example, when reliable information on volume and level of
markets the entity can access.
activity for an asset is reasonably available for different markets
in which the asset is traded, an entity would not ignore this
information and presume that the market in which it normally
transacts is the principal market.
820-10-35-5 An entity may ‘normally transact’ In these cases, it may be appropriate to consider:
[IFRS 13.16] in multiple markets for the same
• which of the markets to which the entity has access has a greater
asset.
volume and level of activity for the asset to identify the principal
market; or
• if there is no principal market (e.g. all of the markets to which the
entity has access are of a similar volume or level of activity, or
the volume or level of activity of all markets is not known), which
market is the most advantageous market.
820-10-35-6A In addition, when an entity transacts in multiple markets, fair value
[IFRS 13.19] is determined assuming a hypothetical sale of the entire holding
in the principal (or most advantageous) market, irrespective of
the entity’s intentions to sell some of the items in other markets.
However, if there are different businesses within an entity, more
than one principal market may exist (see Question E10).

Challenge Considerations
820-10-35-5 – 35-5A Accurate volume and activity data In some cases (e.g. for cryptocurrencies), an entity may need to
[IFRS 13.17, BC53], may be difficult to obtain and/or be exercise judgment in determining the appropriate sources for, and
[AICPA PADA Q.16] of questionable reliability for certain reliability of information on volume and/or level of activity for, an
markets (e.g. an unregulated asset.
exchange).
In these cases, an entity may want to obtain market data from
multiple reliable sources when assessing the principal market for an
asset and check that those sources substantially corroborate each
other.
For example, in assessing reliability, an entity may consider
whether the market in which the asset trades is regulated, whether
the market is reputable, the nature and extent of negative publicity
(e.g. fines, or accusations of fraud or misconduct), or indications of
manufactured volumes.
In the absence of reliable information on volume and/or level of
activity for markets other than the market in which the entity
normally transacts, an entity would generally presume that the
market in which it normally transacts is its principal market. Similar
considerations may apply to identifying the most advantageous
market.
Entities should develop and maintain a robust and sustainable
process to assess whether market information is available,
relevant and reliable.
820-10-35-6A – 35-6B An entity may not be able to access The principal (or most advantageous) market for an asset
[IFRS 13.19–20]; the market that has the greatest must be accessible to the entity as of the measurement date.
[AICPA PADA Q.16] trading volume or level of activity Accessibility does not consider an entity’s intent to trade in a
for an asset. particular market.
For example, a US entity may An entity needs to consider any legal or practical restrictions
not be permitted to access that would impact its ability to access the market with the
an exchange that does not greatest trading volume and level of activity at the measurement
accept US individual or entity date (see Questions C30 and C40). All relevant facts and
customers. circumstances should be considered.
There may also be other factors If an entity is not able to access the market with the greatest
that individually or in combination volume and level of activity for an asset, the principal market is the
preclude an entity legally or one with the greatest volume and level of activity that the entity can
practically from accessing a access at the measurement date.
particular market.

E30. Can an entity have multiple principal or most advantageous markets for
identical assets and liabilities within its consolidated operations?
820-10-35-6A Yes. An entity has to have access to the principal (or most advantageous) market in order to use a price
[IFRS 13.19] from that market. Therefore, the identification of the relevant market is considered from the perspective
of the specific entity. In some cases, different entities within a consolidated group (and businesses within
those entities) may have different principal or most advantageous markets for the same asset or liability.
For example, a parent company trades a particular asset in its principal market for that asset. Due to
regulatory restrictions, its overseas subsidiary is prohibited from transacting in that market. As a result, the
overseas subsidiary has a different principal market for the same asset.

E40. How are transaction costs and transportation costs treated in

identifying the principal or most advantageous market and in
measuring fair value?
820-10-20, 35-9C Transaction costs are directly attributable costs that an entity would incur in selling an asset or transferring
[IFRS 13.A, 26] a liability. Transportation costs are not included in transaction costs. They are the costs that would be
incurred to transport an asset from its current location to the principal (or most advantageous) market.
Examples of transportation costs include trucking, shipping, rail, pipeline, cartage and other costs directly
incurred in the bundling and physical movement of the asset.
820-10-20, Whether transaction and transportation costs are taken into account in identifying the principal and most
35-9B – 35-9C advantageous markets, and in measuring fair value, is summarized in the following table.
[IFRS 13.A, 25–26]

Transaction costs Transportation costs

Identifying the principal market  

Identifying the most advantageous market
 
Measuring fair value  
820-10-35-98 – 35-9C Transaction and transportation costs are not considered in identifying the principal market, because such a
[IFRS 13.25–26] market is identified based only on the volume and level of activity. However, such costs are considered in
identifying the most advantageous market, because it is identified based on the net proceeds from the
assumed transaction.
820-10-35-9B – 35-9C Once the market for the transaction has been identified, the measurement of fair value is an independent,
[IFRS 13.25–26] different calculation.
• Fair value is not adjusted for transaction costs; instead, transaction costs are accounted for in
accordance with other applicable Topics/Subtopics. This is because transaction costs are a characteristic
of the transaction, and not a characteristic of the asset or liability.
• Fair value is adjusted for transportation costs, if location is a characteristic of the asset (see Section C).
For example, the fair value of crude oil held in the Arctic Circle would be adjusted for the cost of
transporting the oil from the Arctic Circle to the appropriate market.

E50. Should transportation costs be included in the entity’s measurement of

fair value using an identified basis differential?
815-10-55-81 – 55-83 No. An identified basis differential generally cannot be used as a proxy for transport costs.
[IFRS 13.A, 26]
This is because an identified basis differential between the price at the location of the asset and at the
principal (or most advantageous) market generally also includes other factors besides location. Basis
differentials reflect multiple factors, such as timing, quality and location; and can be volatile because they
capture the passage of time (a financing element), changes in the relative value of different qualities or
grades of commodities, and changes in the attractiveness of locations from the central pricing hub relative
to each other factor.
Supply and demand is a critical factor in influencing the changes in basis due to quality and location. A
basis differential is therefore not a simple fixed transportation charge, but rather a complex and volatile
variable in and of itself.

E55. Should a forward price be used to measure the fair value of an asset
that is not located in the principal market when both spot and forward
prices are available?
No. In our view, fair value should be measured based on the spot price.
820-10-35-9A, 35-9C A spot price is a price for almost immediate delivery on the measurement date, while a forward or
[IFRS 13.24, 26] futures price is to exchange the item at a future date. It may seem intuitive to use the forward or futures
price to measure fair value when the asset is not located in the principal market; this is because of the
time that it will take to get the asset to the market and achieve the sale. However, in our view an asset
that is not located in the principal market should be valued using the spot price at the measurement date
rather than the forward or futures price. We believe that the asset should be assumed to be available in
the principal market at the measurement date, which is consistent with the definition of fair value.
In measuring fair value, the spot price in the principal market is adjusted for transportation costs to that
market from where the asset is located (see Question E40).

Example E55: Spot versus forward price to value inventory

Company X applies fair value hedge accounting for its commodity inventory. At the measurement date
(December 31, 20X5), Company X has physical inventory located in India and it would take two months
to deliver the inventory to the principal market in New York.
In measuring the fair value of the inventory, Company X uses the spot price in New York on December 31,
20X5, adjusted for appropriate transportation costs. It does not use the two-month forward price that is
quoted on December 31, 20X5.
In addition, we believe that the fair value of the inventory on December 31, 20X5, which is based on the
spot price, should also be discounted to reflect:
• the fact that it would take two months to deliver the inventory to the principal market and so it cannot
be converted to cash immediately (if material); and
• other risks involved in the transfer (e.g. damage to the inventory during shipment).

E60. How should future transaction costs be treated when the fair value is
measured using discounted cash flows?
820-10-35-9B As discussed in Question E40, an investor does not subtract transaction costs that it would incur to sell
[IFRS 13.25] an investment at the measurement date because these transaction costs are not a characteristic of the
asset. This is the case regardless of the valuation technique used.
However, it may be appropriate for future transaction costs (i.e. in subsequent sales transactions) to be
deducted in a DCF analysis. For example, for entities that use a DCF analysis to measure the fair value of
real estate, and the DCF analysis includes an assumption that a market participant would sell the property
in the future, there is a practice to subtract transaction costs (e.g. selling costs) expected to be incurred at
the time of that future disposition.
In contrast, when valuing a business enterprise in a DCF analysis, future transaction costs (e.g. selling
costs) are generally not included because it is assumed that a market participant would maximize
economic benefit by continuing to operate the business indefinitely into the future. In our experience,
market participants entering into a transaction for a business would generally not consider transaction
costs associated with a sale in the future. A terminal value within a DCF analysis generally reflects the
value of future cash flows at the end of a discrete cash flow period but does not imply that a market
participant would sell the business at that point in time.

Example E60: Role of transaction costs in measuring the fair value of certain real estate

Company E measures the fair value of its investment real estate. A DCF analysis resulting in an
estimated value of $100 million for the investment real estate asset at the measurement date includes
a cash inflow (discounted) of $80 million for future sale proceeds and a cash outflow (discounted) of $5
million for selling costs associated with the future sale at the end of an assumed five-year holding period.
The remaining cash flows (discounted) of $25 million in the $100 million value are from net operating
cash flows during the five-year holding period. If the real estate was sold at the measurement date,
selling costs of $4 million would be incurred by the existing investor.
Company E measures the fair value at $100 million (i.e. including the assumed cash outflow for
transaction costs at the end of the five-year holding period) on the basis that the DCF analysis is prepared
from the perspective of a market participant buyer who would consider future transaction costs in
determining the price that it would be willing to pay for the asset.
However, it would not be appropriate for Company E to measure the asset at a value of $96 million (i.e.
estimated value of $100 million less transaction costs of $4 million that would be incurred if the asset
were sold at the measurement date) because market participants would transact at $100 million on the
measurement date.

E70. If an entity sells its loans to market participants that securitize them,
should the market for securities issued by these market participants
(securitization market) be the principal market?
820-10-35-2B No. A fair value measurement is for particular assets or liabilities, which, in this case are the loans.
[IFRS 13.11]

820-10-35-2B The securities issued by the market participant that securitizes the loans are significantly different from the
[IFRS 13.11] loans and have different characteristics. The process of securitizing and issuing interests in a securitization
vehicle fundamentally changes the investors’ interest in the underlying loans. The price received for the
sale of the interests in a securitization vehicle includes earnings associated with the securitization process.
It would be inappropriate to reflect the earnings related to the securitization process in the fair value
measurement of loans.
820-10-35-5 Also, a fair value measurement assumes that the transaction to sell the asset takes place in the
[IFRS 13.16] principal market for that asset. The securitization market cannot be the principal market for the loans
because what is being sold or transferred in the securitization market are the securities issued by the
vehicle that securitized the loans. However, as discussed in Question G90, it may be appropriate to
consider securitization prices as an input into the valuation technique.

E80. How do transaction costs affect the initial measurement of a financial

asset or financial liability?
820-10-35-9 For a financial asset or financial liability measured at fair value, the fair value measurement would be
performed based on an exit price notion. A fair value measurement excludes transaction costs. For
a financial asset or financial liability not required to be measured at fair value upon initial recognition,
transaction costs would be accounted for under other applicable accounting standards, including Topic 320,
Debt and Equity Securities and Topic 946, Investment Companies.
946-320-30-1, 35-1 Portfolio securities are reported at fair value by entities in the scope of Topic 946. These fair value
measurements should be performed using the guidance in Topic 820. However, Topic 946 requires
investments in debt and equity securities to be recorded initially at their transaction price, including
commissions and other charges. Accordingly, entities in the scope of Topic 946 should record the
transaction costs in the cost basis of investment securities, which will then affect the realized and
unrealized gain or loss calculations.
ASC Master Glossary Topic 320 does not provide specific guidance on accounting for transaction costs; however, it refers to
‘holding gains or losses.’ The ASC Master Glossary defines a holding gain or loss as “The net change in fair
value of a security. The holding gain or loss does not include dividend or interest income recognized but not
yet received, writeoffs, or the allowance for credit losses.” Therefore, transaction costs generally are not
included as part of the cost basis of securities and are expensed as incurred by noninvestment companies.
However, because Topic 320 does not provide specific guidance on initial recognition for investments
within its scope, some entities other than investment companies may have elected a policy of including
transaction costs as part of the cost of purchased securities. This was under the view that Topic 820
specifically addresses fair value measurements without affecting an entity’s previous accounting policy
elections for transaction costs associated with purchased securities.

IFRS Accounting Standards different from US GAAP

[IFRS 13.25, 9.5.1.1] Unlike US GAAP, except for certain trade receivables and subject to Question I20, on initial recognition an
entity generally measures a financial asset or financial liability at its fair value, plus or minus, in the case
of a financial asset or financial liability not classified as fair value through profit or loss, transaction costs
that are directly attributable to the acquisition or issue of the financial asset or financial liability.
[IFRS 13.25, 9.5.1.1] Therefore, an initial measurement of a financial asset or financial liability classified as fair value through
profit or loss excludes transaction costs that are directly attributable to the entry transaction, while the
initial measurement of all other financial assets and financial liabilities includes transaction costs that are
directly attributable to the entry transaction.

E90. How is fair value measured when there appears to be no market for an
asset or liability?
820-10-35-9 The concept of a market in Topic 820 does not mean that there needs to be a structured, formal or
[IFRS 13.22–23] organized market (e.g. a dealer network or an organized exchange). When a structured or other market
does not exist, the entity focuses on identifying market participants to which it would sell the asset or
transfer the liability in an assumed transaction (see Section D). The entity also considers the assumptions
that those market participants would use in pricing the asset or liability, assuming that they act in their
economic best interest.

Example E90: Measuring the fair value of customer relationships

Company P acquired contractual customer relationships as part of a business combination. There is no

structured market where such items are traded, and instead Company P focuses on identifying market
participants that would benefit from the customer relationships.
Company P concludes that there are two types of potential market participants:
• two or three strategic buyers in the same industry as Company P, which would use the customer
relationships to enhance its business; and
• a number of financial buyers, which would restructure the acquired business (including the customer
relationships) for later resale.
In measuring the fair value of the customer relationships, Company P considers the assumptions
that these market participants would use in pricing the asset and, as a result, which type of market
participants would be willing to pay the highest price in an assumed sale transaction. Company P
does not automatically limit itself to financial buyers simply because there are more of them than
strategic buyers.
For simplicity, the above answer ignores the valuation premise of the customer relationships
when considered together with the other assets acquired. For further discussion of this point,
see Question J40.

F. Valuation approaches and

techniques
Overview
• In measuring the fair value of an asset or a liability, an entity selects those valuation
approaches and techniques that are appropriate and for which sufficient data is available to
measure fair value.
• The technique chosen should maximize the use of relevant observable inputs and minimize
the use of unobservable inputs (see Section G).
• A valuation approach is a broad category of techniques, while a valuation technique refers to a
specific technique such as a particular option pricing model.
• Valuation approaches used to measure fair value fall under three categories:
- Market approach – Valuation techniques that fall under the market approach include quoted
prices in an active market, but often derive market multiples from a set of comparable assets.
- Income approach – Valuation techniques that fall under the income approach convert future
amounts such as cash flows or income streams to a current amount on the measurement
date.
- Cost approach – Valuation techniques under the cost approach reflect the amount that
would be required to replace the service capacity of an asset. The concept behind the cost
approach is that an investor will pay no more for an asset than the cost to buy or construct a
substitute asset of comparable utility.

F10. What are some examples of the different valuation techniques used?
The following are examples of different valuation techniques used under the three valuation approaches,
and examples of common usage of those techniques.

Market approach

Technique Examples of common usage

Quoted price in an exchange market Equity securities, futures

Quoted prices in dealer markets • On-the-run US Treasury notes

• To-be-announced (TBA) mortgage-backed
securities

Market multiples derived from a set of comparable Unlisted equity interests

assets (e.g. a price to earnings ratio expresses an
entity’s per-share value in terms of its earnings
per share)

Matrix pricing Debt securities similar to benchmark quoted

securities

Income approach

Technique Examples of common usage

Present value techniques • Debt securities with little, if any, trading activity
• Unlisted equity instruments

Black-Scholes-Merton model or lattice model Over-the-counter European call option or American

call option

Multi-period excess earnings method: based on Intangible assets, such as customer relationships
a DCF analysis that measures the fair value of an and technology assets, acquired in a business
asset by taking into account not only operating combination
costs but also charges for contributory assets;
this isolates the value related to the asset to
be measured and excludes any value related to
contributory assets

Relief-from-royalty method Intangible assets expected to be used actively

(e.g. brands)

Cost approach

Technique Examples of common usage

Depreciated replacement cost method: considers Factory plant and equipment

how much it would cost to replace an asset of
equivalent utility taking into account physical,
functional and economic obsolescence; it
estimates the replacement cost of the required
capacity rather than the actual asset

F20. When more than one valuation approach or technique is used, what
factors should an entity consider in weighting the indications of fair
value produced by the different valuation approaches and techniques?
820-10-35-24 An entity should consider, among other things, the reliability of the valuation approaches and techniques
[IFRS 13.61, BC142] and the inputs that are used in the approaches and techniques. If a particular market-based approach relies
on higher-level inputs (e.g. observable market prices) compared to a particular income-based approach that
relies heavily on projections of income, the entity will often apply greater weight to the measurement of
fair value generated by the market-based approach because it relies on higher-level inputs.
820-10-35-24 An entity should maximize the use of relevant observable inputs and minimize the use of unobservable
[IFRS 13.61] inputs. Therefore, higher-level inputs that are available and relevant should not be ignored (see Section G).
820-10-35-24B Any, or a combination of, the approaches and techniques discussed in Topic 820 can be used to measure
[IFRS 13.63] fair value if the approaches and techniques are appropriate in the circumstances. However, when multiple
valuation approaches or techniques are used to measure fair value (e.g. when valuing a reporting unit for
impairment testing purposes), Topic 820 does not prescribe a mathematical weighting scheme; rather it
requires judgment.
In our experience, in many cases valuation professionals produce an evaluated price that uses a market
approach based on observable transactions of identical or comparable assets or liabilities and an income
approach that is calibrated to market data.
820-10-35-24B When multiple valuation approaches and techniques are used to measure fair value, the approaches and
[IFRS 13.63] techniques should be evaluated for reasonableness and reliability, and how they should be weighted. The
respective indications of value should be evaluated considering the reasonableness of the range of values
indicated by those results. The objective is to find the point within the range that is most representative
of fair value in the circumstances. In some cases, a secondary method is used only to corroborate the
reasonableness of the most appropriate valuation approach or technique.

F25. Can an entity change the valuation technique used to estimate fair
value between reporting periods?**
820-10-35-25 It depends. An entity applies valuation techniques used to measure fair value consistently. However, a
[IFRS 13.65] change in a valuation technique is appropriate if it results in a measurement that is equally or more
representative of fair value in the circumstances. This may happen, for example, when:
• new markets develop;
• new information becomes available;
• previously used information is no longer available;
• valuation techniques improve; and/or
• market conditions change.
820-10-35-26 An entity accounts for revisions to fair value resulting from a change in the valuation technique
[IFRS 13.66, prospectively as a change in accounting estimate.
IAS 8.32A, 34A]
For a discussion on whether an entity can change between using NAV as a practical expedient and other
measures of fair value to estimate fair value between reporting periods, see Question Q45.

F30. In using the income approach to measure the fair value of a

nonfinancial asset or nonfinancial liability, what are some of the
key components that will have the most significant effect on the
overall fair value measurement?
Measuring the fair value of a nonfinancial asset or nonfinancial liability under an income approach (e.g.
a DCF method) requires consideration of the following.

The type of valuation model employed

The type of valuation model employed is important because the model affects the nature of the projected
financial information. There are three primary types of DCF valuation techniques:
• The discount rate adjustment technique uses one set of forecasted cash flows and includes a premium
[IFRS 13.B18]
in the discount rate for all possible risks, including risks in the timing of the cash flows, liquidity risks,
credit risks, market risks, etc.
[IFRS 13.B25] • The expected present value technique method 1 (EPV Method 1) uses expected cash flows (which
represent a probability-weighted average of all possible cash flow scenarios) and adjusts those expected
cash flows by subtracting a cash risk premium. Because the adjusted cash flows represent certainty-
equivalent cash flows, the discount rate used is a risk-free interest rate.
[IFRS 13.B26] • The expected present value technique method 2 (EPV Method 2) also uses expected cash flows but
does not adjust those expected cash flows by subtracting a cash risk premium. EPV Method 2 adjusts
for risk by adding a risk premium to the risk-free interest rate for discounting purposes. The expected
cash flows are discounted at a rate that corresponds to an expected rate of return associated with the
probability-weighted cash flows (expected rate of return).

The discount rate

820-10-55-12, 55-16 The discount rate for the discount rate adjustment technique and the EPV Method 2 should consider all of
[IFRS 13.B22, B26] the risks associated with the cash flows being discounted to the extent that these risks have not been
considered in the cash flows. For the EPV Method 2, the discount rate comprises a risk-free rate and a
risk premium that a market participant would require to take on the risk of investing in the asset given the
alternative investment opportunities. To determine this discount rate, an entity may employ a model used
for pricing risky assets, such as the capital asset pricing model.

F40. How should the fair value of an intangible asset acquired in a business
combination be measured if the acquirer plans to discontinue its active
use?
820-10-35-10E The fair value measurement of an intangible asset to be retired or whose active use will be discontinued is
[IFRS 13.27, 30] no different from any other nonfinancial asset, and should be based on its highest and best use by market
participants (see Section J). One common methodology is the with-versus-without method. This method is
useful for intangible assets that market participants would be expected to use defensively.
It measures the incremental cash flows that would be achieved by market participants arising from their
ownership of an existing intangible asset by locking up the competing acquired intangible asset. Fair value
is measured as the difference between the fair value of the group of assets of the market participant:
• assuming that the acquired intangible asset were to be actively used by others in the market; and
• assuming that the acquired intangible asset was withdrawn from the market.

F50. Is the cumulative cost of construction an acceptable technique for

measuring the fair value of real estate property?
Generally, no. For real estate properties undergoing development, estimating fair value can prove difficult,
because much of the data used as inputs into a traditional valuation analysis is not available. Few, if
any, sales of comparable projects under construction exist from which meaningful fair value inputs can
be derived. As a result of this lack of relevant and applicable market data, some real estate investment
funds may consider the total cost expended in the measurement of the fair value of a development
property.
Although the cumulative cost of construction of a development property may be an appropriate input
to consider in measuring the property’s fair value, particularly in the very early stages of development,
it would generally not be expected to equal the property’s fair value. In the absence of observable and
comparable transactions, in our experience the property’s fair value is generally based on a DCF method
where cash inflows and outflows are discounted at a risk-adjusted rate of return required by market
participants.
In practice, as development progresses, the probability of completion increases and certain risks
associated with the investment decrease, which increases the fair value of the property. Those risks
include, but are not limited to, failure to secure necessary planning and other permissions on a timely
basis, construction cost over-runs, changes in market conditions during construction that could lead to
delays in leasing/sales and/or reduced lease rates or sale prices, and higher than projected operating
expenses. In addition, there is an element of developer’s profit that would be expected to increase the fair
value of the property.

In our view, market participant assumptions used in a DCF model would include estimates of cash outflows
needed to complete the project (which should consider the developer’s profit for the remaining work to
be completed) as well as cash inflows and outflows from operating the property and ultimately selling it
at some point in the future. We believe that a market participant would also be expected to consider the
likelihood of achieving those estimated cash inflows based on the risks associated with completion of
development and ultimate operations of the property.
If it is determined that the cumulative cost of construction is a reasonable proxy for fair value (e.g. in
the very early stages of development), it would not be appropriate to include third-party costs
associated with the acquisition of an investment in the determination of cost. Such costs typically
relate to direct incremental costs incurred for due diligence and closing the transaction and should be
excluded from a fair value measurement following the general principle that the fair value of an asset
or liability is not adjusted for transaction costs (see Question E40). Accordingly, regardless of industry
practice, under the requirements of Topic 820, transaction costs should not be included in the fair
value measurement.

F60. Is the initial cost (transaction price) of an investment in a private

operating company an acceptable proxy for fair value at subsequent
measurement dates?
Generally, no. Although measuring the fair value of an investment in a private operating company can prove
difficult because of a lack of observable data to use as inputs, it cannot be assumed that the initial cost
remains indicative of fair value at subsequent measurement dates.
In our experience, cost will be an appropriate estimation of fair value at the measurement date only in
limited circumstances, such as for a pre-revenue entity when there is no catalyst for a change in fair value,
or the transaction date is relatively close to the measurement date.
[IFRS 13.EM.02-13.28, The following are examples of factors that make it unlikely that fair value will stay consistent with initial
IFRS 9.B5.2.3–B5.2.4] cost:
• the passage of time between the transaction date and the measurement date;
• the performance of the investee compared with budgets, plans or milestones;
• the expectation that the investee’s technical product milestones will be achieved or their timing;
• the market for the investee’s products or potential products;
• the economic environment in which the investee operates;
• the equity markets, such as variances in the market valuations of comparable, publicly traded entities;
• internal matters of the investee such as fraud, commercial disputes, litigation, management or strategy;
and
• evidence about the valuation of the investment implied from external transactions in the investee’s
equity, either by the investee (such as a new equity issue), or by transfers of equity instruments between
third parties.
In some cases (e.g. start-up companies), performance that follows original plans or the launch of a new
product as expected, may lead to a significant increase in the fair value of the investment. This is because
uncertainty over those events is removed. All else being equal, the fair value of an investment is expected
to increase over time based on returns required by investors.

F70. Is the par amount of a loan an acceptable proxy for fair value at
subsequent measurement dates?
Generally, no. This is because the contractual interest rate of a loan does not generally represent the
market rate of interest charged by market participants at the measurement date. This includes floating
interest rate loans, which generally have differences between par and fair value that is attributable to:
• the effect of interest rate changes since the last reset date; and
• the contractual spread above the benchmark rate, which is usually not repriced to reflect changes
in market participants’ views of credit and liquidity risks between the date of issuance and the
measurement date.

F80. How should the fair value of loan assets be determined?

In measuring fair value for either measurement or disclosure purposes, the approach used depends on the
facts and circumstances. Some loans can be valued under a market approach (e.g. if there are secondary
market transactions and prices for identical or similar loans). However, in our experience other loans are not
traded on secondary markets; therefore, they often are valued under the income approach. When there is
no secondary market for loan sales, in some cases relevant inputs might be derived from rates or prices in
the origination market (i.e. rates associated with the issuance of new loans).
When loans are valued using origination rates or prices, the entity needs to consider whether a sale to a
market participant would reflect a premium or discount from the price in the origination market. If there
is no secondary market for loans but they are valued using inputs from markets for more liquid traded
instruments, the entity also needs to consider whether an additional liquidity adjustment is required
(see Question G40).
In general, the assumptions made in applying the income approach need to be consistent with the
assumptions that market participants would make with respect to future cash flows and discount rates.
Estimates of future cash flows used might, depending on the circumstances, reflect either:
• contractual cash flows, gross of expected credit losses; or
• expected cash flows, net of expected credit losses.
The discount rates used in each case need to be consistent with the cash flow estimates used.
• In using contractual cash flows, a discount rate adjustment technique is required and the discount rate
reflects uncertainty and risks not reflected in the cash flows – i.e. the discount rate is adjusted for both
expected and unexpected credit losses.
• In using expected cash flows, an expected present value technique is required and the discount rate is
consistent with the risk inherent in the expected cash flows – i.e. it would not include an adjustment for
expected credit losses as it is already reflected in the cash flows, but it would reflect the cost of bearing
the risk that credit losses will be different from expected.
820-10-55-5 Factors that affect estimates of expected cash flows and discount rates include
[IFRS 13.B13] the following.
• The time value of money.
• The currency denomination of the loan.
• The credit risk of the loan (e.g. the credit spread over the risk-free interest rate) considering both the
credit standing of the issuer and the specific terms of the instrument, such as collateral and other credit
risk enhancements, seniority, subordination or nonrecourse features.

Market data on credit spreads used to value a loan issued by a particular issuer for which there is not an
observable price might be derived from observable prices of traded credit default swaps (CDSs) referenced
to similar obligations of the same issuer or observable prices of other bonds of the same issuer. In other
cases, relevant market data might also be obtained from observable prices of so-called proxy CDSs or
bonds – e.g. CDSs referenced to obligations of entities that are considered similar to those of the particular
issuer or CDSs referenced to an index of obligations of similar entities. An adjustment to a credit spread
derived from a proxy CDS or other instrument may often be necessary to reflect differences between
the proxy instrument and the loan being valued (e.g. in relation to credit rating, capital structure, industry
or region of issuer as well as the possible impact of differences in liquidity, including basis differences
between pricing of derivative and nonderivative instruments). Judgment may be necessary to determine
whether a credit spread derived from a proxy instrument is appropriate and observable for the loan being
valued. For a discussion of the categorization of the resulting fair value measurement in the hierarchy,
see Section H.
• Prepayment risk.
• Liquidity risk.
• Legal risks (e.g. contractual or legislative provisions or deficiencies that might affect the ability of the
lender to realize any collateral).
• Embedded derivatives that have not been separated from the loan, and other risks and uncertainties
inherent in the cash flows that relate to specific contractual terms of the loan, not including credit risk (e.g.
terms that link cash flows to inflation or to variables specific to the borrower such as revenues or EBITDA).
An entity needs to consider all available information and use judgment to determine whether any
adjustments are required to reflect differences between the characteristics of instruments from which
inputs are derived and the loans being valued. For example, adjustments may be required to reflect
differences in liquidity, underwriting criteria, collateral, maturity, vintage, customer type, geographical
location, prepayment options or rates or other differences in credit risk.
An entity may sell its loans to market participants that securitize them, or it may securitize the loans itself.
The securitization market cannot be the principal market for the loans (see Question E70). However,
in measuring the fair value of the loans it may be appropriate to consider the current transaction price
for the securities that would be issued by a market participant that securitizes the loans as an input
(see Question G90).

F90. Should an entity measure the fair value of a group of loan assets with
similar risk characteristics on a pooled basis?
820-10-35-18D – 35-18E It depends. The fair value of financial assets is generally determined on an instrument-by-instrument basis.
As discussed in Section L, Topic 820 permits an exception to measure the fair value of a group of financial
assets and financial liabilities with offsetting risk positions on the basis of a net exposure, if certain criteria
are met (the portfolio measurement exception).
The portfolio measurement exception does not apply to a group of loan assets because the loans do not
have offsetting risks. However, in our view it may be appropriate to measure the fair value of a group of
loans as a pool, but only if it is consistent with the way in which market participants would transact, the
loans are similar to loans that are typically transacted by the entity as part of a pool, and it is consistent
with the guidance on the unit of account (see Section C).

948-310-35-3 For example, for mortgage loans and mortgage-backed securities held for sale, Topic 948 permits using
either the aggregate or individual loan basis to determine the lower of cost or fair value. Therefore, for such
loans, measuring fair value on a pooled basis may be appropriate if it is consistent with market participants’
approaches and assumptions in buying and selling the loans, and the entity is able to access the market for
pooled loans at the measurement date.
However, we believe that generally it would not be appropriate to measure fair value on a pooled basis
for loans that do not have similar risk characteristics. To do so would generally be inconsistent with the
approach and assumptions used by market participants when buying and selling these loans.

Example F90: Mortgage loans transacted as a pool

Bank B acquired a group (pool) of mortgage loans on April 1. All assets in the pool were current (i.e. none
were past due) with credit risk (FICO) scores above 650.
In Bank B’s principal market, mortgage loans of this type with similar FICO scores are typically transacted
in whole loan sales as a pool, as opposed to sales of individual mortgage loans. In addition, Bank B
typically buys and sells mortgage loans of this type as a pool, and is able to access the market for pooled
loans at the measurement date.
On June 30, all loans remained current with FICO scores over 650. As a result, Bank B concluded that it
was appropriate to measure fair value based on prices for loan pools.
On December 31, 5% of the loans in Bank B’s pool are now delinquent and/or have credit scores
below 650. As a result, Bank B determines that those mortgage loans are not comparable to the pools
of mortgage loans being transacted in the market. Accordingly, Bank B measures the fair value of the
delinquent loans and/or loans with credit scores below 650 on an individual loan basis.

IFRS Accounting Standards different from US GAAP

[IFRS 13.BC47] Unlike US GAAP, IFRS Accounting Standards do not have specific measurement requirements for
mortgage loans and mortgage-backed securities held for sale or specific guidance for the unit of account
for measuring the fair value of these loans. Unless the portfolio measurement exception applies, the unit
of account is typically the individual loan.

F100. What techniques are used to measure the fair value of a financial
guarantee?
460-10-30-2, In certain circumstances, it will be necessary to measure the fair value of a financial guarantee, e.g. a
815-10-30-1, 35-1 financial guarantee in the scope of Topic 815, Derivatives. Below are some examples of the valuation
techniques used to measure the fair value of a financial guarantee.

Market prices of comparable instruments

An entity may be able to identify a market price for financial guarantees identical or similar to those that
either it or a member of the group has issued or received in exchange for consideration. It might also be
possible to identify market prices for similar guarantees, credit default swaps or credit insurance products.
These prices could be adjusted to estimate the fair value of the financial guarantee. In our experience, this
will be the easiest technique to apply.

Discounted cash flow models

There are different DCF models that could be applied to estimate the fair value of the financial guarantee,
including using a probability-weighted DCF analysis reflecting default and recovery rates among entities
with the same credit rating as the entity. In respect of default rates, an entity should consider whether
historical default rates should be updated to reflect current and forecasted economic conditions.

Interest rate differentials

In some cases, an entity (borrower) might receive a guarantee for its issued loan for no consideration
(e.g. a parent gives a guarantee for a loan of its subsidiary). When measuring the fair value of the benefit
received on initial recognition, the entity might use the difference between the interest charged on the
guaranteed loan and what would have been charged had the loan not been guaranteed as the basis for
estimating the fair value of the guarantee. The premise is that the interest that the capital provider (e.g.
a bank) is willing to forgo represents the price that it is willing to pay for the guarantee. This technique
requires the entity to estimate the interest rate that it would have been charged without the financial
guarantee and evaluating the borrower’s credit standing on a stand-alone basis.

G. Inputs to valuation techniques

Overview
• Inputs to valuation techniques are the assumptions that market participants would use in
pricing the asset or liability.
• Inputs are categorized into three levels:
- Level 1 inputs. Unadjusted quoted prices in active markets for identical assets or liabilities
that the entity can access at the measurement date.
- Level 2 inputs. Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
- Level 3 inputs. Unobservable inputs for the asset or liability.
• These inputs include assumptions about risk, such as the risk inherent in a particular valuation
technique used to measure fair value and the risk inherent in the inputs to the valuation
technique.
• An entity selects the valuation techniques:
- that are appropriate in the circumstances;
- for which sufficient data is available; and
- that maximize the use of relevant observable inputs and minimize the use of unobservable
inputs.

G10. If quoted prices in an active market are available and readily accessible,
is it permissible for an entity to use a lower level input as a starting
point for measuring fair value?
820-10-35-40, Generally, no. An entity does not make an adjustment to a Level 1 input except under specific
35-41C, 35-44 circumstances. If an identical instrument is actively traded, a price is available and the entity can access
[IFRS 13.76, 79–80] that price at the measurement date, the fair value measurement should equal the product of the quoted
market price (unadjusted) times the quantity of instruments held by the entity at the reporting date (i.e.
PxQ) (see also Question C90).

G20. If Level 1 inputs are not available, does that change the objective of the
fair value measurement?
820-10-35-53 No. The fair value measurement objective remains the same regardless of the level of the inputs to the
[IFRS 13.87] fair value measurement. Unobservable inputs also reflect the assumptions that market participants would
use when pricing the asset or liability, including assumptions about risk.

G30. Should a blockage factor be considered in measuring the fair value of

financial assets?
820-10-35-36B, 35-44 No. A blockage factor is a discount that reflects the number of instruments (i.e. Q) as a characteristic of the
[IFRS 13.69, 80] entity’s holding relative to daily trading rather than a characteristic of the asset or liability. An entity is
prohibited from applying a blockage factor for a fair value measurement for all three levels of the fair value
hierarchy. This is the case even in respect of positions that comprise a large number of identical assets and
liabilities, such as financial instruments.
820-10-35-36B, 35-44 An entity selects inputs that are consistent with the characteristics of the unit of valuation for the asset or
[IFRS 13.69, 80] liability that market participants would take into account. An entity should not select inputs that reflect size
as a characteristic of the entity’s holding even if the market’s daily trading volume is not sufficient to absorb
the entire quantity held by the entity without changing the market price.
820-10-35-54H If an entity decides to enter into a transaction to sell a block of identical assets or liabilities (e.g. financial
[IFRS 13.BC156–BC157] instruments), the consequences of that decision should not be recognized before the transaction occurs
regardless of the level of the hierarchy in which the fair value measurement is categorized. Selling a block
as opposed to selling the underlying assets or liabilities individually or in multiple, smaller pieces is an
entity-specific decision. These differences are not relevant in a fair value measurement, and therefore they
should not be reflected in the fair value of an asset or a liability.

G40. Should a liquidity adjustment be considered in measuring the fair value

of financial assets?
Yes, in certain circumstances.
820-10-35-36B, A liquidity adjustment should not be applied if the instruments being valued are actively traded (e.g. for
35-41C, 35-44 instruments for which there are Level 1 inputs for the noncontrolling equity instruments). In that case, fair
[IFRS 13.69, 79–80] value is measured as the product of the quoted price and the quantity held by the entity (i.e. PxQ).
However, applying a liquidity adjustment may be appropriate in measuring fair value if the:
• instruments being valued are categorized in Level 2 or Level 3 of the fair value hierarchy;
• other inputs in the valuation have not factored in the liquidity of the instrument; and
• market participants would include an adjustment when buying or selling the instrument.

820-10-35-36B, 35-44 If it is appropriate to make a liquidity adjustment, the amount of the adjustment is based on the liquidity of
[IFRS 13.69, 80] the specific instrument’s unit of valuation in the entity’s principal (or most advantageous) market and not on
the size of the entity’s holding relative to the market’s daily trading volume.

IFRS Accounting Standards different from US GAAP

Unlike US GAAP, in some cases there is uncertainty about the unit of account (unit of valuation), in
particular for investments in subsidiaries, associates and joint ventures. This difference, which is
discussed in Question C90, affects whether a liquidity adjustment is considered in measuring fair value.

G50. [Not used]

G60. When an investment company holds a controlling interest in an entity,

should it include a control premium (or market participant acquisition
premium) in its measurement of fair value?
820-10-35-36B, It depends. If the instruments being valued are actively traded (i.e. for instruments for which there are
35-41C, 35-44 Level 1 inputs for the noncontrolling equity instruments), fair value is measured as the product of the
quoted price and the quantity held by the entity (i.e. PxQ). In this situation, an adjustment for a control
premium (or market participant acquisition premium) would not be appropriate for Level 1 inputs.
This conclusion for instruments categorized as Level 1 in the fair value hierarchy does not apply to
equity instruments held by an investment company that are categorized as Level 2 and Level 3 (i.e. for
instruments for which there are no Level 1 inputs for the noncontrolling equity instruments). Specifically,
for investment companies in the scope of Topic 946, Investment Companies, there are situations in which
a control premium (or market participant acquisition premium) may be appropriate if an entity holds a
controlling interest. Topic 946 does not clearly establish a unit of account for investment companies
and does not prohibit the use of either the individual security or the grouping of one issuer’s equity
securities together as the unit of account. Practice has evolved so that investment companies use a single
unit of account in these situations (i.e. the entire controlling interest) if market participants would take
that approach; in such cases, a control premium (or market participant acquisition premium) would be
considered.

IFRS Accounting Standards different from US GAAP

Unlike US GAAP, in our view there is an accounting policy choice for the unit of account for investments
in subsidiaries. If the unit of account is the investment as a whole, it may be appropriate to add such a
premium in measuring the fair value of the investment (even if Level 1 prices exist for individual shares).
This is explained in Question C90.

G70. What criteria must be met to qualify for the practical expedient not to
use Level 1 inputs?
820-10-35-41C(a) As a practical expedient, an entity may measure the fair value of certain assets and liabilities under an
[IFRS 13.79(a)] alternative method that does not rely exclusively on quoted prices. This practical expedient is appropriate
only when the following criteria are met:
• the entity holds a large number of similar (but not identical) assets or liabilities; and
• quoted prices from an active market, while available, are not readily accessible for these assets or
liabilities individually (i.e. given the large number of similar assets or liabilities held by the entity, it would
be difficult to obtain pricing information for each individual asset or liability at the measurement date).
In our view, the use of such an alternative method as a practical expedient also is subject to the condition
that it results in a price that is representative of fair value. We believe that the application of a practical
expedient is not appropriate if it would lead to a measurement that is not representative of an exit price at
the measurement date.
For a discussion of the categorization of the resulting fair value measurement in the hierarchy,
see Questions H30 and H90.

G80. How is the fair value measurement of an asset or liability affected by

the transaction price for similar or identical assets or liabilities?
820-10-35-54J An entity considers all of the following in measuring fair value or estimating market risk
[IFRS 13.B44] premiums.
• If the evidence indicates that a transaction is not orderly, the entity places little, if any, weight (compared
with other indications of fair value) on that transaction price (see Section M).
• If the evidence indicates that a transaction is orderly, the entity takes into account that transaction price.
The amount of weight placed on that transaction price when compared with other indications of fair
value will depend on facts and circumstances, such as the volume of the transaction, the comparability
of the transaction to the asset or liability being measured, and the proximity of the transaction to the
measurement date.
• If the entity does not have sufficient information to conclude whether a transaction is orderly, it takes
into account the transaction price. However, that transaction price may not represent fair value; that is,
the transaction price is not necessarily the sole or primary basis for measuring fair value or estimating
market risk premiums. If the entity does not have sufficient information to conclude whether particular
transactions are orderly, it places less weight on those transactions when compared with other
transactions that are known to be orderly.
820-10-35-54G A fair value measurement is not intended to reflect a forced transaction or a distressed sale price.
[IFRS 13.B41] Nevertheless, the presence of distressed sellers in a particular market may influence the price that could
be obtained by a non-distressed seller in an orderly transaction.

820-10-35-50(c) Although significant adjustments to a Level 2 input may be necessary as a result of a significant decrease
[IFRS 13.83(c)] in the volume or level of activity for the asset or liability in relation to normal market activity, Level 2 inputs
related to transactions that either are orderly or where there is insufficient information to conclude whether
a transaction was orderly are considered to be relevant and therefore should be considered in the valuation
technique.

G90. In measuring the fair value of loans, should an entity consider the
current transaction price for the securities that would be issued by a
market participant that securitizes the loans?
820-10-35-36 – 35-37 It depends. A valuation technique should maximize observable inputs and minimize unobservable inputs. In
[IFRS 13.67, 72] addition, the fair value hierarchy gives priority to quoted prices (unadjusted) in active markets for identical
assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
820-10-35-36 – 35-37 As a result, it may be appropriate to include securitization prices as an input into the valuation technique if
[IFRS 13.67, 72] market participants would consider this pricing. This would be the case particularly if a reliable observable
price for the loans is not available, even though the securitization market is not considered the principal
market (discussed in Question E70). If the valuation technique uses these inputs, then the fair value of the
loans generally would be obtained by adjusting the securitization prices (including the value of retained
interests) for the costs that would be incurred and the estimated profit margin that would be required by a
market participant to securitize the loans.

G100. How should the fair value of a reporting unit that is a subsidiary
be measured if the entity owns a 60% controlling interest and the
remaining noncontrolling interest shares are publicly traded?
350-20-35-22 – 35-24 In measuring the fair value of a reporting unit for goodwill impairment testing purposes, the unit of
[IFRS 13.69, BC47] account is the collection of assets and liabilities forming the controlled entity. Acquisitions of public
companies frequently involve payment of a premium to the pre-announcement share price, primarily
because of synergies and other benefits that flow from control over another entity. In these circumstances,
the quoted market price of an individual equity security may not be representative of the fair value of
the reporting unit as a whole. Therefore, a control premium (or market participant acquisition premium)
adjustment may be appropriate.

G110. If an entity has adopted a convention for prices subject to a bid-ask

spread, but evidence exists that the price under the convention is not
representative of fair value, should the entity adjust its valuation?
820-10-35-36C Yes. An entity should not ignore available evidence that its pricing convention (e.g. mid-market pricing)
[IFRS 13.70] is producing an amount that is not representative of fair value. The price within the bid-ask spread that is
representative of fair value in the circumstances should be used to measure fair value.
820-10-35-36C – Topic 820 does not preclude an entity from establishing policies to use mid-market pricing or other pricing
35-36D conventions that are used by market participants as a practical expedient for fair value measurements
[IFRS 13.70–71] within a bid-ask spread. However, in our view the use of mid-market pricing or other pricing conventions
is subject to the condition that it results in a price that is representative of fair value. Therefore, an
entity cannot ignore available evidence that its pricing convention does not result in an amount that is
representative of fair value. When using a pricing convention, an entity should ensure that the assumptions
used each reporting period reflect current market conditions.

Example G110: Mid-market pricing

Company G invests in a financial asset that has bid and ask prices with a very wide bid-ask spread.
Company G’s approach is to use the mid-market pricing convention for measuring fair value.

If Company G’s approach is to use mid-market pricing for assets and liabilities measured at fair value
that have bid and ask prices, and the bid-ask spread is particularly wide or the applicable bid-ask spread
has widened significantly for a specific asset or liability, a mid-market price may not be representative
of fair value in those circumstances. In that case, Company G would evaluate whether the mid-market
price continues to be representative of a fair value measurement as used by market participants for that
specific asset or liability.

G120. Is it appropriate for an entity that historically measured the fair value
of individual positions using a mid-market pricing convention to use a
different point within the bid-ask spread, to achieve a desired reporting
outcome?
No. In our view, it is not appropriate for an entity to change its valuation technique or policies to achieve
a desired financial reporting outcome. However, a change in valuation technique or policy that results in a
more representative measure of the fair value in the current circumstances would be appropriate.

G130. In measuring the fair value of exchange-traded securities, at what time

of the day should the security be priced?
In practice, an entity generally uses the closing price from the principal (or most advantageous) market
on the last day of its reporting period. Some entities use prices that reflect after-hours trading, which in
practice is most common for instruments that trade in foreign markets that close before similar markets
in other time zones. Consideration should be given to the circumstances in which adjustments to Level 1
prices may be appropriate.
820-10-35-36C In an exchange market, closing prices are both readily available and generally representative of fair value.
[IFRS 13.B34] However, the definition of a closing price may represent different things on different exchanges for different
types of financial instruments. For example, a closing price may range from the last transaction price for the
day to a price derived from a complicated calculation or process. If an asset or liability is subject to a bid-ask
spread, an entity needs to assess the nature of the closing price.
946-320-S99 For mutual funds and other similarly regulated entities, the measurement date may be determined either
by reference to other applicable Codification Subtopics or industry-specific regulations.

IFRS Accounting Standards different from US GAAP

There are no industry-specific requirements under IFRS Accounting Standards. Instead, the general
principles of IFRS 13 apply.

G140. When might a quoted price in an active market not be representative of

fair value at the measurement date?
820-10-35-41C(b) In some cases, a quoted price in an active market might not represent fair value at the measurement date,
[IFRS 13.79(b)] which might occur if a significant event takes place after the close of a market but before the measurement
date (e.g. the announcement of a business combination or trading activity in similar markets). In that case,
an entity chooses an accounting policy, to be applied consistently, to identify those events that might affect
fair value measurements.
820-10-35-41C(b) However, if the quoted price is adjusted for new information, the adjustment results in a fair value
[IFRS 13.79(b)] measurement categorized within a lower level of the fair value hierarchy (see Section H).

Example G140: Adjustment to inputs

Company G holds shares of Company T that are listed on the London Stock Exchange (LSE). On the
reporting date, Company G obtains the closing price of the shares from the LSE. Subsequent to the
LSE’s closing time, but still on the reporting date, Company T makes a public announcement that affects
the fair value of its shares as evidenced by prices for a small number of aftermarket transactions in
depository receipts on the shares of Company T that are traded on the New York Stock Exchange.
Company G would use the aftermarket prices to make appropriate adjustments to the closing price
from the LSE to measure the fair value of the shares at the measurement date. Because the adjustment
is derived from observed market prices, the resulting fair value measurement would be a Level 2
measurement in the fair value hierarchy.

G150. How might an entity determine the necessary adjustment when the
quoted price is not representative of fair value at the measurement
date?
820-10-35-41C(b) An entity should choose an accounting policy, to be applied consistently, to identify significant events
[IFRS 13.79(b)] occurring after the close of the principal or most advantageous market, but before the measurement date,
which may affect fair value measurements.
In our experience, pricing data from aftermarket trades or trades for identical or similar assets or liabilities
in another market may be useful to determine the existence of a significant event that affects the fair
value measurement of an asset or liability. Pricing data also may be used to determine the amount of the
adjustment to be made to the Level 1 price sourced from the entity’s principal (or most advantageous)
market.
If an entity uses pricing data from aftermarket trades or trades for identical or similar assets or liabilities
in another market to determine the amount of the adjustment, it should support that adjustment through
analysis of how the pricing data or their underlying factors affect the fair value of the asset or liability. This
analysis may be based on quantitative and qualitative factors to assess whether the pricing data is relevant
to the fair value measurement of the asset or liability being measured.
For example, if an entity uses a statistical method in its analysis, to the extent that the analysis supports
a correlation coefficient that is other than 1, that factor may need to be applied to pricing data from
aftermarket trades or trades for identical or similar assets or liabilities in another market to develop the
adjustment to be applied to the Level 1 price in the entity’s principal (or most advantageous) market.
This analysis also may include a comparison between the pricing data from aftermarket trades or trades
for identical or similar assets or liabilities in another market and the subsequent price in the entity’s
principal (or most advantageous) market. To the extent that a difference is found through this analysis, an
adjustment to the Level 1 price from the entity’s principal (or most advantageous) market may need to
reflect this difference.

Example G150: Oil futures contracts

Company G holds oil futures contracts at the New York Mercantile Exchange (NYMEX). On the reporting
date, Company G obtains the closing price of the oil futures from NYMEX. On the reporting date, but
subsequent to the closing time of NYMEX, there is a public announcement that affects oil prices and
related financial instruments. This is evidenced by prices of oil forward contracts transacted in the over-
the-counter (OTC) market on the reporting date.
Company G needs to evaluate the futures prices with forward contracts to factor in how correlated the
futures and forward markets are. If this analysis supports a correlation, and the correlation coefficient
is other than 1, that factor may need to be applied to the aftermarket forward prices to determine the
appropriate adjustments to the price quoted on NYMEX.
Because of the adjustment to the price obtained from the principal market, the resulting fair value
measurement generally would be expected to be a Level 2 measurement, unless the unobservable
inputs are significant, in which case a Level 3 designation would be appropriate.

G160. If an entity uses a pricing service to obtain inputs to a fair value

measurement, what is management’s responsibility for evaluating the
appropriateness of those inputs?
AICPA’s Current SEC The preparation of financial statements requires management to establish accounting and financial
and PCAOB reporting processes for measuring fair value, including adequate internal controls. Even though third-party
Developments, sources may provide management with data points for measuring fair value, management is still
December 2011 responsible for:
• complying with the applicable Topics, including disclosure requirements;
• maintaining appropriate internal controls to prevent or detect material misstatements related to the fair
value measurements and disclosures; and
• assessing the effectiveness of internal control over financial reporting related to fair value
measurements.
820-10-35-54K, 35-54M Management should understand how the quote or price was determined by the pricing service. It should
[IFRS 13.B45, B47] understand what the source of the information was, the inputs and assumptions used, and whether a
quote is binding or nonbinding. It also should consider whether an adjustment to the price is necessary. In
addition, management is expected to establish internal controls to determine that the pricing information
received from a vendor and used by management in the valuation process is relevant and reliable, including
whether:
• the prices are consistent with the fair value measurement objective (i.e. the price at which an orderly
transaction would take place between market participants on the measurement date); and

• there are a number of price indicators for a single instrument and the price indications are widely
dispersed. If so, management should consider which prices best represent the price at which an orderly
transaction would take place between market participants on the measurement date. If the differences
in prices are significant, it generally is not appropriate to take the average of the quotes obtained from
pricing services because an average does not necessarily represent a price at which a transaction would
take place, and it is likely that one or more of the prices obtained better represents fair value than the
others (see also Question H120).
[IU 01-15] Prices obtained from a pricing service are not considered observable simply because they were
obtained from a third party or because the instrument being measured is liquid. The classification of
these measurements within the fair value hierarchy depends on the nature of the inputs involved in the
measurement. Therefore, to make sure that fair value measurements are categorized properly in the fair
value hierarchy, management needs to understand the source of the inputs used for the measurement.
With respect to SEC registrants, the SEC staff noted that obtaining information from pricing sources
may be critical to providing appropriate MD&A and financial statement disclosure. Therefore, the better
management understands the models, inputs and assumptions used in developing the price provided by
the vendor, the more likely it is that appropriate risk and uncertainty disclosures will be made.
The SEC staff’s communications have clarified management’s responsibilities relating to prices obtained
from third-party pricing sources that are used by management for estimating fair values for financial
reporting purposes.

G170. When an IPO is a likely event for a private company, does the expected
IPO price represent the fair value of the company’s own equity
instruments before the IPO?
Generally, no. While the expected IPO price is a meaningful data point and should be considered in
measuring the fair value of the company’s own equity instruments, it generally will not be representative
of fair value as of the measurement date. This is because the ultimate IPO price is not finalized until the
registration date, and the market price will not be determinable until trading takes place. Furthermore, the
expected IPO price reflects the value of the entity’s shares under the assumption that they are publicly
traded (i.e. a liquid instrument), whereas they are not in fact publicly traded at the measurement date.
Although the expected IPO price generally is not representative of fair value as of the measurement
date, in our experience it is usual for management to obtain an understanding of the differences between
that price and the measurement of fair value. This review can help to support the reasonableness of
assumptions underpinning the valuation.

G180. Should the price established in an orderly, recent round of equity

financing be considered in measuring the fair value of an existing
equity investment that is similar but not identical?
Yes. However, the entity needs to consider differences between the investments. For example, a recent
round of equity financing might relate to Series B preferred instruments, while the equity investment
whose fair value is being measured comprises Series A preferred instruments that have different
liquidation preferences. In this case, an adjustment could be applied against the recent price to reflect such
differences. Alternatively, the recent price may be an input into a valuation technique, e.g. calibrating the
valuation model to value the instrument using the recent price of a similar instrument.
820-10-35-54J(b) In our experience, the nature and amount of adjustments will depend on the facts and circumstances as of
[IFRS 13.B44(b)] the measurement date. These factors also influence the relative weighting that would be given to
the adjusted price if the results of multiple valuation techniques are being used (see Question F20).
Considerations include the following.
• The comparability of the instrument in the transaction to the asset being measured. The rights and
preferences associated with the instruments issued in the recent investment round (e.g. liquidation
preferences, conversion ratios, dividends and anti-dilution provisions) are compared with the instrument
that is being valued. This assessment includes considering the effect that the recent issuance had
on previously issued instruments (e.g. the liquidation preference for an existing instrument may have
become subordinated to more recently issued instruments).
• The proximity of the transaction to the measurement date. The passage of time between the transaction
date and the measurement date reduces the relevance and reliability of the recent investment round
for measuring the fair value of the instrument at the measurement date. In addition, events occurring
between the recent investment round and the measurement date need to be considered.
• The volume of the transaction. The size of the recent investment round in total dollars.

H. Fair value hierarchy

Overview
• Topic 820 establishes a fair value hierarchy based on the inputs to valuation techniques used
to measure fair value.
• The inputs are categorized into three levels – the highest priority is given to unadjusted quoted
prices in active markets for identical assets or liabilities, and the lowest priority is given
to unobservable inputs. For a more in-depth discussion of inputs to valuation techniques,
see Section G.
• The fair value hierarchy is made up of three levels, with Level 1 being the highest level.
- Level 1 inputs. Unadjusted quoted prices in active markets for identical assets or liabilities
that the entity can access at the measurement date.
- Level 2 inputs. Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
- Level 3 inputs. Unobservable inputs for the asset or liability.
• Fair value measurements are categorized in their entirety based on the lowest level input that
is significant to the entire measurement.
• The resulting categorization is relevant for disclosure purposes.

H10. How are fair value measurements categorized in the fair value
hierarchy?
820-10-35-37 – 35-37A Fair value measurements are categorized in their entirety based on the lowest level input that is
[IFRS 13.72–73] significant to the entire measurement. This is summarized in the following diagram.

Quoted price for an Yes No

identical item in an active Price adjusted? Level 1
market?
Yes
No

Any significant No
Level 2
unobservable inputs?

Yes
Level 3

820-10-35-37A – 35-38, The level into which a fair value measurement is categorized in its entirety is determined with reference
35-40, 35-47, 35-52 to the observability and significance of the inputs used in the valuation technique (see Section F).
[IFRS 13.73–74, 76, 81, Categorization into Level 1 can only be achieved through using a quoted price in an active market for an
86, A] identical asset or liability, without adjustment.

H20. If fair value is measured using inputs from multiple levels of the
hierarchy, how should an entity determine the significance of an input
for categorizing the fair value measurement within the hierarchy?
Topic 820 does not provide guidance on how to determine significance.
820-10-35-37A – 35-38 If a fair value is measured using inputs from multiple levels of the fair value hierarchy, the inclusion of a
[IFRS 13.73–74] lower level input in an entity’s measurement may indicate that the input is significant. This is because
the entity’s decision to include the lower level input provides evidence that it considers the input to be
significant to the overall measurement of fair value.
820-10-35-37A However, the final determination of whether inputs are significant is a matter of judgment that requires an
[IFRS 13.73] entity to consider:
• factors specific to the asset or liability; and
• the effect of the input on the overall fair value measurement, including possible alternative assumptions
for the input.
The assessment of whether an input is significant to the fair value measurement of an item is made by
reference to the item’s (entire) fair value rather than by reference to other metrics such as the entity’s
total assets or net profit. Topic 820 does not include ‘bright lines’ for assessing significance. An entity may
develop methodologies, including significance thresholds, that are applied consistently to similar items.
One possible methodology for assessing significance is a sensitivity analysis, whereby the percentage
change to an item’s fair value measurement arising from using reasonably possible alternative amounts for
the unobservable input is compared to a significance threshold.

Example H20: Assessing significance of inputs – Stock option

Company P holds a European option to acquire 100 shares in Company T, exercisable in five years.
Company T’s shares are listed on the London Stock Exchange. Company P uses an option pricing model
to value the stock option. The inputs to the model include two unobservable inputs – the expected
volatility and the expected dividend yield. Using expected volatility of 30% and expected dividend yield of
3%, Company P determines that the fair value of the stock option is 100.
Company P uses a sensitivity analysis to assess the significance of these two unobservable inputs –
i.e. it considers how a reasonably possible change in one of the inputs at the measurement date would
impact the option’s fair value of 100. Company P uses a significance threshold of 10% of the fair value
measurement (i.e. 10% of the option’s fair value of 100) to determine whether the impact is significant,
as illustrated in the table below.

Reasonably Adjusted fair Change in Significance Conclusion

possible range value value threshold
Expected +/− 0.5% 94 / 106 −/+ 6% 10% Not significant
dividend
yield

Expected +/− 4% 113 / 87 +/− 13% 10% Significant

volatility

Company P concludes that expected volatility is a significant unobservable input, and therefore
categorizes the fair value measurement of the stock option as a Level 3 measurement. This is because a
reasonably possible change to the expected volatility input from 30% to 34% (or 26%) would change the
measurement of the option by 13%, which is higher than the significance threshold of 10%.

If multiple unobservable inputs are used, in our view the unobservable inputs should be considered
individually and in total for the purpose of determining their significance. For example, it would not be
appropriate to categorize in Level 2 a fair value measurement that has multiple Level 3 inputs that are
individually significant to that measurement but whose effects happen to offset. If factors such as volatility
inputs are used, an entity could apply some form of comparability methodology (e.g. a stress test of the
sensitivity of the fair value estimate to an option’s volatility input or a with and without comparison to assist
in determining significance).

H30. When an entity uses the practical expedient in G70 to deviate from a
Level 1 input, how is the resulting fair value measurement categorized
in the hierarchy?
820-10-35-41C(a), 55-3C The use of an alternative pricing method results in a fair value measurement categorized within a lower
[IFRS 13.79(a), B7] level of the fair value hierarchy. An example of an alternative pricing method is matrix pricing. This pricing
method involves using a selection of data points, usually quoted prices, or yield curves to calculate prices
for separate financial instruments that share characteristics similar to the data points. Matrix pricing using
observable market-based data points will usually result in a Level 2 categorization in the fair value hierarchy.

H40. In what level of the hierarchy should an entity categorize a fair

value measurement of an equity investment that is subject to a
security-specific restriction?
820-10-35-38A Generally, Level 2 or Level 3. For securities that, absent the security-specific restriction, are publicly traded
[IFRS 13.75] in an active market (i.e. the observed price is a Level 1 input for the unrestricted security), an entity
adjusts the publicly available price for the effects of the restriction to arrive at the fair value of the
restricted security (e.g. restrictions on the transfer of securities obtained in a Rule 144A private placement;
see Question C40). Any such adjustments will cause the overall fair value measurement to be categorized
as a Level 2 or Level 3 measurement.
820-10-35-41C Although the overall fair value measurement will be a Level 2 or Level 3 measurement, further adjustments
[IFRS 13.79] to the publicly traded price are generally not appropriate (see also Question H80).

H45. In what level of the hierarchy should an entity categorize the fair value
measurement of publicly traded equity investments held indirectly
through an intermediate entity?
820-10-35-2E; It depends. The categorization of an asset or liability in the fair value hierarchy is based on the lowest level
35-37A – 35-38A input that significantly affects the fair value measurement in its entirety. A reporting entity first determines
[IFRS 13.14, 73] the unit of account prescribed by the Topic/Subtopic that applies to the intermediate entity and the publicly
traded equity investments held indirectly. Generally, we expect that a direct investment in an intermediate
entity will represent the unit of account being measured at fair value, instead of investments held indirectly
by the intermediate entity (see Question C15).
In instances where the sole purpose of the intermediate entity is to hold the publicly traded equity
investments, the fair value of the investment in the intermediate entity may be determined by adjusting
the fair value of the publicly traded equity investments for the effects of risks (e.g. liquidity risk) of the
intermediate entity. Regardless of whether adjustments were applied to the fair value of the publicly traded
equity investments, when the intermediate entity is the unit of account being measured, the investment
in the intermediate entity is not an identical asset to the publicly traded equity investments. Therefore,
assuming that the intermediate entity is not listed, it would not be appropriate to categorize the investment
in Level 1 of the hierarchy.
The intermediate entity may hold assets and/or liabilities in addition to its investments in the publicly traded
equity investments. In this case, the categorization of the investments in Level 2 or Level 3 of the hierarchy
will depend on whether significant unobservable inputs were used to value these assets and/or liabilities.
In instances where the intermediate entity is consolidated by the reporting entity, the publicly traded equity
investments (the individual shares) held by the intermediate entity become the unit of account of the
consolidated reporting entity (see Question C15). If the publicly traded equity investments have a quoted
price in an active market for the identical asset, then the equity investments are categorized in Level 1 of
the hierarchy. If the market for the publicly traded equity investments is not active, then the investments
are categorized in Level 2 or 3 of the hierarchy.
820-10-35-54B In certain instances, the intermediate entity may be an investment company in which the fair value of the
investment is estimated using the net asset value as a practical expedient. In these instances, the fair
value is not categorized in the hierarchy.

IFRS Accounting Standards different from US GAAP

Unlike US GAAP, IFRS Accounting Standards do not include an exception that allows the use of NAV as
a practical expedient. Under IFRS Accounting Standards, an entity may only measure investments on
the basis of NAV when it is representative of fair value (see Questions P20 and P30). Therefore, the last
paragraph above is relevant only to US GAAP.

H50. In what level of the hierarchy should an entity categorize a fair value
measurement of an equity investment in a privately held company?
820-10-35-37A – 35-38 Generally, Level 3. The categorization of an asset or liability in the fair value hierarchy should be based on
[IFRS 13.73–74] the lowest level input that significantly affects the fair value measurement in its entirety. To determine an
investment’s categorization in the hierarchy, an entity should consider the technique used to value the
investment as well as the inputs to the measurement. Usually, there are no current observable prices
for shares in private companies and accordingly the measurement of fair value is based on valuation
techniques that use unobservable inputs.
820-10-55-3A – 55-3B For example, one common technique for valuing equity securities under the market approach is basing the
[IFRS 13.B5–B6] measurement on multiples of income statement amounts (e.g. EBITDA, net income, revenue) for similar
companies. For this technique, the multiples used in the fair value measurement should, if available and
applicable, be calculated based on publicly available market information for similar companies that have
actively traded equity securities.
820-10-35-37A However, although market information should be used if available and relevant, the overall fair value
[IFRS 13.73] measurement of the equity securities measured under this technique generally will be a Level 3
measurement because the other inputs into the measurement technique (e.g. entity-specific income
statement amounts, comparability adjustments) are not observable.
820-10-35-36B One of the other inputs that needs to be considered is a discount for the nonmarketable nature of the
[IFRS 13.69] unquoted equity investment being measured, as compared with equity instruments of the similar
companies that are publicly traded and, therefore, likely to be more liquid. An adjustment to reflect the
nonmarketable nature of the investment generally will result in a fair value measurement categorized as a
Level 3 measurement.

H60. For assets or liabilities that have maturities longer than instruments for
which market pricing information is available, how should the fair value
measurement be categorized?
820-10-35-40 In the absence of quoted prices in active markets for identical assets or
[IFRS 13.76] liabilities that the entity can access on the measurement date, fair value measurements should not be
categorized as Level 1. To be categorized as a Level 1 measurement, the market information should be
observable prices for identical instruments.

820-10-35-37A, 35-48 To determine the appropriate categorization of fair value measurements of instruments that involve terms
[IFRS 13.73, 82] requiring both observable and unobservable inputs, an entity should consider each of the following factors.
• If market prices are observable for substantially all of the term of the asset or liability, the fair value
measurement may be a Level 2 measurement. If market prices are not observable for substantially all of
the term of the asset or liability, this may cause the measurement to be a Level 3 measurement.
• If the effect of an unobservable input on the overall fair value measurement is significant, the fair
value measurement will be a Level 3 measurement. An adjustment to a Level 2 input for the effect
of the unobservable term that is significant to the entire measurement may cause it to be a Level 3
measurement if the adjustment uses unobservable inputs.

Example H60: Categorization of derivatives when prices are not available

Company H has an over-the-counter contract to purchase natural gas every month for the next 30 months.
The contract is accounted for as a derivative instrument and therefore is measured at fair value. Assume
that natural gas futures prices are available in an active market for the next 24 months after the current
reporting date. However, observable natural gas futures prices with maturities ranging from 25 to
30 months are not available. Therefore, for the remaining 6 months of the term, Company H uses internally
developed estimates of future natural gas prices.
In our view, the fair value measurement of the natural gas contract would be categorized as a Level
3 measurement because market pricing information (Level 2 inputs) is only available for 80% of the
term of the contract (24 of the 30 months), which does not represent substantially the entire term
of the contract. Further, it is doubtful that the effect of the unobservable market pricing information
(Level 3 inputs) on the overall fair value measurement would be insignificant. However, in the following
year, if quoted natural gas prices continue to be available for the following 24 months, the fair value
measurement might be categorized as a Level 2 measurement.

H70. How should an entity determine whether entity-derived inputs are

corroborated by correlation to observable market data for the purpose
of determining whether they are Level 2 inputs?
820-10-20 Market-corroborated inputs are defined as “inputs that are derived principally from or corroborated by
[IFRS 13.A] observable market data by correlation or other means.”
Topic 815 An entity may use correlation analysis to prove the relationship between inputs. Correlation is a statistical
[IAS 39] concept, indicating the strength and direction of a linear relationship between two variables. In our view, for
an input to be considered a Level 2 input by using correlation, the correlation between the input and relevant
observable market data should be high. In using correlation or other statistical means to support Level 2
inputs, an entity may apply similar statistical considerations to those applied in establishing that a hedging
relationship is highly effective using a regression analysis.

In establishing the level in the hierarchy of an input corroborated using correlation analysis, an entity
considers factors such as the R-squared confidence level of the statistical analysis and the number of data
points.

H80. How does an adjustment for information occurring after the close
of the market affect the categorization of the measurement in the
hierarchy and an entity’s ability to make other adjustments?
820-10-35-41C(b) An adjustment to exchange-traded pricing for information occurring after the close of the principal (or most
[IFRS 13.79(b)] advantageous) market, but before the measurement date, will result in a fair value measurement that is
lower than Level 1.
820-10-35-41C Although the adjusted price is no longer a Level 1 measurement, in our view an entity is not allowed to
[IFRS 13.79] make other adjustments to the measurement (e.g. for market or other risks), except if the criteria to make
one of the other adjustments to Level 1 prices in Topic 820 are met (see Question G70 and sections K
and L). We believe that the circumstances that allow an entity to adjust Level 1 inputs only allow for
adjustments related to those circumstances.

H90. If an entity obtains prices from a third-party pricing service to use in its
fair value measurement of an asset or liability, how should it categorize
the resulting measurement in the hierarchy?
820-10-35-54K The use of a pricing service for inputs in a fair value measurement does not change the analysis of the
[IFRS 13.B45, IU 01-15] categorization of the inputs in the fair value hierarchy. Prices obtained from a pricing service are not
considered observable simply because they were obtained from a third party. Instead, the resulting fair
value measurement is categorized in the fair value hierarchy based on the nature (or source) of the prices
provided by the pricing service. Therefore, an entity using a pricing service should obtain an understanding
of the valuation methods and the sources of inputs used by the pricing service to properly categorize any
fair value measurements based on those inputs (see also Question G160).
820-10-35-37A, For example, if a pricing service provides quoted prices (unadjusted) from active markets for identical
35-38A, 35-40 assets or liabilities, any resulting fair value measurement that relies solely on those prices would be Level 1
[IFRS 13.73, 75–76, (see Question H110). Alternatively, if the pricing service provides prices based on models that it has
IU 01-15] generated, any resulting fair value measurement would be a Level 2 or Level 3 measurement, depending
on the observability and significance of inputs used in the model for the measurement and any
adjustments made to those inputs.
820-10-35-41C(a) In some cases, pricing services may provide Level 2 inputs determined using a matrix pricing methodology,
[IFRS 13.79(a)] even though Level 1 inputs are available to both the entity and the pricing service. Using Level 2 inputs in
these situations is not appropriate unless the entity meets the criteria in Question G70. If these criteria
are not met, the entity should obtain quoted prices (Level 1 inputs) either from the pricing service or from
other sources.

Example H90: Fair value measurement from pricing services

If a price is obtained from a pricing service, how should it be categorized in the fair value hierarchy in each
of the following scenarios?

Scenario 1: Debt security traded in a dealer market

Company H holds a debt security that is traded in a dealer market in which bid-ask quoted prices are
available. Assume that the market is an active market for the debt security and Company H has access to
this market.
If the pricing service used the price to measure the fair value of the debt security (i.e. the identical
CUSIP), the debt security would be a Level 1 measurement.10 However, if the pricing service uses a
methodology for this class of debt securities based on observable market data using matrix pricing
methodology in addition to Level 1 inputs when it meets the relevant criteria (see Questions G70 and
H30), the price would usually be categorized as a Level 2 measurement.

Scenario 2: Exchange-traded debt security

Company H issued an exchange-traded debt security and elected to account for the instrument under the
fair value option. The pricing service uses the quoted price for the security trading as an asset in an active
market as its measurement of the fair value of the debt security.
Company H evaluates whether the quoted price for the asset used by the pricing service requires
adjustment for factors such as a restriction preventing the sale of that asset, which would not apply to
the fair value measurement of the liability.
In this case, Company H determines that no adjustments are required to the quoted price of the asset.
Therefore, the debt security would be categorized as a Level 1 measurement. This is because the price
used to measure the fair value of the debt security is for the identical instrument issued by Company H
and traded as an asset, and no adjustments were made to the quoted price of the identical instrument.

Scenario 3: Interest rate swap

Company H is a party to an interest rate swap transaction in an OTC market. There are no quoted prices in
the OTC market for interest rate swaps that are identical to Company H’s swap. Company H obtains rates
from a third-party pricing service to use in the measurement of the fair value of the swap. For providing
the price, the pricing service uses transaction rates for similar swaps in the OTC market.

While similar swaps may have been transacted in the OTC market, these swaps have different
counterparties as well as different fixed coupons and residual maturities, and therefore are not identical to
Company H’s interest rate swaps. The price at which Company H would be able to sell the interest rate swap
would result from a negotiated transaction taking into account the credit ratings of the two parties to the
swap as well as the terms of the specific swap. Because the swap is not identical to similar swaps for which
there are transactions in the OTC market, the price would not be categorized as a Level 1 measurement, but
as Level 2 or Level 3 depending on whether significant unobservable inputs are used to produce the price.

10. Committee on Uniform Security Identification Procedures – the US alphanumeric code that identifies a financial security.

H100. When prices derived from consensus valuations are used for measuring
fair value, where in the hierarchy does the resulting measurement fall?
It depends. A consensus valuation is a common method (e.g. for loans and derivatives) when multiple
participants in a group assembled by a pricing service submit their best estimate of price (typically a
mid-market price) for the assets or liabilities that each entity holds in its trading books. The pricing service
returns consensus prices to each subscriber based on the data received.
820-10-35-54M When assessing consensus data, it is important to understand what the prices submitted represent. If the
[IFRS 13.B47] estimates provided to the service do not represent executable quotes or are not based on observable
prices, a fair value measurement derived from the consensus price would be a Level 3 measurement.
However, if the inputs to the price received from the pricing service are Level 1 or Level 2 inputs, the use
of those prices generally will result in a Level 2 measurement.
820-10-35-54K As discussed in Question G160, management is required to obtain an understanding of the source of the
[IFRS 13.B45] inputs for a price received from a pricing service to properly categorize any fair value measurement based
on those inputs.

H110. Should a fair value measurement be categorized in Level 1 of the

hierarchy when the asset or liability measured has a bid price and an
ask price?
It depends. In our view, a valuation technique that uses only unadjusted quoted prices in an active market
at the measurement date for an identical instrument may be categorized in its entirety in Level 1 if it uses
more than one Level 1 input (e.g. a Level 1 bid price and a Level 1 ask price) and the valuation technique
does not include adjustments to those Level 1 inputs.
820-10-35-36C – Therefore, we believe that a fair value measurement that uses a mid-market price that is an average of a
35-36D, 35-40 Level 1 bid price and a Level 1 ask price may be considered a Level 1 measurement. Similarly, we believe
[IFRS 13.70–71, 76] that the price within the bid-ask spread that is most representative of fair value may also be categorized in
Level 1, if the bid and ask prices are Level 1 prices.
However, we believe that a fair value measurement that is based on a model that uses complex algorithms
or quoted prices in an active market from different points in time before the measurement date cannot
be considered a Level 1 measurement. Similarly, a fair value measurement that is based on a model that
uses only quoted prices in an active market as inputs, but not all of those inputs relate to the identical
instrument being measured, cannot be considered a Level 1 measurement.

H120. Should executable prices be considered quoted prices?

It depends. In our view, certain types of executable prices (e.g. third-party quotes that represent binding
offers) can be considered quoted prices even though they do not represent the price of an actual
transaction.
For example, in many markets (particularly when market makers or similar intermediaries are involved) the
market price is determined on the basis of bid and ask prices, which are binding offers but do not represent
the price of an actual transaction until the offer is accepted and a trade occurs.

820-10-35-54L Although in measuring fair value less weight generally is placed on quotes that do not reflect the result of
[IFRS 13.B46] transactions compared with other indications of fair value that reflect the result of transactions, we believe
that bid and ask prices may in some cases represent quoted market prices. This is because current quoted
bid and ask prices (or similar binding offers to trade) from market makers or exchanges may be more
representative of the price at which a market participant could sell an asset at the measurement date than
the prices of actual transactions that occurred at an earlier point in time; these earlier transactions do not
necessarily represent the price at the measurement date. If an executable price is considered a quoted
price but the market is not active, the price will be categorized in Level 2 of the hierarchy.
We believe that determining whether a binding offer is considered a quoted price in the market and
whether the market in which the binding offer is made is considered ‘active’ requires judgment and
depends on the specific facts and circumstances. In particular, it would be unusual for binding offers to
be available at widely different price levels if the market is active. Similarly, a wide bid-ask spread may be
associated with a market not being active.

H130. If a credit spread is used as an input to measure the fair value of an

instrument, how does it affect its categorization in the fair value
hierarchy?
820-10-35-51 As explained in Questions F80 and O20, market data on credit spreads used to value a derivative or non-
[IFRS 13.84] derivative instrument issued by a particular issuer for which there is not an observable price might be
derived from observable prices of traded CDSs, proxy CDSs or bonds. An adjustment to a credit spread
may often be necessary. If the adjustment is made using unobservable inputs, then this may indicate that
the credit spread is not observable and would result in a Level 3 categorization of the measurement if it is
significant to the entire measurement (valuation) of the instrument (see Question H10).

I. Fair value on initial recognition

Overview
• If an asset is acquired (or a liability assumed), the transaction price paid for the asset (or
received to assume the liability) normally reflects an entry price. However, Topic 820 requires
fair value measurements to be based on an exit price.
• Although conceptually different, in many cases the exit and entry price are equal and therefore
fair value on initial recognition generally equals the transaction price.
• However, if there is a difference, it is necessary to consider whether a day one gain or loss
should be recognized.

I10. Can there be a difference between the transaction price and fair value
on initial recognition?
820-10-30-2 – 30-3 Yes, although this is expected to occur only in limited circumstances. In many cases, the transaction price
[IFRS 13.57–58] (excluding transaction costs) equals the fair value. However, there may be situations in which the
transaction price might not be representative of fair value on initial recognition.
820-10-30-3A In determining whether fair value on initial recognition equals the transaction price, an entity considers
[IFRS 13.59, B4] factors specific to the transaction and to the asset or liability. The transaction price might, for example, not
represent fair value on initial recognition if the:
• transaction to purchase the asset or assume the liability was entered into in a market other than the
entity’s principal (or most advantageous) market;
• transaction price (i.e. entry or purchase price) is not the price within the bid-offer spread that is most
representative of fair value (i.e. an exit or sale price). This may apply when an entity uses bid prices for
asset positions and ask prices for liabilities;
• transaction is between related parties;
• transaction takes place under duress or the seller is forced to accept the price in the transaction; and/or
• unit of account represented by the transaction price is different from the unit of account for the asset
or liability measured at fair value. This might be the case in a business combination, or for a financial
asset or financial liability that is purchased or assumed as part of a portfolio to which the entity applies
the portfolio measurement exception (see Section L). In this case, the transaction price is based on the
individual item, while the initial fair value measurement is based on the entity’s net position.

820-10-30-3A Before concluding that it is appropriate that the fair value on initial recognition is different from the
[IFRS 13.59, B4] transaction price, the entity should:
• identify the specific attributes of the transaction that generate the difference between the transaction
price and the entity’s estimate of fair value; and
• consider the guidance and examples given in Topic 820.
820-10-30-3 The transaction price remains an important piece of objective evidence for measuring the fair value of
[IFRS 9.B5.1.2A] financial instruments. Therefore, as the significance of the assumptions made by an entity increases in
importance to the overall measurement of fair value, the entity should consider whether the transaction
price for the instrument provides better evidence of the fair value of the instrument than its own estimate
of fair value.

Example I10: Difference between transaction price and fair value on initial recognition

825-10-55-47 – 55-49 Company R, a retail counterparty, enters into an interest rate swap in a retail market with Company D, a
[IFRS 13.IE24–IE26] dealer, for no initial consideration (i.e. the transaction price is zero).
• Company D can access both the retail market (i.e. with retail counterparties) and the dealer market (i.e.
with dealer counterparties).
• Company R can access only the retail market.
The dealer market is the market with the greatest volume and level of activity for the swap. The fair value
determined by transactions in the dealer market may be different from the transaction price in the retail
market.
Company D

From the perspective of Company D, the dealer market is the principal market for the swap, which
is different from the market in which it initially entered into the swap transaction (the retail market).
Therefore, for Company D the transaction price of zero may not necessarily represent the fair value of the
swap on initial recognition.
Company R
Company R cannot access the dealer market, and the retail market is the principal market from its
perspective. If it were to transfer its rights and obligations under the swap, it would do so with a dealer
counterparty in that retail market. Therefore, the transaction price of zero represents the fair value of the
swap to Company R on initial recognition (ignoring the potential effect of the bid‑ask spread).

I20. Is an entity required to recognize a day one gain or loss if the

transaction price differs from the fair value measurement on initial
recognition?
820-10-30-6 It depends. For assets or liabilities that are measured initially at fair value, Topic 820 requires day one gains
[IFRS 13.60] or losses resulting from the difference between the fair value and the transaction cost to be recognized
in profit or loss, unless the relevant Topic that requires or permits fair value measurement specifies
otherwise.
820-10-30-6 Recognition of the difference between the transaction price and the entity’s estimate of fair value is not
dependent on where in the fair value hierarchy the entity’s fair value measurement falls (i.e. Level 1, 2
or 3). As such, an entity can recognize a day one gain or loss even when the fair value measurement is
categorized in Level 3 of the hierarchy.

IFRS Accounting Standards different from US GAAP

[IFRS 9.B5.1.2A, For financial instruments, the relevant accounting standards contain requirements that specify when an
B5.2.2A] entity is required to recognize day one gains or losses in profit or loss. Unlike US GAAP, these accounting
standards prohibit the immediate recognition of a day one gain or loss unless fair value is evidenced by
a quoted price in an active market for an identical financial asset or liability, or is based on a valuation
technique whose variables include only data from observable markets (the observability condition).
[IFRS 9.B5.1.2A, Unlike US GAAP, if the entity determines that the fair value on initial recognition differs from the
B5.2.2A] transaction price but it is not evidenced by a valuation technique that uses only data from observable
markets, the carrying amount of the financial asset or liability on initial recognition is adjusted to defer
the difference between the fair value measurement and the transaction price. This deferred difference
is subsequently recognized as a gain or loss only to the extent that it arises from a change in a factor
(including time) that market participants would take into account when pricing the asset or liability.

However, in our experience some banks immediately recognize losses equal to the difference between
the fair value on initial recognition and the transaction price, even if the valuation technique is not based
wholly on observable market data. Additionally, in our experience banks may consider the recognition
of day one gains if any unobservable inputs used in the valuation technique that forms the basis for
measuring the instrument’s fair value on initial recognition are judged to be insignificant in relation to
measuring the day one gain.

The table illustrates the application of the day one gain and loss guidance in IFRS Accounting Standards
on initial recognition if:
• a difference arises between the transaction price (e.g. 100) and management’s alternative estimate of
fair value (e.g. 99); and
• the observability condition is not met.

Application of day one gain or loss guidance if observability condition is not met
Fair value: Management’s estimate of exit price = 99
Initial measurement, ignoring transaction Fair value (99) plus the difference between
costs: transaction price and fair value of 1 (100 - 99) =
100

I30. Can there be a day one difference for a hybrid instrument if the entity
has access to a market for the components of the hybrid that would
result in a more advantageous measurement of the entire hybrid
instrument?11
820-10-35-2B It depends. An entity is required to consider the hybrid instrument acquired or obtained, including all its
[IFRS 13.11] rights and obligations, as well as any other items that would be considered by market participants, when
developing a price for the hybrid instrument in its entirety.
820-10-35-9 It may be appropriate to measure the fair value of a hybrid instrument in its entirety based on the separate
[IFRS 13.22] fair value measurements of its individual components (i.e. the host contract and one or more embedded
derivatives) if that is how market participants would price the instrument in the principal (or most
advantageous) market for the hybrid instrument.
820-10-30-3A However, if the resulting measurement on initial recognition is different from the transaction price, it may be
[IFRS 13.59, B4] appropriate for an entity to recognize the difference between the transaction price and the entity’s
measurement of fair value, only if the entity can:
• identify the specific attributes of the transaction that generate the difference between the transaction
price and the entity’s estimate of fair value; and
• reconcile those attributes with the guidance on recognizing when a day one gain or loss may be
appropriate (see Questions I10 and I20).
820-10-30-6 If there is a difference between the transaction price and the fair value of the hybrid instrument on initial
recognition based on the fair values of its separate components, the resulting day one gain or loss is
recognized in profit or loss.
820-10-35-24C For the fair value of a hybrid financial instrument in its entirety to be based on the instrument’s individual
[IFRS 13.64] component parts, without adjustment, the valuation technique used should capture all of the cash flows
or other exchanges of value included in the contractual terms of the hybrid instrument together with
associated risks including any interdependencies between different components.

IFRS Accounting Standards different from US GAAP

[IFRS 9.B5.1.2A, Unlike US GAAP, if there is a difference between the transaction price and the fair value of a hybrid
B5.2.2A] financial instrument on initial recognition, recognition of a day one gain or loss depends on the
observability condition (see Question I20).

11. A hybrid instrument refers to a nonderivative instrument that consists of a nonderivative host contract and one or more
embedded derivatives.

I40. Can a gain or loss arise at initial measurement for an investment when
fair value is measured using a mid-market pricing convention?
820-10-35-36C – 35-36D Yes. As explained in Question G110, Topic 820 does not prohibit using mid-market prices or other pricing
[IFRS 13.70–71] conventions generally used by market participants as a practical expedient for fair value measurements
within a bid-ask spread. However, in our view the use of mid-market prices requires that it provides a
reasonable approximation of an exit price.
820-10-35-30-6 Therefore, if it is determined that the mid-market price is representative of fair value, a gain or loss will
[IFRS 13.60] arise on initial recognition because of the difference between the transaction price (e.g. ask price paid to
purchase an asset) and the mid-market price. For discussion of the treatment of gains or losses on initial
recognition, see Question I20.

IFRS Accounting Standards different from US GAAP

[IFRS 9.5.1.1A, Unlike US GAAP, for financial instruments IFRS Accounting Standards prohibit the immediate recognition
B5.1.2A] of a day one gain or loss unless the observability condition is met (see Question I20).

J. Highest and best use

Overview
• Highest and best use is a valuation concept that represents the use of a nonfinancial asset
by market participants that would maximize the value of the asset or the group of assets and
liabilities (e.g. a business) within which the asset would be used.
• The highest and best use of a nonfinancial asset establishes the valuation premise that is used
to measure the asset’s fair value.
• A fair value measurement of a nonfinancial asset considers a market participant’s ability to
generate economic benefits by using the asset at its highest and best use or by selling it to
another market participant who would use the asset in its highest and best use.

J10. Can an entity assume a change in the legal use of a nonfinancial asset
in determining its highest and best use?
820-10-35-10A It depends. A fair value measurement of a nonfinancial asset takes into account a market participant’s
[IFRS 13.27] ability to generate economic benefits by using the asset at its highest and best use or by selling it to
another market participant that would use the asset at its highest and best use.

No
Physically possible?

Yes

No
Legally permissible?
Use is not considered in
Yes measuring fair value

No
Financially feasible?

Yes

No
Maximizes value?

Yes

Use is considered in measuring fair value

820-10-35-10B, In determining the highest and best use of a nonfinancial asset, the entity considers whether the use is
35-10E(a)(i), 35-10E(b) physically possible, legally permissible and financially feasible. The entity also considers whether maximum
[IFRS 13.28, 31(a)(i), value would be provided to market participants by using the asset on a stand-alone basis or in combination
31(b)] with other assets. This is illustrated in the above diagram.
820-10-35-10C Highest and best use is determined from the perspective of market participants, even if the entity intends
[IFRS 13.29, BC71] a different use. However, an entity’s current use of a nonfinancial asset is presumed to be its highest and
best use unless market or other factors suggest that a different use by market participants would maximize
the value of the asset.
820-10-35-10B(b) A use that is legally permissible takes into account any legal restrictions on the use of the nonfinancial
[IFRS 13.28(b), BC69] asset that market participants would take into account when pricing the asset. To be considered legally
permissible, the potential use of a nonfinancial asset should not be prohibited under current law in the
jurisdiction.
820-10-35-10C When a nonfinancial asset’s fair value measurement contemplates a change in its legal use (e.g. a change
[IFRS 13.BC69] in zoning restrictions), the risks of changing its legal usage and the costs a market participant would incur
to transform the asset should be considered.

Example J10: Land acquired in a business combination

820-10-55-30 – 55-31 Company J acquires land in a business combination. The land is currently developed for industrial use as
[IFRS 13.IE7–IE8] a factory site. Although the land’s current use is presumed to be its highest and best use unless market
or other factors suggest a different use, Company J considers the fact that nearby sites have recently
been developed for residential use as high-rise apartment buildings.

On the basis of that development and recent zoning and other changes to facilitate that development,
Company J determines that the land currently used as a factory site could be developed as a residential
site (e.g. for high-rise apartment buildings) and that market participants would take into account the
potential to develop the site for residential use when pricing the land.

The highest and best use of the land is determined by comparing:

• the value of the land as currently developed for industrial use (i.e. an assumption that the land would
be used in combination with other assets, such as the factory, or with other assets and liabilities); and
• the value of the land as a vacant site for residential use, taking into account the costs of demolishing
the factory and other costs necessary to convert the land to a vacant site. The value under this use
would take into account risks and uncertainties about whether the entity would be able to convert the
asset to the alternative use (i.e. an assumption that the land would be used by market participants on a
stand-alone basis).

The highest and best use of the land would be determined on the basis of the higher of these values.
In situations involving real estate appraisal, the determination of highest and best use might take into
account factors relating to the factory operations (e.g. the factory’s operating cash flows) and its assets
and liabilities (e.g. the factory’s working capital).

J20. When an acquirer in a business combination plans to use an acquired

intangible asset defensively, who are the market participants?
820-10-35-10C – It depends. In evaluating the highest and best use to market participants, the possible perspectives of
35-10D, 55-32 financial and strategic buyers may be considered to determine the asset’s highest and best use. In general,
[IFRS 13.29–30, IE9] the key difference between the two categories of potential market participants is that strategic buyers have
existing operations and may have complementary assets with which the intangible asset may be used
either actively or defensively, while financial buyers do not. There are exceptions such as when financial
buyers have existing investments in a specific market with which acquired assets may be used or when
financial buyers may be pursuing a roll-up strategy.
820-10-35-10C – 3 The highest and best use of the intangible asset to market participants may be to actively use the
5-10D, 55-32 intangible asset with other assets, including potentially other assets already owned by market participants.
[IFRS 13.29–30, IE9] This use could apply to both financial and strategic buyers. Alternatively, the highest and best use
may be to use the asset defensively in a manner that results in a highest and best use of the group of
complementary assets. This may be the highest and best use for strategic buyers, but would be less likely
to apply to financial buyers who are more likely to use the intangible asset actively.
820-10-55-32 One of the most important aspects of valuing an intangible asset that is expected to be used defensively
[IFRS 13.IE9] to increase the value of other assets is determining the characteristics of market participants. The entity’s
decision not to actively use the asset is not determinative in concluding who the appropriate market
participants are or the highest and best use of the intangible asset to market participants.

J30. Should an entity use entity-specific assumptions about its future plans
in measuring the fair value of an intangible asset acquired in a business
combination?
820-10-35-10C – No. The entity does not consider its planned future use or non-use (i.e. retired or otherwise not used) in
35-10D measuring the fair value of the intangible asset. Like all nonfinancial assets, the fair value of an intangible
[IFRS 13.29–30, asset is measured based on the assumptions that market participants would use in pricing the asset.
BC70–BC71] Therefore, an entity considers the highest and best use by market participants in measuring the fair value
to be allocated to the intangible assets in the acquisition accounting.

J40. Can an entity use differing valuation premises for nonfinancial assets
within a group of assets and liabilities?
820-10-35-10E(a)(iii) No, assumptions about the highest and best use of nonfinancial assets within a group should be
[IFRS 13.31(a)(iii)] consistent.

Example J40: Customer relationships

Company J acquired contractual customer relationships and technology assets as part of a business
combination. Company J considers the following in determining whether the highest and best use of the
customer relationships would be on a stand-alone basis or in combination with complementary assets.
• The relationships with customers arose in the context of the sale of products incorporating the
technology. A market participant without complementary technology would likely realize lower value
from the customer relationships on a stand-alone basis, because of the probability of lower expected
sales.
• However, a market participant with access to complementary technology would likely realize
higher sales and profits than on a stand-alone basis and would consider this in valuing the customer
relationships.
In this example, the valuation premise for each asset in the group would be in combination with the other
assets and liabilities of the group.

J50. Does the highest and best use concept apply to financial assets?
ASU 2011-04.BC45− No. The highest and best use and valuation premise is only relevant when measuring the fair value of
BC47, BC49 nonfinancial assets. This is because financial assets do not have alternative uses, and their fair values do
[IFRS 13.BC47, not depend on their use within a group of other assets or liabilities. In addition, the unit of account of a
BC63−BC65, BC67] financial instrument is typically the individual instrument (see Question C10).
Financial assets do not have alternative uses because they have specific contractual terms and have a
different use only if the contractual terms change. However, a change to the contractual terms generally
will cause the financial asset to become a different asset (which does not exist at the measurement date).
Although the highest and best use concept does not apply to financial assets, Topic 820 permits a
measurement exception that allows an entity to measure the fair value of a group of financial assets and
financial liabilities with offsetting risk positions on the basis of its net exposure, if certain criteria are met
(see Section L).

K. Liabilities and own equity

instruments
Overview
• In measuring the fair value of a liability or an own equity instrument, it is assumed that the
item is transferred to a market participant at the measurement date (e.g. the liability remains
outstanding and the market participant transferee would be required to fulfill it).
• If there is no quoted price for the transfer of an identical or a similar liability or an entity’s own
equity instrument, and another market participant holds the identical item as an asset, the
entity measures the item’s fair value from the perspective of such a market participant.
• In other cases, an entity uses a valuation technique to measure the fair value of the item
from the perspective of a market participant that owes the liability or that issued the equity
instrument.
• The fair value of a liability reflects the effect of nonperformance risk (i.e. the risk that an entity
will not fulfill an obligation). Nonperformance risk includes, but may not be limited to, an
entity’s own credit risk.

K10. How does a fair value measurement based on a transfer notion differ
from a valuation based on a settlement notion?
820-10-35-16 A fair value measurement based on a transfer notion requires an entity to determine the price that would
[IFRS 13.34] be paid by a market participant to another market participant to assume the obligation. Because the liability
will be transferred, it is assumed that the liability remains outstanding and that the transferee will be
required to fulfill the obligation; the liability is not settled with the counterparty or otherwise extinguished
on the measurement date.
820-10-35-16 In contrast, settlement may include different forms of extinguishment of the liability with the counterparty
[IFRS 13.34, BC81] or any other party. Topic 820 does not allow fair value measurements based on a settlement notion
because this would incorporate an assumption of an extinguishment of the liability, which would be based
on entity-specific rather than market participant assumptions. As a result, when a liability is measured at
fair value, the relative efficiency of the entity in settling the liability using its own internal resources appears
in earnings over the course of its settlement, not before.

K20. How should an entity measure the fair value of a liability or own equity
instrument?
820-10-35-16 A fair value measurement of a liability (financial or nonfinancial) or an entity’s own equity instrument
[IFRS 13.34] assumes that the item is transferred in an orderly transaction between market participants at the
measurement date. This transfer notion is conceptually consistent with the exit price concept.
The following diagram illustrates the process that an entity uses in performing a fair value measurement of
a liability or its own equity instruments.

Yes Quoted price for the transfer of

Use quoted price an identical or similar liability/own
equity instrument?

Identical instruments held as an

asset by another party?

Yes No

Value from perspective of a market

Value from perspective of a market
participant that owes the liability
participant that holds the asset
or issued the equity instrument

Quoted price in an active market

for an identical item held as
an asset?

Yes No

Use quoted price

Use another valuation technique
(adjusted for differences)

820-10-35-16A Liabilities are rarely transferred individually because of contractual or other legal restrictions preventing
[IFRS 13.35] their transfer (see Question K50). In addition, in many cases there is no observable market to provide
pricing information about the transfer of a liability or an equity instrument. However, there might be an
observable market for these items if they are held by other parties as assets (e.g. debt securities).

Liabilities and equity instruments held by other parties as assets

820-10-35-16B, 35-16D When there is no quoted price for the transfer of an identical or similar liability or equity instrument and
[IFRS 13.37] another party holds the identical item as an asset, an entity measures fair value based on the perspective
of a market participant that holds the identical item as an asset. An entity will adjust the quoted price of the
asset only if there are factors specific to the asset that are not applicable to the fair value measurement of
the liability or equity instrument.
820-10-35-16D Factors that may indicate that the quoted price of the asset should be adjusted include the
[IFRS 13.39] following.
• The quoted price for the asset relates to a similar (but not identical) liability or equity instrument held by
another party as an asset. For example, a liability may have a particular characteristic, such as the credit
quality of the issuer, which is different from what is reflected in the fair value of a similar liability held as
an asset.
• The unit of valuation for the asset is not the same as that of the liability or equity instrument. The price
for an asset may reflect a combined price for a package comprising both the amounts due from the
issuer and a third-party credit enhancement. If the unit of account for the liability is not the combined
package, the objective is to measure the fair value of the issuer’s liability and not the fair value of the
combined package. In these cases, the entity would adjust the observed price for the asset to exclude
the effect of the third-party credit enhancement (see Question K60).
When the asset held by another party includes a security-specific characteristic restricting its sale, the
fair value of the corresponding liability or equity instrument also would include the effect of the restriction
and no further adjustment may be necessary. Further, transfer restrictions that are entity-specific are not
considered in determining the fair value of the asset (see Question K50).

Liabilities not held by other parties as assets

820-10-35-16H When there is no quoted price for the transfer of an identical or similar liability and there is no
[IFRS 13.40] corresponding asset (e.g. an asset retirement obligation (ARO)), the entity uses a valuation technique to
measure the fair value of the item from the perspective of a market participant that owes the liability.
820-10-35-16(a) – When using a present value technique to measure fair value, the entity could estimate the future cash
35-16L outflows that market participants would expect to incur in fulfilling the obligation, including any
[IFRS 13.41(a), compensation for risk and the profit margin that a market participant would require to undertake the
B31–B33] activity. An entity may estimate those future cash outflows using the following steps.
(1) Estimate the future cash flows that the entity would expect to incur in fulfilling the obligation.
(2) Exclude the cash flows that other market participants would not incur.
(3) Include the cash flows that other market participants would incur but that the entity would not incur.
(4) Estimate the compensation that a market participant would require to assume the obligation. This
compensation incorporates a profit margin at a rate consistent with undertaking the activity, a risk
that the actual cash outflows might differ from estimated cash outflows (including credit risk), an
assumption of inflation and a risk-free rate of interest.
For further discussion in the context of an ARO, see Question K80.

IFRS Accounting Standards different from US GAAP

[IFRS 13.39, Similar to US GAAP, when measuring the fair value of a liability or own equity instrument held by another
BC88–BC89, party as an asset, IFRS Accounting Standards require an entity to adjust the quoted price of the asset only if
BC100] there are factors specific to the asset that are not applicable to the fair value measurement of the liability or
equity instrument.
Although IFRS 13 requires an entity to ensure that the price of the asset does not reflect the effect of a
restriction preventing the sale of that asset, it does not specify whether such ‘restrictions’ include both
security-specific and entity-specific restrictions, or entity-specific restrictions only.
In our view, in measuring the fair value of a liability or an entity’s own equity instrument under
IFRS Accounting Standards from the perspective of a market participant that holds the item as an
asset, an entity should choose one of the following accounting policies to be applied consistently.
• Approach 1: Reflect only the effect of security-specific restrictions on the sale of the asset and ignore
entity-specific restrictions in determining the fair value of the respective liability or an entity’s own
equity instrument. This approach is consistent with the approach applied in valuing the item held
as an asset. This is because IFRS 13 presumes that in an efficient market, the fair value of a liability
equals the fair value of an asset whose features mirror those of the liability, assuming an exit from
both positions in the same market. Therefore, under this approach, consistent with the measurement
from the holder’s perspective, security-specific restrictions preventing the sale of the asset should be
reflected in the measurement of the corresponding liability or own equity instrument.
• Approach 2: Do not reflect the effect of any restrictions on the sale of the asset (i.e. the effect of
both security-specific and entity-specific restrictions is ignored) in determining the fair value of the
corresponding liability or an entity’s own equity instrument. This is because restrictions on the sale of an
asset relate to the marketability of that asset and therefore do not affect the corresponding liability.
Approach 1 above is similar to US GAAP; however, Approach 2 is different.

K30. Does an entity consider its own risk of nonperformance in measuring

the fair value of its liabilities?
820-10-35-17 Yes. If an entity has elected or is required to measure its liabilities at fair value, it is required to consider
[IFRS 13.42] its own nonperformance risk, because it would be considered by market participants, in measuring fair
value.
820-20 Nonperformance is the risk that an entity will not fulfill an obligation and therefore it encompasses all
[IFRS 7.A, 13.A] factors that might influence the likelihood that the obligation will not be fulfilled.
820-10-35-17 In a fair value measurement, it is assumed that the nonperformance risk remains the same before and
[IFRS 13.42] after the transfer.

K40. Other than the entity’s own credit risk, what factors are considered in
determining nonperformance risk?
820-10-35-18 In considering nonperformance risk in measuring the fair value of a liability, in addition to own credit risk,
[IFRS 13.43] an entity takes into account any other factors that might influence the likelihood that the obligation will or
will not be fulfilled. That effect depends on the nature of the liability (e.g. whether it is a financial liability
or an obligation to deliver a good or perform a service). For example, the risk that the entity will not be
able to obtain and deliver a product, such as a commodity, to its counterparty may affect the fair value
measurement.
820-10-35-18 – 35-18A For commodity contracts, nonperformance risk may be mitigated by make-whole or other default
[IFRS 13.43–44] provisions in the contract. These factors should be considered in determining any necessary adjustment for
nonperformance risk (including credit risk) to the contract’s (or any resulting receivable’s or payable’s) fair
value measurement.

K50. How should a restriction on transfer be taken into account when

measuring the fair value of a liability or own equity instrument?#
820-10-35-16D, 35-18B When measuring the fair value of a liability or own equity instrument using the quoted price of the item
[IFRS 13.39, 45] when traded as an asset, a separate input (or adjustment to another input) to reflect a restriction that
prevents the transfer of the liability or own equity instrument is not applied.
820-10-35-18B – The effect of a restriction that prevents the transfer of a liability or an own equity instrument is either
35-18C implicitly or explicitly included in the other inputs to the fair value measurement. This is because, at the
[IFRS 13.45–46] measurement date, both the creditor and obligor are willing to accept the transaction price for the liability
with full knowledge that the obligation includes a restriction that prevents its transfer.
820-10-35-18C Therefore, the restriction is already included in the transaction price and a separate input (or adjustment
[IFRS 13.46] to another input) into the fair value measurement of the liability or own equity instrument is not required
to reflect the effect of the restriction on transfer. However, an entity may adjust quoted prices for other
features that are present in the asset but not present in the liability, or vice versa. For discussion of the
impact of a characteristic restricting the sale of the asset held by another party on the fair value of the
corresponding liability or equity instrument, see Questions K20 and R50.

K60. Should an inseparable third-party credit enhancement be included in

the fair value measurement of a liability?
820-10-35-18A Generally, no. The fair value of a liability reflects the effect of nonperformance risk based on its unit of
account. The issuer of a liability with an inseparable third-party credit enhancement (e.g. debt that is
issued with a financial guarantee from a third party that guarantees the issuer’s payment obligation)
generally excludes the credit enhancement from the unit of account in measuring the fair value of the
liability. This is because the credit enhancement is not a contractual obligation of the borrower/issuer and
because the existence of the guarantee does not change the obligation of the entity.

Third-party guarantor

Financial
guarantee

Debt
Borrower/issuer Lender/holder

825-10-25-13, However, in two situations the inseparable third-party credit enhancement is not accounted for as a
820-10-35-18A separate unit of account (i.e. it is included in the fair value measurement of the liability):
• the credit enhancement is granted to the issuer of the liability (e.g. deposit insurance provided by a
government or government agency); or
• the credit enhancement is provided between reporting entities within a consolidated or combined group
(e.g. between a parent and its subsidiary or between entities under common control).
This guidance generally applies to all liabilities issued with third-party credit enhancements that are
measured or disclosed at fair value on a recurring basis, including derivatives.
820-10-35-16D(b) The guidance prescribing the unit of account is specific to the issuer of the liability and does not apply to
[IFRS 13.39(b)] the holder of the credit enhanced liability (as an asset). In measuring the fair value of a liability based on the
fair value of the corresponding asset, an adjustment may be required to the observed price for the asset to
exclude the effect of the third-party credit enhancement (see Question K20).

IFRS Accounting Standards different from US GAAP

IFRS Accounting Standards do not contain explicit guidance about the unit of account for the fair value
measurement of a liability with an inseparable third-party credit enhancement; therefore, practice may
differ from US GAAP.

K70. What is the fair value of a liability payable on demand?

The fair value of demand deposits, savings accounts and certain money market deposits is measured at
the amount payable on demand at the measurement date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

IFRS Accounting Standards compared to US GAAP

[IFRS 13.47] Under IFRS Accounting Standards, the fair value of a financial liability with a demand feature (e.g.
demand deposits) is not less than the amount payable on demand, discounted from the first date that
the amount could be required to be paid.

K80. How is the fair value of an asset retirement obligation measured?

410-20-30-1, Generally, an expected present value technique is used to measure the fair value of an asset retirement
820-10-55-7 – 55-9 obligation (ARO). An entity is not precluded from using a discount rate adjustment technique (see
[IFRS 13.B15–B17] Question F30) or a technique based on a market approach. However, applying these techniques is rare
because observable market prices, including market interest rates for AROs, generally do not exist.
410-20-55-13, To measure the fair value of a liability for an ARO under an expected present value technique, an entity
820-10-35-16J – begins by estimating the expected cash flows that reflect, to the extent possible, a marketplace
35-16L, 820-10-55-6 assessment of the cost and timing of performing the required retirement activities. Considerations in
[IFRS 13.B14, estimating those expected cash flows include developing and incorporating explicit assumptions, to the
B31–B33] extent possible, about:
• the costs that a third party would incur in performing the tasks necessary to retire the asset;
• other amounts that a third party would include in determining the price of the transfer, including inflation,
overhead, equipment charges, profit margin and advances in technology;
• the extent to which the amount or timing of a third party’s costs would vary under different future
scenarios and the relative probabilities of those scenarios; and
• the price that a third party would demand and could expect to receive for bearing the uncertainties
and unforeseeable circumstances inherent in the obligation (i.e. market risk premium), including
consideration of the liquidity, or illiquidity, of the obligation.
820-10-35-16L To determine the fair value of the ARO, a market risk premium is included as an input into the undiscounted
[IFRS 13.B33] estimated cash flows of the obligation if a market participant would demand one. An entity can include a
risk premium in the fair value measurement of the liability in one of two ways. An entity may adjust the
cash flows or adjust the rate used to discount the future cash flows to their present value.

Example K80: Fair value measurement of an ARO

820-10-55-77 – 55-81 Company K assumes an ARO liability in a business combination and is therefore required to measure the
[IFRS 13.IE35–IE39] liability at fair value in the acquisition accounting. Company K is legally required to remediate a mine pit at
the end of its useful life, which is estimated to be in 10 years. Company K uses a present value technique
to measure the fair value of the ARO.
If Company K were allowed to transfer its ARO to a market participant, it would conclude that a market
participant would use all of the following inputs in estimating the price.

Labor costs 100

Allocated overhead and equipment costs – 60% of labor costs 60
Third-party contractor margin of 20%, based on margins that contractors in the industry
generally receive for similar activities – 160 × 20% 32
Annual inflation rate of 4%, based on market data for the applicable jurisdiction –
192 × 4% compounded for 10 years 92
5% risk adjustment that reflects the compensation that an external party would require to
accept the risk that the cash flows might differ from those expected given the uncertainty
in locking in today’s price for a project that will not occur for 10 years – 284 × 5% 14
A risk-free rate based on 10-year government bonds in the applicable jurisdiction 5%
An adjustment to the discount rate to reflect Company K’s nonperformance risk,
including its credit risk 3%

The following diagram shows the composition of these costs to give a fair value of the ARO of 138:
present value at 8% of 298 (100 + 60 + 32 + 92 + 14) in 10 years.

300
5% risk adjustment

4% inflation for 10 years

200
20% profit margin

Overhead allocated
100 Discounted at 5% (risk-
free rate) for 10 years Adjustment for own
credit risk (increase
Labor costs discount rate to 8%)

The adjustment for the time value of money is shown separately from the credit risk adjustment,
to illustrate the direction of the adjustment. However, in our experience only one discount rate
calculation would be undertaken.

K90. When an unquoted financial liability is assumed in a business

combination, should the assumptions for the fair value measurement
be from the perspective of the combined entity?
It depends. Following the general valuation principles, the assumptions underlying the fair value
measurement are consistent with those that a market participant would make in valuing the financial
liability at the time of the business combination.
• If, as a result of the business combination, the acquirer becomes a legal obligor of the liability (e.g. by
providing a guarantee), in our experience market participants would value the liability on that basis. For
example, nonperformance risk would be based on the risk that the combined entity will not fulfill the
obligation.
• If the acquiree remains the sole legal obligor after the acquisition, the fair value will reflect a market
participant’s view of nonperformance risk subsequent to the acquisition. For example, an acquiree in
financial difficulty may be acquired by a group with a good credit rating such that a market participant
may consider that the acquirer might support the acquiree in fulfilling its obligations even though the
acquirer has no legal obligation to do so.

L. Portfolio measurement
exception
Overview
• An entity that holds a group of financial assets, financial liabilities, nonfinancial items
accounted for as derivatives in accordance with Topic 815, or combinations of these items is
exposed to market risks (i.e. interest rate risk, currency risk and other price risk) and to the
credit risk of each of the counterparties.
• If certain conditions are met, an entity is permitted (but not required) to measure the fair
value of a group of financial assets and financial liabilities with offsetting risk positions on
the basis of its net exposure. The reference to financial assets and financial liabilities includes
nonfinancial contracts that are accounted for as derivatives under Topic 815.
• Under the exception, the fair value of the group is measured on the basis of the price
that would be received to sell a net long position (or paid to transfer a net short position)
for a particular risk exposure in an orderly transaction between market participants at
the measurement date. Therefore, application of the portfolio measurement exception is
considered to be consistent with the way in which market participants would price the net risk
position at the measurement date.

IFRS Accounting Standards compared to US GAAP

[IFRS 13.48, 52, Like US GAAP, IFRS Accounting Standards contain a portfolio measurement exception that permits an
BC119A–BC119B] entity to measure the fair value of a group of financial assets and financial liabilities with offsetting risk
positions on the basis of its net exposure to a particular risk if certain conditions are met. The reference
to financial assets and financial liabilities includes all contracts that are in the scope of, and accounted
for in accordance with, IFRS 9, regardless of whether they meet the definitions of financial assets or
financial liabilities in IAS 32 Financial Instruments: Presentation. This would include contracts to buy or
sell nonfinancial items that are accounted for as derivatives in accordance with IFRS 9.

L10. When is it appropriate for an entity to measure the fair value of a group
of financial assets and financial liabilities on a net portfolio basis?
820-10-35-18D – 35-18E Measuring on a net-exposure basis is permitted if the conditions in the following diagram are
[IFRS 13.48–49, 52] satisfied.
820-10-35-18E An entity should assess the appropriateness of electing the portfolio measurement exception based on
[IFRS 13.49, BC120] the nature of the portfolio being managed in the context of its risk management or investment strategy.
820-10-35-18G If the entity is permitted to use the exception, it should choose an accounting policy, to be applied
[IFRS 13.51, BC121] consistently, for a particular portfolio. However, an entity is not required to maintain a static portfolio to use
the exception.

Group managed on basis of net exposure to particular

market risk or credit risk to a particular counterparty No
consistent with documented risk management or
investment strategy?

Yes

Information provided to key management personnel No

on a net basis? Measure individual assets and
liabilities – measurement on
Yes
a net basis prohibited
Measured at fair value in the statement of financial No
position on a recurring basis?

Yes

Measurement on a net basis permitted

L20. When the portfolio measurement exception is applied, how does this
affect the unit of account?
820-10-35-2E, 35-18D, In our view, application of the portfolio measurement exception changes the unit of valuation from the
35-18I, 35-18L, 35-36B individual financial asset or financial liability to the net position for a particular risk exposure. We believe
[IFRS 13.14, 48, 53, 5 that the size of the net risk exposure is a characteristic to be considered in measuring the fair value of the
6, 69] net risk exposure.

L30. When considering whether the exception applies for a group of

financial assets and financial liabilities, what degree of risk offsetting
is necessary?
820-10-35-18E(b) There is no prescribed minimum degree of offsetting risk to qualify for the portfolio measurement
[IFRS 13.49(b), BC120] exception. Assets in a portfolio do not have to be completely offset by liabilities. Evaluating the degree of
offset requires judgment. In making this judgment, the entity considers whether it does in fact manage on
the basis of its net (rather than gross) risk exposure and that this is consistent with its documented risk
management and internal strategy and is how it provides information to key management personnel.

L40. What factors need to be considered in determining whether a particular

market risk within the group of financial assets and financial liabilities
could be offset in measuring fair value on a net portfolio basis?
820-10-35-18J – In addition to the factors described in Questions L10 and L30, Topic 820 requires that market risks being
35-18K offset are substantially the same with regard to both their nature (e.g. interest rate risk, currency risk or
[IFRS 13.54–55, commodity price risk) and duration. For example, an entity could not combine the interest rate risk
BC123] associated with a specific financial asset with the commodity price risk associated with a derivative liability.
These risks would not qualify as being substantially the same and therefore would not qualify for the
portfolio exception.
820-10-35-18J Any basis risk resulting from market risk parameters that are not identical is reflected in the fair value of
[IFRS 13.54, BC123] the net position. For example, an entity managing its interest rate risk on a net portfolio basis may include
financial instruments with different interest rate bases in one portfolio. However, any difference in the
interest rate bases (e.g. IBOR versus US Treasury) will be reflected in the fair value measurement.
820-10-35-18K Similarly, to the extent that there are duration differences, adjustments for duration mismatches should be
[IFRS 13.55, BC123] reflected in the fair value of the net position for the entity’s exposure to market risk. For example, if an
entity has a five-year financial instrument and is managing the interest rate risk exposure for the first 12
months of the financial instrument’s duration with a 12-month futures contract, the exposure to 12 months
of interest rate risk may be measured on a net portfolio basis while the interest rate risk exposure from
years two to five would be measured on a gross basis.

L50. Does the portfolio measurement exception also apply to financial

statement presentation?
820-10-35-18F No. The net portfolio measurement exception does not relate to financial statement presentation.
[IFRS 13.50]

820-10-35-18F Although application of the exception to financial assets and financial liabilities with offsetting positions
[IFRS 13.50] changes the fair value measurement basis for a particular market risk(s) or counterparty risk, it does not
change the requirements for presentation in the statement of financial position.

820-10-35-18D, 35-18F Consequently, application of the exception may result in a measurement basis that is different from the
[IFRS 13.48, 50] basis of presentation of financial instruments in the statement of financial position.

L60. How is a net portfolio basis adjustment resulting from the application
of the exception allocated to the individual financial assets and
financial liabilities that make up the portfolio?
820-10-35-18F An entity performs allocations, for presentation and disclosure purposes, on a reasonable and consistent
[IFRS 13.50] basis using an appropriate methodology. Topic 820 does not prescribe particular allocation methods.
In our experience, for credit risk adjustments, the following allocation methods generally are used for
allocating the net portfolio basis adjustment to the individual financial instruments in the portfolio (other
methods may be appropriate for allocating other types of valuation adjustments).
• Relative fair value method. Under this method, the portfolio-level credit risk adjustment is allocated to
the individual instruments in the portfolio based on their relative fair values. There are two methods that
are used in practice:
- allocate the adjustment to all instruments in the portfolio based on their relative fair values; or
- allocate the adjustment only to those instruments that are in the same position (asset or liability)
as the net position with the counterparty, based on their relative fair values; for example, if the net
position is an asset, the portfolio-level credit risk adjustment is allocated only to the financial assets in
the portfolio based on their relative fair values.
• Relative credit adjustment method. Under this method, the portfolio-level credit risk adjustment is
allocated to the individual instruments in the portfolio based on their relative stand-alone credit risk
adjustment. The application of this method requires the entity to calculate the credit risk adjustment both
on a gross basis (assuming that the portfolio measurement exception is not applied) and on a net basis.
820-10-35-44 However, the appropriate allocation method is affected by the fair value hierarchy of the financial
instruments within the portfolio. We understand from conversations with the FASB staff that they believe
that the fair value allocated to financial instruments within the portfolio categorized in Level 1 of the fair
value hierarchy should be determined using the instrument price times the quantity (i.e. PxQ), which is
consistent with the guidance in Topic 820 for Level 1 inputs (see Section G). The FASB staff indicated that
the net portfolio measurement exception allows an entity to estimate the fair value of financial instruments
at levels different from the unit of account prescribed by other Topics, but does not provide an exception to
the other conclusions and concepts of fair value measurement under Topic 820.
If an entity applies the portfolio measurement exception and the portfolio includes multiple counterparties,
the credit risk adjustment will be considered separately for each individual counterparty. Therefore, the
allocation will need to be performed separately for the individual financial assets and financial liabilities of
each counterparty.

There may be an interaction between the amounts of some types of valuation adjustments, e.g. between
funding valuation adjustments and credit risk adjustments (see Question O35), which may need to be
considered in the methods used to measure and allocate these adjustments.

Example L60: Portfolio exception and allocating fair value

Company L holds 10,000 exchange-traded equity securities and has an offsetting position of forward
contracts to sell 6,000 of the same exchange-traded equity securities. In addition, Company L concludes
that the portfolio measurement exception criteria have been met and has elected to apply the portfolio
measurement exception.
Company L allocates the fair value measurement adjustment that resulted from the valuation of the net
portfolio position to the individual forward contracts with no adjustment being allocated to the Level 1
equity securities (i.e. equity securities are valued at PxQ). If allocating the net portfolio adjustment to
the forward contracts results in an unreasonable fair value of the forward contracts, Company L should
carefully reevaluate the appropriateness of using the exception.

IFRS Accounting Standards compared to US GAAP

[IFRS 13.48, 52, The IASB has not addressed the allocation of portfolio-level adjustments to instruments that would have
BC119A–BC119B] a Level 1 measurement on a stand-alone basis.

L70. Are net portfolio basis adjustments that have been allocated to the
individual financial assets and financial liabilities in the portfolio
considered in determining the categorization in the fair value hierarchy
for disclosure purposes?
820-10-35-37A Yes. In categorizing fair value measurements of the individual financial assets and financial liabilities in the
[IFRS 13.73] fair value hierarchy for disclosure purposes, net portfolio basis adjustments are considered. Each asset and
liability measured at fair value is categorized within the fair value hierarchy on the basis of the lowest level
input that has a significant effect on its overall fair value measurement (see Section H).
820-10-35-18D, 35-37A The portfolio measurement exception enables an entity to measure the fair value of a group of financial
[IFRS 13.48, 73] assets and financial liabilities consistently with how market participants would price the net risk exposure.
In our view, an allocated net portfolio basis adjustment is considered an assumption (i.e. input) that market
participants would use when pricing the financial assets and financial liabilities that make up the offsetting
risk position. Therefore, we believe that an allocated net portfolio basis adjustment is an input to the fair
value measurement of the individual asset or liability.
820-10-35-37A An allocated net portfolio basis adjustment that is an unobservable input and that has a significant effect on
[IFRS 13.73] the fair value measurement of an individual financial asset or financial liability would cause the entire fair
value measurement to be categorized within Level 3.

Example L70: Credit risk adjustment allocation

Company L holds a group of financial assets and financial liabilities, which it manages on the basis of
its net exposure to credit risk to a particular counterparty and applies the net portfolio basis exception.
The inputs to the net portfolio basis adjustment for a particular counterparty are unobservable, while all
other inputs to the fair value measurement of the group and to the individual financial assets and financial
liabilities within the group are Level 2 inputs.
Because the portfolio measurement exception does not apply to financial statement presentation, the
counterparty credit risk adjustment is allocated to the financial assets and financial liabilities within the
group. The allocation of the counterparty credit risk adjustment to the individual financial assets and
financial liabilities may affect the level of the fair value measurements of those financial assets and
financial liabilities within the fair value hierarchy.
If the allocated counterparty credit risk adjustment is significant to the fair value measurement of an
individual financial asset or financial liability, that fair value measurement would be categorized within
Level 3. If the credit risk adjustment allocation is significant only to the fair value measurement of some
of the individual financial instruments in the portfolio, and not to others, some would be categorized as
Level 2 measurements and some as Level 3 measurements.

L80. In applying the exception, how should an entity consider the existence
of an arrangement that mitigates credit risk exposure in the event of
default?
820-10-35-18D, 35-18L Question C70 discusses the usual position of how an entity should consider an arrangement that
[IFRS 13.48, 56] mitigates credit risk exposure in the event of default. However, if an entity applies the portfolio
measurement exception to a group of financial assets and financial liabilities entered into with a particular
counterparty, the effect of such an agreement would be included in measuring the fair value of the group of
financial assets and financial liabilities.
For individual instruments that are actively traded on an exchange, the actual counterparty to the trade
transaction in many instances is the exchange entity (e.g. the clearing house for the exchange). For these
exchange transactions, we understand that even when there is no master netting agreement between the
exchange and the entity, credit risk is usually deemed to be minimal because the operating procedures of
the exchanges require the daily posting of collateral which is, in effect, an arrangement that mitigates credit
risk exposure in the event of default.
In addition, if the exchange is not the counterparty to the trade transaction, the transaction is a principal-
to-principal transaction and an arrangement that mitigates credit risk exposure in the event of default may
be considered in determining the appropriate credit adjustment in measuring the fair value of the financial
instrument if the entity meets the requirement to and elects to use the portfolio measurement exception.

M. Inactive markets
Overview
• In an active market, transactions for the asset or liability take place with sufficient frequency
and volume to provide pricing information on an ongoing basis.
• An orderly transaction 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.
• A fair value measurement may be affected if there has been a significant decrease in the
volume or level of activity for that item compared with its normal market activity. Judgment
may be required in determining whether, based on the evidence available, there has been a
significant decrease.
• If an entity concludes that the volume or level of activity for an asset or liability has
significantly decreased, further analysis of the transactions or quoted prices is required. A
decrease in the volume or level of activity on its own might not indicate that a transaction
or a quoted price is not representative of fair value, or that a transaction in that market is
not orderly.
• It is not appropriate to presume that all transactions in a market in which there has been a
decrease in the volume or level of activity are not orderly.

M10. What is considered an active market?

820-10-20 Whether transactions take place with sufficient frequency and volume to constitute an active market
[IFRS 13.A] is a matter of judgment and depends on the facts and circumstances of the market for the asset or liability.
A market with limited activity may still provide relevant pricing information when there is no contrary
evidence that the pricing information is not relevant to the fair value of the asset or liability being evaluated,
but may result in a lower level measurement within the fair value hierarchy (see Section H). This may be the
case when the volume or level of activity for an asset or a liability has significantly decreased.
The determination of whether a market is active is not based on the size of the entity’s holdings. For
example, a market that trades 100,000 shares of ABC common stock per day may be considered active,
even if the entity holds 20,000,000 shares of ABC stock. An active market is not necessarily limited to
national exchanges like the New York Stock Exchange (NYSE) or the LSE. Over-the-counter (OTC) markets
(e.g. OTC Pink) can be and often are considered active markets.
In addition, a lack of a secondary market does not necessarily preclude a market from being considered
active.

M20. How does a decrease in volume or level of activity affect how fair value
is measured?
820-10-35-40 – 35-41B It depends. If the market for identical assets or liabilities is still active and quoted prices in that market
[IFRS 13.76–78] continue to be available, the fair value of the asset or liability continues to be measured at the quoted
market price on the measurement date (i.e. using a Level 1 input).
820-10-35-54C An entity might take the following factors into consideration to determine whether there is a significant
[IFRS 13.B37] decrease in the volume or level of activity in relation to normal market activity for the asset or liability.
• There are few recent transactions.
• Price quotations are not developed using current information.
• Price quotations vary substantially either over time or among market makers (e.g. some brokered
markets).
• Indices that previously were highly correlated with the fair values of the asset or liability are
demonstrably uncorrelated with recent indications of fair value for that asset or liability.
• There is a significant increase in implied liquidity risk premiums, yields or performance indicators (such
as delinquency rates or loss severities) for observed transactions or quoted prices when compared with
the entity’s estimate of expected cash flows, taking into account all available market data about credit
and other nonperformance risk for the asset or liability.
• There is a wide bid-ask spread or significant increase in the bid-ask spread.
• There is a significant decline in the activity of, or there is an absence of, a market for new issuances
(i.e. a primary market) for the asset or liability or similar assets or liabilities.
• Little information is publicly available (e.g. transactions that take place in a principal-to-principal market).
820-10-35-54D An entity should evaluate the significance and relevance of such factors to determine whether, based on
[IFRS 13.B38] the weight of the evidence, there has been a significant decrease in the volume or level of activity for the
asset or liability. If an entity concludes that there has been a significant decrease in the volume or level
of activity for the asset or liability relative to normal market activity, further analysis of the transactions or
quoted prices is needed.
820-10-35-54D A decrease in the volume or level of activity on its own may not indicate that a transaction price or quoted
[IFRS 13.B38] price does not represent fair value or that a transaction in that market is not orderly. However, if an entity
determines that a transaction or quoted price does not represent fair value (e.g. there may be transactions
that are not orderly), an adjustment to the transactions or quoted prices will be necessary if it uses
those prices as a basis for measuring fair value and that adjustment may be significant to the fair value
measurement in its entirety.
820-10-35-54D Adjustments also may be necessary in other circumstances (e.g. when a price for a similar asset requires
[IFRS 13.B38] significant adjustment to make it an appropriate price for the comparable asset being measured or when
the price is stale).
820-10-35-54G Even when there has been a significant decrease in the volume or level of activity for the asset or liability,
[IFRS 13.B41] the objective of a fair value measurement remains the same. However, the characteristics of market
participants may change. For example, hedge funds and private equity firms (and similar entities) may
become the only potential buyers for certain types of assets, while financial institutions may have been the
primary market participants before the significant decrease. A fair value measurement contemplates the
rate of return required by current market participants.

820-10-35-54F If there has been a significant decrease in the volume or level of activity for the asset or liability, a
[IFRS 13.B40] change in valuation approach or technique or the use of multiple valuation approaches or techniques may
be appropriate (e.g. the use of a market approach and an income approach).
820-10-35-54F If multiple valuation approaches or techniques are used, the different indications of fair values are weighted
[IFRS 13.B40] relative to each other to arrive at the estimated exit price for the asset or liability (see Section F). There is
no particular methodology for weighting the different indications of fair value. However, when an entity
weights different indications of fair value, it should consider the reasonableness of the range of the
different fair value indications. The objective of the weighting process is to determine the point within the
range that is most representative of fair value under current market conditions. A wide range of fair value
estimates may be an indication that further analysis is needed.

M30. What are the characteristics of a transaction that is forced or not

orderly?
820-10-35-54I(a) An orderly transaction assumes sufficient time to market the asset or liability in the usual and customary
[IFRS 13.B43(a)] manner. For certain types of assets such as liquid financial instruments (e.g. an actively traded stock) the
usual and customary market exposure may be short. In other situations (e.g. real estate assets), a longer
market exposure would be required to contact potential buyers, generate interest, conduct negotiations,
complete due diligence and complete legal agreements. Therefore, the customary time will depend on the
type of asset or liability.
820-10-20 [IFRS 13.A] An orderly transaction is not a forced transaction (e.g. a forced liquidation or distressed sale).
820-10-35-54I Generally, a transaction is forced if it occurs under duress or the seller otherwise is forced to accept a
[IFRS 13.B4(b), B43] price that a willing market participant would not accept. Whether a transaction is forced is based on the
specific facts and circumstances of the transaction and the participating parties. Forced transactions are
considered not orderly. See Question G80 for measurement considerations when an entity determines
that a transaction is not orderly.
820-10-35-54I Circumstances that may indicate that a particular transaction is not orderly include the following.
[IFRS 13.B43]

• There was not adequate 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
under current market conditions.
• There was a usual and customary marketing period, but the seller marketed the asset or liability to a
single market participant.
• The seller is in, or near, bankruptcy or receivership (i.e. is distressed).
• The seller was required to sell to meet regulatory or legal requirements (i.e. was forced to sell).
• The transaction price is an outlier when compared with other recent transactions for the same or a
similar asset or liability.
820-10-35-54D, 35-54I A decrease in the volume or level of activity for an asset or liability on its own may not indicate that a
[IFRS 13.B38, B43] transaction or a quoted price is not representative of fair value, or that a transaction in that market is
not orderly. It is not appropriate to presume that all transactions in a market in which there has been a
decrease in the volume or level of activity are not orderly.

For example, during periods in which markets experience illiquidity and reduced credit availability, demand
for investments in certain types of investment funds (e.g. private equity funds) can decline. Investors may
find it difficult to meet required capital commitments in the short term and may avoid investing in funds
that require future capital funding. This may result in an over-supply and can contribute to a decrease in the
volume of transactions in secondary markets and discounts to NAV. In some instances, these discounts
may result from a forced or distressed sale; however, in other cases the transactions may still meet the
definition of an orderly transaction.
For further discussion of application issues for investments in investment funds, see Section P.

M40. How extensive is the analysis expected to be to determine whether a

transaction is orderly?
820-10-35-54J An entity is not required to undertake exhaustive efforts to determine whether a transaction is orderly,
[IFRS 13.B44] but it cannot ignore information that is reasonably available. An entity is presumed to have sufficient
information to conclude whether a transaction is orderly when it is party to the transaction.
820-10-35-54D A transaction should not be considered not orderly based on current general market conditions. If
[IFRS 13.B38] transactions are occurring between market participants in a manner that is usual and customary under
current market conditions, those transactions generally should be considered orderly. It would not be
appropriate to assume that all transactions in a market, even a relatively illiquid market, are forced.

N. Disclosures
Overview
The disclosure requirements of Topic 820 are split into two categories.
• Disclosures for assets and liabilities measured at fair value in the statement of financial
position after initial recognition. These disclosures are more extensive and distinguish
between recurring and nonrecurring fair value measurements.
• Disclosures of fair value measurements that are required or permitted to be disclosed by
other Topics/Subtopics, but are not included in the statement of financial position.

N10. What is the difference between recurring and nonrecurring fair value
measurements?
820-10-50-2(a) Recurring fair value measurements arise from assets and liabilities measured at fair value at the end of
[IFRS 13.93(a)] each reporting period (e.g. trading securities). Nonrecurring fair value measurements are fair value
measurements that are triggered by particular circumstances that may occur during the reporting period
(e.g. an asset being classified as held-for-sale or an impaired asset resulting in the need for fair value
measurement under the applicable Codification Subtopics). The disclosures required for a nonrecurring
fair value measurement are applicable in the financial statements for the period in which the fair value
measurement occurred.

N20. What disclosures are required?#

The disclosure requirements, which are most extensive for recurring Level 3 measurements, are
summarized in the following table.

820-10-50-8
[IFRS 13.99]
 Disclosure required for all entities, in tabular format

820-10-50-2F, 825-10-
P Disclosure required for public business entities only
50-2A

820-10-50-2(bbb)(ii)
N Disclosure required for nonpublic entities only

FV recognized in the statement of financial

position FV only disclosed
Recurring Nonrecurring
Requirement L1 L2 L3 L1 L2 L3 L1 L2 L3
820-10-50-2(a) Fair value at end of reporting
[IFRS 13.93(a)] period
     
820-10-50-2(a) Reasons for the
[IFRS 13.93(a)] measurement
  
820-10-50-2(b), 50-
2E, 825-10-50-10 Level within hierarchy       P P P
[IFRS 13.93(b), 97]

820-10-50-2(c), Amount of and reasons for

50-2G transfers into and out of 
[IFRS 13.93(e)(iv)] Level 3 (see 
below)
820-10-50-2(bbb) Description of valuation
[IFRS 13.93(d), 97] technique and inputs used    
(see below)
820-10-50-2(bbb) Changes to either or both
[IFRS 13.93(d), 97] a valuation approach and
a valuation technique, and    
reasons for the changes
(see  below)
820-10-50-2(bbb), Quantitative information
50-2(bbb)(2)(ii) about significant  
[IFRS 13.93(d)] unobservable inputs12
820-10-50-2(bbb)(2) Range and weighted
(i)-(ii) average of significant
unobservable inputs,
P P
including how the weighted
average was calculated
(see below)
820-10-50-2(c), 50-2C Reconciliation of opening
P
[IFRS 13.93(e)] and closing balance
820-10-50-2G
Purchases and issues N
[IFRS 13.93(e)(iii)]

12. See Question N120 for how nonpublic entities may satisfy the requirement to disclose quantitative information about
significant unobservable inputs.

FV recognized in the statement of financial

position FV only disclosed
Recurring Nonrecurring
Requirement L1 L2 L3 L1 L2 L3 L1 L2 L3

820-10-50-2(d), 50-2F Unrealized gains/losses

[IFRS 13.93(f)] from remeasurement
included in earnings (or
changes in net assets) and
P
in OCI relating to those
assets and liabilities held at
the reporting date
(see below)
820-10-50-2(g) Measurement uncertainty
[IFRS 13.93(h)(i)] from the use of significant
unobservable inputs if those
inputs could have been P
different at the reporting
date (narrative) (see 
below)
820-10-50-2(h), 50-2E For nonfinancial assets
[IFRS 13.93(i), 97] when highest and best
use differs from actual, the
      P P P
reasons why
820-10-50-4A For a liability measured at
[IFRS 13.98] fair value, the existence of
an inseparable third-party
     
credit enhancement
820-10-50-6B Fair value of equity
securities subject
to contractual sale
restriction(s), the nature
and remaining duration      
of the restriction(s), and
the circumstances that
could cause a lapse in the
restrictions (see 
below)

820-10-50-2H, Not-for-profit entities that receive contributed nonfinancial assets (e.g. gifts-in-kind, gifts, donations or
958-605-50-1A grants) must disclose in the notes to the financial statements a disaggregation of the amount of
contributed nonfinancial assets recognized within the statement of activities by category that depicts the
type of contributed nonfinancial assets. These entities are also required to disclose incremental information
about each category of nonfinancial assets, such as a description of the valuation inputs and techniques
used in determining the fair value of contributed nonfinancial assets on initial recognition (see below). 

IFRS Accounting Standards different from US GAAP

[IFRS 13.93] Unlike US GAAP, fair value disclosure requirements under IFRS Accounting Standards apply to all entities,
regardless of their public status.

[IFRS 13.93(c), (e)

 Unlike US GAAP, entities are required to disclose the amount of, and reasons for, transfers between
(iv), 95] Level 1 and Level 2 for assets and liabilities measured at fair value on a recurring basis. Furthermore, for
transfers between Level 1 and Level 2 and for transfers into or out of Level 3 of the fair value hierarchy,
entities are required to disclose the policy for determining when the transfers are deemed to have
occurred.

[IFRS 13.93(d)]
 Unlike US GAAP, an entity is required to provide a description of the valuation technique used (and if
there has been a change in the technique used, the reasons for the change) and disclose the inputs used
for assets and liabilities that are not measured at fair value in the statement of financial position but for
which fair value is required to be disclosed.

[IFRS 13.91–92,
 Unlike US GAAP, there is no specific requirement to disclose the range and weighted average of
93(d), IE63] significant unobservable inputs used to develop fair value measurements categorized within Level 3 of
the fair value hierarchy.
An entity considers the level of detail that is necessary to meet the disclosure objectives. For each
class of assets or liabilities, it considers whether to include information about the range of values or a
weighted average for each unobservable input used for each class.

[IFRS 13.93(f)]
 Unlike US GAAP, there is no requirement to disclose the change in unrealized gains or losses for the
period from remeasurement included in OCI for recurring fair value measurements categorized within
Level 3 of the fair value hierarchy.
Rather, under IFRS Accounting Standards, for recurring fair value measurements categorized within
Level 3 of the fair value hierarchy, entities are required to disclose only the amount of total gains or losses
for the period included in profit or loss that is attributable to the change in unrealized gains or losses
relating to those assets and liabilities held at the reporting date.

[IFRS 13.93(h)(i)]
 Despite differences in the wording, similar to US GAAP, a narrative description of the sensitivity of the
Level 3 recurring fair value measurement to changes in unobservable inputs is required if a change in
those inputs might result in a significantly higher or lower fair value measurement.

[IFRS 13.93(h)(ii)] Unlike US GAAP, if financial assets and financial liabilities are categorized as recurring Level 3 fair value
measurements, there is a requirement to disclose quantitative sensitivity information if changing one
or more unobservable inputs to reflect reasonably possible alternative assumptions would change fair
value significantly.

[IFRS 13.93(g)] Unlike US GAAP, entities are required to provide a description of the valuation processes used (e.g.
how an entity decides its valuation policies and procedures) for recurring and nonrecurring fair value
measurements categorized within Level 3 of the fair value hierarchy.

 Unlike US GAAP, IFRS Accounting Standards do not include disclosure requirements relating to equity
securities subject to contractual sale restrictions (see Section R).

[Preface to IFRS
 Unlike US GAAP, IFRS Accounting Standards are designed for use by profit-oriented entities. They
Accounting therefore do not include disclosure requirements relating to the receipt by not-for-profit entities of
Standards 5, 9, IAS contributed nonfinancial assets. The International Public Sector Accounting Standards issued by the
20.1–2] International Public Sector Accounting Standards Board are developed for use by public sector entities.
Notwithstanding this, entities engaged in not-for-profit activities may find IFRS Accounting Standards
useful and may follow them if doing so is considered appropriate.

Example N20: Example disclosures

Uncertainty from the use of significant unobservable inputs for nonfinancial assets if those inputs
reasonably could have been different as of the reporting date
820-10-50-2(g) The significant unobservable inputs used in the fair value measurement of Company N’s livestock
[IFRS 13.93(h)(i)] assets are growth rates and mortality rates. The inputs used for growth and mortality are 12% and 5%,
respectively. Significant decreases in growth rates, or increases in mortality rates, in isolation would
result in a significantly lower fair value measurement. Generally, a change in the assumption used for
growth rates should be accompanied by a change in the assumption for mortality rates in the same
direction as excessively fast growth increases the risk of mortality. Therefore, the effects of these
changes partially offset each other.

Asset used differently from its highest and best use

820-10-50-2(h) Company N operates a brewery on a piece of land in an area that has recently been rezoned to allow both
[IFRS 13.93(i)] residential and industrial use. The highest and best use of the land and buildings of the brewery, based on
current land prices at the reporting date, would be to demolish the brewery and build residential property.
Company N is using the land and buildings in a manner that differs from its highest and best use to
continue its current brewing operations. This is consistent with the long-term strategy and core operations
of Company N, which is not in a position to carry out a conversion because the brewery is integral to its
operations.

N30. Are all of the disclosures required in interim financial reports?

ASU 2011-04 Transition Yes. The disclosures are required for both interim and annual periods.

IFRS Accounting Standards different from US GAAP

[IAS 34.16A(j)] Unlike US GAAP, IFRS Accounting Standards include two general exemptions from the above disclosures
in an entity’s interim financial report. An entity is not required to provide disclosures about:
• nonfinancial assets and nonfinancial liabilities (except as may be required if a business combination
has occurred in the interim period); and
• classes of financial assets and financial liabilities whose fair value is disclosed, but they are not
measured at fair value in the statement of financial position.
[IAS 34.15B(h), In addition, in an interim financial report there is a general requirement for an entity to disclose any
15B(k)] changes in business or economic circumstances that have affected the fair value of the entity’s financial
assets and financial liabilities, regardless of their basis of measurement. The interim disclosures also
include a general disclosure requirement regarding any transfers of financial instruments between levels
of the hierarchy.

N35. What should an entity consider in determining an appropriate level of

disaggregation for its disclosures?
820-10-50-1D, 50-2, Topic 820 requires fair value measurement disclosures to be presented for each class of assets and
50-2B liabilities. Determining an appropriate balance in the level of aggregation or disaggregation of classes of
[IFRS 13.92–94, 7.B3] assets and liabilities requires judgment, and will often require a greater level of detail than the line items
presented in the statement of financial position. Disclosures that are aggregated too highly can obscure
important information about the risks associated with the fair value measurements. However, disclosures
that provide excessive detail can be burdensome and may not provide meaningful information to users of
the financial statements.
820-10-50-2B In determining the appropriate classes of assets and liabilities, an entity considers the nature,
[IFRS 13.94] characteristics and risks of the asset or liability (e.g. shared activities or business sectors, vintage,
geographic concentration, credit quality or other economic characteristics), and the level of the fair value
hierarchy within which the fair value measurement is categorized. Generally, the level of disaggregation
will be greater for Level 3 measurements, because they include a greater degree of uncertainty and
subjectivity in the use of valuation inputs and techniques than for Level 1 and Level 2 measurements.
In our view, other factors that may be relevant considerations include:
• whether another Topic specifies the disclosure class for an asset or liability (e.g. derivative instruments);
• the extent of homogeneous or shared risks within the class of assets or liabilities;
• differences in valuation inputs and techniques used to determine the fair value measurements;
• the ranges in values of significant unobservable inputs; for example, if the range of values for an
unobservable input used in measuring the fair value of a class of assets is very wide, this may indicate
that the information is not sufficiently disaggregated;
• the uncertainty of measurements from the use of significant unobservable inputs if those inputs
reasonably could have been different;

• whether other disclosures in the financial statements provide sufficient information about the classes of
assets and liabilities (e.g. a schedule of investments for investment companies); and
• the significance of the class of assets or liabilities relative to the context of the particular disclosure; for
example, a class of assets might not be significant to the fair value hierarchy table at the reporting date,
but might be significant within the context of the Level 3 rollforward because of significant sales activity
and gains and losses incurred during the period.
820-10-50-2B If disclosures are provided at a greater level of detail than the line items presented in the statement of
[IFRS 13.94] financial position, the entity provides information sufficient to reconcile the classes of assets and liabilities
used for disclosure purposes to the line items presented in the statement of financial position.

Example N35: Level of aggregation for fair value disclosures

820-10-50-2(bbb)(2) Company Z is a public business entity and discloses quantitative information about unobservable
[IFRS 13.93(d)] volatility inputs used to measure the fair values of a class of equity derivatives. This class includes 100
derivatives, 90 of which are valued using a volatility of 20% per annum with the remaining 10 valued
using a volatility of 50% per annum.
Company Z considers whether this difference means that its disclosure of unobservable inputs should
be disaggregated to a level of two smaller classes, one with 90 derivatives and one with 10.
820-10-50-2(bbb)(2) If Company Z determines that disclosure at the level of the class that includes all 100 derivatives is
(i)–(ii) appropriate, it discloses the range of values of the volatilities used (i.e. 20–50%) and the weighted
average of the inputs (assumed to be 23%).

IFRS Accounting Standards different from US GAAP

[IFRS 13.91–92, There is no specific requirement under IFRS Accounting Standards to disclose the range and weighted
93(d), IE63] average of significant unobservable inputs. However, because the range of volatility values used in the
example above is so wide (20–50%), Company Z should consider also disclosing the weighted average
of the inputs (23%). Otherwise, Company Z’s disclosures would not indicate that the majority of the
inputs used are at the low end of the range and, therefore, the disclosure objectives of IFRS 13 may not
be met.

N40. Which fair values should be disclosed if the measurement occurs at a

date that is different from the reporting date?
820-10-50-2(a) The requirements for fair value measurements require the disclosure of amounts as of the reporting date.
However, a nonrecurring fair value measurement may have occurred before the reporting date. In that
case, the fair value measurement disclosures are based on the date at which the fair value of that item was
determined.
350-30-35 For example, an indefinite-lived intangible asset is measured at fair value (a nonrecurring measurement)
at September 30 based on an impairment assessment under Subtopic 350-30, General Intangibles Other
Than Goodwill ). The entity’s year-end is December 31, and the year-end financial statement disclosures
apply to the fair value determined on September 30.

IFRS Accounting Standards different from US GAAP

[IAS 36.134(e)] Unlike US GAAP, the IFRS 13 disclosures do not apply when an impairment loss is recognized on the
basis of fair value less costs of disposal.
[IFRS 13.93(a), IAS Instead, a relevant example under IFRS Accounting Standards would be an item of property, plant and
16.31] equipment that is revalued to fair value under IAS 16 Property, Plant and Equipment at September 30.
The entity’s year-end is December 31 and, in our view, the year-end financial statement disclosures apply
to the fair value determined on September 30.

N50. As of what date should transfers into or out of Level 3 of the fair value
hierarchy be presented?
820-10-50-2C It depends. An entity is required to make an accounting policy choice, to be applied consistently, to
[IFRS 13.95] determine when transfers into or out of Level 3 of the fair value hierarchy have occurred.
The following are three examples of policies that may be used to determine the date to use when transfers
into or out of Level 3 of the fair value hierarchy have occurred:
• on the date the event causing the transfer occurs;
• at the beginning of the reporting period during which the transfer occurred; or
• at the end of the reporting period during which the transfer occurred.
If the end-of-period date is used, the SEC staff recommends disclosure in the MD&A of the realized gains
and losses for the period that were excluded from the rollforward disclosures as a result of using the end-
of-period amount.13

IFRS Accounting Standards different from US GAAP

[IFRS 13.93(c), 93(e) Unlike US GAAP, under IFRS Accounting Standards entities are required to provide disclosures about
(iv), 95] transfers between all categories, not just transfers into or out of Level 3. Entities are required to follow
the same accounting policy for determining when transfers between the fair value hierarchy levels are
deemed to have occurred and disclose that policy.

N60. Does the guidance on how to measure fair value apply to assets and
liabilities that are not measured at fair value but for which fair value is
disclosed?
820-10-15-1 Generally, yes. The guidance on how to measure fair value applies to assets and liabilities for which fair
value is disclosed even if those assets and liabilities are not recognized at fair value in the statement of
financial position, unless the item is specifically scoped out of Topic 820.

13. SEC Division of Corporate Finance, Sample Letter Sent to Public Companies on MD&A Disclosure Regarding the
Application of SFAS 157 (Fair Value Measurements), March 2008.

IFRS Accounting Standards different from US GAAP

[IFRS 13.5] Like US GAAP, the guidance on how to measure fair value applies to assets and liabilities for which fair
value is disclosed even if those assets and liabilities are not recognized at fair value in the statement of
financial position, unless the item is specifically scoped out of IFRS 13. However, the assets or liabilities
for which fair value disclosures are required under IFRS Accounting Standards may differ from those
under US GAAP, and the assets or liabilities in the scope of IFRS 13 and Topic 820 may differ. Additionally,
fair value disclosure exceptions might be available under IFRS Accounting Standards but not under US
GAAP (and vice versa).
[IAS 40.79(e), IFRS For example, an entity that applies the cost model to measure investment properties generally is
7.25, 29] required to disclose the fair values of those properties. Similarly, an entity discloses the fair values
of financial assets and financial liabilities unless, for example, the carrying amount is a reasonable
approximation of fair value. In such circumstances, the fair values for disclosure purposes are measured
under IFRS 13.

N70. [Not used]

N80. For the purpose of disclosures about recurring Level 3 measurements,

how should an entity calculate the amount attributable to the change in
unrealized gains or losses that is recognized as part of the total gains or
losses for the period?
820-10-50-2(d) In practice, meeting this disclosure requirement may be straightforward for some types of instruments;
[IFRS 13.93(f)] however, identifying the change in earnings and/or the change in OCI for the period may be difficult
for those instruments that are subject to periodic cash settlements. In many situations, periodic cash
settlements constitute both a realization of gains or losses arising in prior periods (i.e. settlement of the
initial carrying amount) and a realization of gains or losses arising in the current period.
In our view, an entity may define the change in unrealized gains or losses as those gains or losses included
in earnings or in OCI for the current period, relating to assets and liabilities held at the reporting date,
exclusive of settlements received or paid in the current period for movements in fair value that occurred in
the period. In that case, an entity develops a reasonable method to allocate cash settlements received or
paid during the period to the:
• unrealized gain or loss as of the beginning of the period or the initial carrying amount (which would not
affect the realized gains or losses in the period); and
• change in fair value during the period (which would constitute realization of gains or losses in the period).

To facilitate this separation, these guidelines may be useful in determining the appropriate amount to
disclose.
• The total change in fair value, comprising both realized and unrealized gains or losses, is calculated by
comparing the beginning-of-the-period fair value of the applicable asset or liability, adjusted for all cash
flows received or paid for the asset or liability during the current reporting period, to the end-of-period
fair value for the asset or liability.
• Cash flows received or paid during the current reporting period that relate to either changes in fair value
that occurred in a prior reporting period, or settlement of the initial carrying amount, do not represent
either realized or unrealized gains or losses in the current reporting period. They represent an adjustment
to the related account in the statement of financial position.
• Cash flows received or paid during the current reporting period that relate to changes in fair value that
occurred in the current reporting period represent realized gains or losses in the current reporting period.
• Unrealized gains or losses for the current period for the applicable asset or liability generally are equal to
the difference between the total change in fair value and the amount of realized gains or losses for the
current period calculated above.
Some have suggested that, as an alternative to the methodology described above, either (a) the periodic
amount of cash settlements should be considered to be a realization of the current-period gain or loss, or
(b) periodic cash settlements should be excluded in their entirety from the determination of realized gains
and losses in the current period (because they are considered to be attributable entirely to the unrealized
gain or loss at the beginning of the period). Use of either alternative method may not effectively isolate
the unrealized gain or loss included in earnings or in OCI that relates to assets or liabilities still held at the
reporting date.

Example N80: Determination of unrealized gains and losses

Company N, a public business entity, executes an at-the-money receive fixed-pay floating interest rate
swap with Counterparty C on January 22, 20X2. The swap has a term that ends at December 22, 20X5
and a transaction price of zero. The swap requires periodic settlements, which occur on December 22
of each year that the swap is outstanding, beginning in the second year (i.e. December 22, 20X3, 20X4
and 20X5).
Company N uses an income approach to measure the fair value of the swap by calculating the present
value of the cash flows expected to occur in each year based on current market data.

Amount of total FV of the derivative liability

that relates to the individual settlement period
FV of expected payment to be made on
December 22:

As of December 31 20X3 20X4 20X5 Total FV

20X2 $300 $350 $350 $1,000

20X3 $500 $600 $1,100

20X4 $800 $800

20X5 $0

Actual periodic cash settlements by year:

December 22, 20X3: $375 paid
December 22, 20X4: $580 paid
December 22, 20X5: $750 paid

Based on this information, Company N discloses the following.

20X2 20X3 20X4 20X5

FV at beginning of reporting period 0 1,000 1,100 800

Purchases 0 0 0 0
Sales 0 0 0 0
Issues 0 0 0 0
Settlements 0 (375) (580) (750)
Total (gains) or losses in period 1,000 475 280 (50)
FV at end of reporting period 1,000 1,100 800 0

However, Company N must also determine the disclosures required for the change in unrealized gains
or losses. Therefore, Company N analyzes all settlements paid or received during the year to determine
whether they relate to gains or losses originating in the current period or in a prior reporting period.

For the reporting period ended December 31, 20X2, no cash flows were received or paid on the swap;
therefore, any gain or loss would be entirely attributable to the change in unrealized gains or losses for
the period (i.e. $1,000).

For the reporting period ended December 31, 20X3, Company N performs the following calculation.

For the reporting period ended December 31, 20X3

FV attributed to the expected cash outflow of the period 300

Actual cash outflow in the period (i.e. settlement) (375)
Over/(under) estimate, representing the change in FV in the current year (75)
Total (gain)/loss in the period 475
Amount attributable to the change in unrealized (gains) or losses in the current year
400

Similarly, Company N also performs these calculations at the next two reporting periods.

For the reporting period ended December 31, 20X4

FV attributed to the expected cash outflow of the period 500

Actual cash outflow in the period (i.e. settlement) 580

Over/(under) estimate, representing the change in FV in the current year (80)

Total (gain)/loss in the period 280

Amount attributable to the change in unrealized (gains) or losses in the current year 200

For the reporting period ended December 31, 20X5

FV attributed to the expected cash outflow of the period 800

Actual cash outflow in the period (i.e. settlement) 750

Over/(under) estimate, representing the change in FV in the current year 50

Total (gain)/loss in the period (50)

Amount attributable to the change in unrealized (gains) or losses in the current year 0

As expected, the change in unrealized gains or losses in the final year of the swap would be $0 as the
liability is no longer recognized at the reporting date.

Therefore, using this analysis of cash flows, Company N discloses the following information about the
change in unrealized gains or losses.

Reporting period ended December 31

20X2 20X3 20X4 20X5

Total (gain) or loss in current period

(see above) $1,000 $475 $280 ($50)

Amount attributable to the change in

unrealized (gains) or losses included
in earnings relating to those assets
and liabilities held at the reporting
date $1,000 $400 $200 $0

IFRS Accounting Standards different from US GAAP

See Question N20 for the difference in disclosure requirements about the change in unrealized gains or
losses from remeasurement included in OCI.

N90. If an entity uses the liquidation basis of accounting, do the disclosures

apply?
It depends. In our view, if an entity uses the liquidation basis of accounting, the disclosures apply to the
extent that fair value is used to approximate the estimated amount of cash or other consideration that the
entity expects to collect in carrying out its plan of liquidation.
205-30-25-1 – 25-2, An entity generally prepares its financial statements on the liquidation basis of accounting when liquidation
30-1 is imminent. In that case, the entity measures its assets to reflect the amount of cash or other
consideration that it expects to collect in settling or disposing of those assets in carrying out its plan for
liquidation. In some cases, fair value may not differ from the amount that an entity expects to collect.
205-30-50-1, 50-2(c) When the liquidation basis of accounting is applied, an entity makes all disclosures required by other
Topics/Subtopics that are relevant to understanding its liquidation basis of accounting. Disclosure is also
required of the methods and significant assumptions used to measure assets and liabilities, including
subsequent changes to those methods and assumptions. Therefore, if an entity uses fair value to
approximate the estimated amount of cash or other consideration that the entity expects to collect in
carrying out its plan of liquidation, we believe that the disclosures in Topic 820 apply.

IFRS Accounting Standards different from US GAAP

The liquidation basis of accounting is not an accounting framework that is referred to in IFRS Accounting
Standards. Instead, in our view, under IFRS Accounting Standards there is no general dispensation from
the measurement, recognition and disclosure requirements under the applicable accounting standards
even if an entity is not expected to continue as a going concern.

N100. Are the disclosures required for a feeder fund whose sole investment is
in a master fund?
Generally, no. Under SEC guidance, a feeder fund is required to attach the financial statements of the
master fund to its financial statements.14 Although not currently required, nonpublic feeder funds generally
follow similar practice. In our view, the fair value disclosures in Topic 820 are not required in a feeder fund’s
financial statements in respect of (1) the underlying investments of the master fund, and (2) the feeder
fund’s investment in the master fund, if the master fund’s financial statements are attached to the feeder
fund’s financial statements. In such cases, we believe that the feeder fund’s footnote disclosures should
include a reference to the valuation disclosures included in the attached report of the master fund.
When a nonpublic feeder fund does not attach the master fund’s financial statements to its financial
statements, we believe that the feeder fund should consider disclosing information sufficient for users to
understand the valuation policies of the master fund, which may include disclosures similar to or consistent
with those required under Topic 820.

IFRS Accounting Standards different from US GAAP

Unlike US GAAP, there is no requirement under IFRS Accounting Standards for a feeder fund to attach
the financial statements of the master fund to its financial statements. If the feeder fund accounts for
its investment in the master fund at fair value through profit or loss in accordance with IFRS 9, then it is
subject to the general requirements under IFRS 13 and IFRS 7 Financial Instruments: Disclosures. This is
because these accounting standards apply to the feeder fund’s investment in the master fund.
There is no specific, minimum requirement to provide disclosures under IFRS 13 for the underlying
investments of the master fund.
[IFRS 13.91–92, 7.7, When compliance with the requirements under IFRS Accounting Standards is insufficient to enable
31, IAS 1.31] users of financial statements to understand the effect of particular transactions, events or conditions on
an entity’s financial position and financial performance, the entity considers whether to provide additional
disclosures.

14. SEC Staff Generic Comment Letter for Investment Company CFOs, December 1998.

A feeder fund needs to consider what disclosures in its financial statements are required to meet the
disclosure objectives of IFRS 13 and of the financial instruments disclosure standard. The objectives
are to enable users of the feeder fund’s financial statements to understand the valuation techniques
and inputs used to develop fair value measurements in those financial statements and to evaluate the
significance of the financial instruments held by the feeder fund and the nature and extent of the related
risks.
This might include making some or all of the disclosures in IFRS 13 about fair value measurements for
the master fund’s investments. For example, the feeder fund might disclose the categorization of the
underlying investments of the master fund in the fair value hierarchy, and a description of the valuation
techniques and inputs used to measure the fair values of those underlying investments. This may be
particularly relevant if:
• the fair values of the master fund’s investments are an input into the fair value measurement of the
feeder fund’s investment in the master fund (e.g. the investment in the master fund is valued based on
the master fund’s net asset value); or
• the feeder fund’s financial statements otherwise disclose the fair values of the master fund’s
investments, or related risk information.

N110. Is an entity required to make quantitative disclosures about significant

unobservable inputs that have not been developed by the entity?
It depends. Topic 820 includes a general principle that quantitative disclosures about significant
unobservable inputs that have not been developed by the entity are not required. However, as explained
below, care is required to ensure that this exception is not applied too broadly.
820-10-50-2(bbb) An entity is not required to disclose quantitative information about significant unobservable inputs if the
[IFRS 13.93(d)] inputs to the valuation were not developed by the reporting entity (e.g. when the entity uses prices from
prior transactions or third‑party pricing information without adjustment). Fair value measurements that are
valued using unobservable inputs that are externally developed, such as third-party pricing information (e.g.
broker quotes), might qualify for this exception.
ASU 2011-04.BC90 However, an entity cannot ignore other quantitative information that is reasonably available. For example, if
[IFRS 13.BC195] an entity develops an adjustment to a broker quote that is significant to the measurement in its entirety,
the inputs used to determine the adjustment are included in the quantitative input disclosures, even if the
entity excludes the unadjusted portion of the broker quote from the disclosure.
In some circumstances, an entity might use a third-party valuation specialist to measure the fair values
of certain assets or liabilities. In that case, management of the entity might provide the specialist with
developed inputs and assumptions that are significant to the valuation (e.g. projected financial information
prepared by an investee). Significant unobservable valuation inputs provided to third-party valuation
specialists by the reporting entity cannot be omitted from the quantitative disclosures.

Questions N120 to N140 are not applicable to entities reporting under IFRS Accounting
Standards, which do not distinguish between public and nonpublic entities. We have not
provided a comparison between the guidance under US GAAP for nonpublic entities and
IFRS Accounting Standards.

N120. Is a nonpublic entity required to disclose the range and weighted

average of significant unobservable inputs used to develop Level 3 fair
value measurements?
820-10-5-2(bbb)(ii) In our view, a nonpublic entity may, but is not required to, disclose either or both the range and/or the
weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
820-10-50-2(bbb)(2)(i) Topic 820 requires entities (excluding nonpublic entities) to disclose:
• the range and weighted average of significant unobservable inputs used to develop Level 3 fair value
measurements; and
• how they calculated the weighted average.
820-10-50-2(bbb)(2) Although nonpublic entities are not subject to these quantitative disclosure requirements for public
entities, they are required to provide quantitative information about significant unobservable inputs
used in measuring a Level 3 fair value measurement. Therefore, to satisfy the quantitative information
requirement, we would expect a nonpublic entity to disclose either or both the range and/or the weighted
average of significant unobservable inputs used to develop Level 3 fair value measurements, or to disclose
the quantitative information about significant unobservable inputs for each individual Level 3 fair value
measurement.
820-10-5-2(bbb)(2)(i) We expect that most nonpublic entities will disclose the range of significant unobservable inputs to satisfy
the quantitative information requirement. However, if the range is not meaningful (e.g. because it is
extremely wide), it may be appropriate to provide a weighted average or other quantitative information.

N130. What are ‘purchases and issues’ that a nonpublic entity should disclose
for recurring Level 3 measurements?
Topic 820 requires a nonpublic entity to disclose separately the changes in the period for recurring Level
3 fair value measurements due to purchases and issues, and the amount of any transfers into and out of
Level 3 and the reasons for those transfers. While purchases and issues are not defined, in our view this
disclosure is intended to identify increases in Level 3 fair value measurements of assets and liabilities
during the period. For example, purchases may include the purchases of investments measured at fair
value, and issues may include the issuance of the entity’s debt measured at fair value.
820-10-50-2G For derivative instruments, purchases and issues may include upfront payments received or paid by the
nonpublic entity. For those derivative instruments without upfront payments, we believe that a nonpublic
entity may include other quantitative disclosures of purchases and issues. For example, purchases and
issues of derivative instruments may include the Level 3 fair value measurements of assets and liabilities
as of the measurement date.

N135. Should a nonpublic entity disclose purchases, issues and transfers for
recurring Level 3 fair value measurements by class and in a tabular
format?
820-10-50-2(c), Yes. Nonpublic entity users do not seek the same level of detailed information as users of public company
820-10-50-2G, financial statements, especially for disaggregated information and inputs and assumptions underlying the
820-10-50-8, amounts recognized in the financial statements. However, the disclosure of purchases, issues and
ASU 2018-13.BC71 transfers for recurring Level 3 fair value measurements by nonpublic entities represents a portion of the
Level 3 rollforward disclosures that are required to be disclosed for each class of assets and liabilities.
Therefore, we believe that a nonpublic entity should disclose purchases, issues and transfers into and out
of Level 3 by class and in a tabular format.

N140. Can a nonpublic entity present the changes in derivative assets and
liabilities attributable to purchases and issues, and transfers into or out
of Level 3 of the fair value hierarchy, on either a gross or a net basis?
820-10-50-2G, Yes. We believe that a nonpublic entity may present the disclosures for derivative assets and liabilities on
820-10-50-3b, either a gross or a net basis. This view is consistent with the FASB’s belief that although the gross
FAS 157.C99 presentation of derivatives is more meaningful, it allows net presentation in response to concerns that
derivatives can be assets in one period and liabilities in a different reporting period.15

15. FAS 157.C99 (superseded) is Basis for Conclusions paragraph C99 of FASB Statement 157.

O. Application issues: Derivatives

and hedging
Overview
• The general principles discussed throughout this Handbook apply equally to derivative
instruments.
• This section explores some of the specific application questions that arise in relation to
derivative instruments, and also the effect of Topic 820 on hedging.

Reference rate (IBOR) reform

A change in an interest rate benchmark as part of IBOR reform may have an impact on fair value
measurements of derivatives because it may affect future cash flows and/or discount rates. The
FASB and IASB each have issued guidance to address financial reporting issues arising from
IBOR reform, but neither has proposed amendments to Topic 820 or IFRS 13.
FASB Topic 848 provides optional expedients for hedging relationships affected by IBOR reform.
Those expedients:
• permit certain changes to be made to hedging relationships; and
• allow some effectiveness assessments to be performed in ways that disregard certain
potential sources of ineffectiveness.
Phase 1 and Phase 2 of the IASB’s IBOR reform amendments offer similar reliefs from certain
parts of the hedging requirements under IFRS Accounting Standards.
This Section O does not reflect the effects of those expedients.

O10. For derivative instruments that are recognized as liabilities, what

should an entity consider in measuring fair value?
820-10-35-3, 35-16 – The fair value of a liability is defined as the price that would be paid to transfer the liability in an orderly
35-16B transaction between market participants at the measurement date (see Question K20). Although the
[IFRS 13.9, 34–37] fair value measurement objective of a derivative liability is to estimate the price that would be paid to
transfer the liability, generally there is no quoted price for this transfer. However, because a derivative
liability is a contract between market participants, generally it is held by another party as an asset.
Therefore, an entity measures the fair value of a derivative liability from the perspective of a market
participant that holds the derivative as an asset.

820-10-35-41, 35-41C For derivatives that are exchange traded, the price used for fair value measurement is usually the market
[IFRS 13.77, 79] exchange price on the measurement date, which is considered a Level 1 input if the market is active.
820-10-55-3F The fair value measurement of nonexchange traded derivatives (e.g. OTC derivatives) generally is based on
[IFRS 13.B10] an income approach. Valuation techniques that fall under this approach convert future cash flows to a
single amount through discounting. A fair value measurement based on a DCF technique may include
adjustments for liquidity, credit risk or any other adjustments if these are based on assumptions that
market participants would use.
820-10-35-17 – 35-18, Some derivatives, such as forwards and swaps, may be liabilities or assets at different points in time and at
35-37A different interest rates on the yield curve. This adds complexity to the measurement of fair value because
[IFRS 13.42–43, 73] the credit risk adjustments may include both the counterparty’s credit risk and the entity’s own
nonperformance risk (see Questions K30 and O20). In addition, the credit risk adjustment may be affected
by whether and how the nonexchange traded derivative is collateralized (see Questions C80 and O30).
Whether the fair value measurement is categorized within Level 2 or Level 3 of the fair value hierarchy
depends on whether the measurement includes unobservable inputs that are significant to the entire
measurement (see Question H20).
820-10-35-18D – For a group of financial assets and financial liabilities, including derivatives, an entity is permitted, if
35-18E, 35-18I, 35-18L certain conditions are met, to measure the fair value of a group of derivatives based on a price that
[IFRS 13.48–49, 53, 56] would be received to sell or paid to transfer the net risk position (portfolio measurement exception)
(see Question L10). If an entity elects to apply the portfolio measurement exception for a particular
market or counterparty’s credit risk, it may affect the liquidity and credit risk adjustments for the
instruments in the portfolio because they are measured based on the characteristics of the entity’s
net risk position rather than on the characteristics of the individual derivatives (see Section L and
Question O20).
For a discussion of the effect of the inclusion of credit risk adjustments in measurements of fair value on
hedge accounting, see Question O70.

O20. How are credit valuation adjustments (CVA) for counterparty credit
risk and debit valuation adjustments (DVA) for an entity’s own
nonperformance risk determined in measuring derivatives at fair
value?
820-10-35-16, 35-17 The fair value of derivative assets should consider the effect of potential nonperformance of the
[IFRS 13.34, 42] counterparty. In addition, the fair value of derivative liabilities also considers the entity’s own
nonperformance risk (see Question K30).
820-10-35-16B In principle, and assuming no differences in the unit of valuation (see Section C), the credit risk adjustments
[IFRS 13.37] made in the fair value measurement by both counterparties to the financial instrument should be the same.
Derivatives, by their nature, present particular challenges for evaluating own and counterparty credit
risk that are not present in other financial instruments, such as debt instruments. In contrast to debt
instruments, some derivatives might change from being an asset to a liability or vice versa because:
(1) there may be a mixture of expected net cash inflows and expected net cash outflows for different
settlement dates; and (2) the amounts and direction of cash flows may change as a result of changes in
market underlyings. Therefore, the credit risk of both the entity and the counterparty may be relevant in
measuring the fair value of those derivatives regardless of their current classification as assets or liabilities.
This is because the calculation of the credit risk adjustments would need to consider all expected cash
flows and the potential for the other classification.

820-10-35-2B, 35-17 For such derivatives, an entity should consider both counterparty credit risk and its own nonperformance
[IFRS 13.11, 42] risk if market participants would do so in measuring the fair value of these instruments. Therefore, an entity
should design and implement a method for appropriately considering credit risk adjustments in valuing
these derivatives.
In practice, entities often determine an explicit CVA to incorporate counterparty credit risk and an explicit
DVA to incorporate own nonperformance risk, as necessary, into the fair value measurement of derivatives.
Determining CVA/DVA can be complex and, in our experience, multiple techniques are used in practice.
A CVA adjusts a derivative valuation to reflect the expected losses due to counterparty credit risk.
Expected losses are affected by the probability of default (PD), the credit exposure at the time of default
(EAD) and the loss given default (LGD). A DVA adjusts a derivative valuation to reflect the counterparty’s
expected losses due to the entity’s own credit risk. DVA can be thought of as CVA from the counterparty’s
perspective.
The first step is to assess whether CVA/DVA is necessary for measuring the fair value of a derivative.
For some derivatives that are valued under a market approach (e.g. exchange traded futures contracts)
the market value already incorporates nonperformance risk so determining a separate CVA/DVA is
not necessary. In our experience, centrally cleared OTC derivatives (e.g. centrally cleared interest rate
swaps) frequently do not have significant CVA/DVA because the margin requirements of the exchange
or clearinghouse minimize the credit risk of those contracts. However, for non-centrally cleared OTC
derivatives, incorporation of CVA/DVA is often significant because they:
• are often uncollateralized;
• may require collateral to be posted only after a deterioration in one of the parties’ credit risk;
• may only require one of the parties to post collateral; or
• may require collateral to be posted only if a minimum threshold amount is exceeded.
820-10-35-18D – If CVA/DVA is required, the next step is to determine the unit of credit risk measurement. In our
35-18E experience, some entities evaluate credit risk on an individual derivative-by-derivative basis. Other entities
[IFRS 13.48–49] may determine CVA/DVA at a higher unit of measurement, considering the effect of collateral, netting
arrangements and other arrangements that mitigate credit risk. Topic 820 permits (but does not require) an
entity to measure the fair value of a group of financial assets and financial liabilities on the basis of the net
exposure to credit risk of a particular counterparty, only if certain conditions are met (see Section L).

Once the unit of credit risk measurement is determined, assumptions and inputs that are consistent with
a market participant view are used in a technique to determine the CVA/DVA. No specific technique is
required by the accounting standards, and significant judgment is required as to how market participants
would determine the CVA/DVA. An entity’s technique for determining CVA/DVA may be influenced by the:
• materiality of its derivative positions to its financial statements;
• number of derivative types and individual positions;
• number of counterparties;
• pricing information and markets to which the entity has access;
• availability and reliability of inputs in the relevant market;
• existence of collateral, netting arrangements or other arrangements that mitigate credit risk if it is part of
the unit of valuation; and
• extent to which derivatives are deeply in or out-of-the-money.
In our experience, there are a number of different techniques used in practice, which are tailored to an
entity’s particular facts and circumstances.
Expected future exposure techniques are generally the most sophisticated and in our experience are used
by many financial institutions with significant derivative portfolios. Under those techniques, both current and
future exposures are evaluated. Simulation techniques, such as Monte Carlo analysis, project future positive
and negative exposures using assumptions about the volatility of the derivative’s underlying variables and
the effect of any collateral, netting arrangements or other arrangements that mitigate credit risk.
While a robust consideration of future credit exposures under multiple scenarios may be an ideal way to
determine the CVA/DVA for many derivatives, expected future exposure techniques can be very complex
and resource intensive, and therefore in our experience, might not be used by entities whose derivative
portfolios are less significant to their financial statements.
In our experience, a variety of other techniques are used in practice that focus primarily on an entity’s
current credit exposure, assuming that the potential for future changes in exposure will not have a
significant effect on the measurement of fair value at the measurement date. Some entities use a DCF
technique, where the discount rate is adjusted to incorporate credit risk. Other entities estimate CVA/DVA
as the cost to purchase protection against default, either assuming a constant or variable exposure over
the derivative’s life. These techniques vary widely in sophistication.
In our experience, there are several potential sources of information about the PD that entities use when
applying the techniques described above:
• market credit spreads;
• credit default swap (CDS) spreads;
• credit ratings; and
• historical default rates and recovery data.

820-10-35-36 When selecting inputs to the methodology for determining CVA/DVA, an entity should maximize the use of
[IFRS 13.67] the relevant observable inputs and minimize the use of unobservable inputs to reflect a market participant’s
view at the measurement date. Therefore, if there are relevant observable market inputs, they should be
used for the measurement and cannot be ignored in favor of historical information.
Most modern pricing models are based on the assumption that the current price reflects the market’s
expectation of future relevant information, and as a result, current CDS quotes or credit spreads reflect the
market’s best judgment about how the underlying instruments will perform prospectively. In this context,
historical data, if relevant, is already considered in the current market information. Historical information on its
own is not a predictor of the future, and in most cases will produce default estimates that are above or below
those obtained when using current CDS or credit spreads.
820-10-35-51 Market data on credit spreads used to value a derivative issued by a particular issuer for which there is not
[IFRS 13.84] an observable price might be derived from observable prices of traded CDSs referenced to similar
obligations of the same issuer or observable prices of other bonds of the same issuer. In other cases,
relevant market data might also be obtained from observable prices of so-called proxy CDSs or bonds –
e.g. CDSs referenced to obligations of entities that are considered similar to those of the particular issuer
or CDSs referenced to an index of obligations of similar entities. An adjustment to a credit spread derived
from a proxy CDS or other instrument may often be necessary to reflect differences between the proxy
instrument and the loan being valued (e.g. in relation to credit rating, capital structure, industry or region
of issuer as well as the possible impact of differences in liquidity, including basis differences between
pricing of derivative and nonderivative instruments). Judgment may be necessary to determine whether a
credit spread derived from a proxy instrument is appropriate and observable for the loan being valued. If an
adjustment is made to the credit spread using unobservable inputs, then this may indicate that the credit
spread is not observable and would result in a Level 3 categorization of the measurement if the impact of
the adjustment is significant to the entire measurement (valuation) of the derivative. For a discussion of the
categorization of the resulting fair value measurement in the hierarchy, see Section H.
820-10-35-18F, After CVA/DVA is determined, an entity may need to allocate it to individual fair value measurements for
210-20-50-3 certain other financial reporting purposes if it is determined at a unit of measurement that differs from
[IFRS 13.50, 7.13C] the individual derivative instrument. Allocations may be needed in the following situations:
• financial statement presentation (see Question L50);
• an entity applies hedge accounting and allocates CVA/DVA to individual hedge accounting relationships
for assessing effectiveness and measuring ineffectiveness or between derivatives in hedge accounting
relationships and derivatives not in hedge accounting relationships to separately determine derivative
gains and losses recognized in profit or loss (net income) and gains and losses recognized in other
comprehensive income (see Question O70); and
• an entity allocates CVA/DVA among various elements of derivative disclosures, including levels in the
fair value hierarchy (see Question L70) and disclosures of gross derivative balances that are netted in the
statement of financial position.
See Question L60 on how these allocations are usually made.

Finally, an entity needs to consider the potential overlap between the calculation of CVA/DVA and the
calculation of a funding valuation adjustment (FVA) (see Question O35).
Regardless of the technique used to determine and allocate CVA/DVA, an entity should appropriately
document its methodology and significant assumptions, including key areas of judgment, and consider the
appropriate disclosures.

O30. What discount rates are used in practice to measure the fair value of
centrally cleared or fully cash-collateralized derivative instruments?
820-10-35-2B, 55-11 The effect of collateral that is part of the contractual terms of a derivative is a characteristic of the
[IFRS 13.11, B19] instrument. Therefore, the requirement to provide cash collateral and the rate of return on such cash
collateral affect the discount rate that is used in measuring fair value.
For valuing centrally cleared and fully cash-collateralized derivatives, in our experience derivative market
participants generally discount the estimated cash flows at the rate agreed for cash collateral posted under
the respective derivative’s Credit Support Annex (CSA), which typically is an overnight benchmark rate in
the respective currency (e.g. Sterling Overnight Index Average (SONIA), Euro Overnight Index Average
(EONIA) or its replacement the Euro Short-Term Rate (€STR), Secured Overnight Financing Rate (SOFR)
or Federal Funds rate). The overnight index swap market reflects assumptions by market participants
about the overnight rate and is generally used in valuing the centrally cleared and fully cash-collateralized
derivatives.
Entities should monitor developments in valuation techniques, including the effects of IBOR reform, to
ensure that their own valuation models appropriately reflect the types of inputs that market participants
would consider.

O35. What discount rates are used in practice to measure the fair value of
uncollateralized or partially collateralized derivative instruments?
In our experience, there is no consensus about the most appropriate discount rate to apply in a valuation
model used for measuring the fair value of uncollateralized or partially collateralized derivatives. Many
banks incorporate funding valuation adjustments (FVA) in their valuations to reflect the cost (or benefit) of
funding hedges of these transactions. In our experience, generally over-the-counter derivatives dealers now
include FVA, and for this type of business, while methodologies continue to evolve, including this type of
adjustment is market practice for these participants.
However, considerable debate remains about the nature of inputs used to determine and calibrate FVA
and therefore there is diversity in practice about how entities calculate FVA when it is incorporated in their
valuations. Particular complexities include the level at which to net positions, transactions that are partially
collateralized, including those subject to one-way collateral requirements (i.e. only one counterparty is
required to post collateral) or to collateral thresholds (i.e. collateral amounts are adjusted only when the net
exposure exceeds a specified amount), and restrictions exist on the rehypothecation of collateral.

In our experience, in determining whether an adjustment for FVA is needed, and if so how to calculate it,
an entity considers the pricing practices that would be used by market participants if the derivatives were
being sold at the measurement date. In doing so, an entity considers the funding cost and benefit that
market participants would take into account in pricing the instrument, which may differ from the entity’s
estimate of its own funding cost or benefit (see Section D).
One challenge for calculating FVA is the potential for overlap in a valuation model between an adjustment
for a funding rate that a market participant would consider and the adjustments for the counterparty’s
credit risk and the entity’s own credit risk (see Question O20) – i.e. an overlap of FVA with a credit valuation
adjustment (CVA) and a debit valuation adjustment (DVA). This potential overlap occurs because funding
cost discounting techniques usually incorporate both liquidity and credit components, and they may be
difficult to separate.
Therefore, when incorporating FVA in the fair value measurement, an entity needs to ensure that the
valuation appropriately eliminates any overlap of FVA with DVA and CVA, and that a symmetrical technique
is applied to the measurement of derivative assets and liabilities. A symmetrical technique to measurement
is consistent with the requirement for the measurement of a liability with no quoted price for the transfer
of an identical or a similar liability to be made from the perspective of a market participant that holds the
identical item as an asset (see Question K20).
Entities should monitor developments in valuation techniques to ensure that their own valuation models
appropriately reflect the types of inputs – including discount rates – that market participants would consider.

O40. For a derivative contract between a dealer and a retail counterparty, if

the dealer has a day one difference, does the retail counterparty have
the same difference?
820-10-35-2, 55-47 – It depends. The difference between the fair value and the transaction price for the retail counterparty is not
55-49 necessarily the same as for the dealer counterparty. The measurement of fair value should be based on the
[IFRS 13.9, IE24–IE26] price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants.
820-10-30-3A(d) As discussed in Question I10, a difference between the transaction price and the fair value at initial
[IFRS 13.B4(d)] recognition may arise if an entity transacts in a market that is different from its principal (or most
advantageous) market. An entity (e.g. a dealer) may transact in the retail market with a retail counterparty,
while the principal market to which the entity has access for the specific financial instrument is different
(e.g. the dealer market). In this case, the fair value measured by reference to transactions in the dealer
market may be different from the transaction price in the retail market, which is often zero.
820-10-55-47 – 55-49 If the dealer’s retail counterparty does not have access to the dealer market, the difference between the
[IFRS 13.IE24–IE26] transaction price and the fair value on initial recognition will not be the same for the dealer counterparty
(for which the principal market is the dealer market) and for the retailer counterparty (for which the principal
market is the retail market).

820-10-30-6 If there is a difference between the transaction price and the fair value on initial recognition for the
dealer and/or the retail counterparties, the resulting day one gain or loss is recognized in earnings
(see Question I20).

IFRS Accounting Standards different from US GAAP

[IFRS 9.B5.1.2A, Unlike US GAAP, if there is a difference between the transaction price and the fair value on initial
B5.2.2A] recognition for the dealer and/or the retail counterparties, recognition of a day one gain or loss depends
on the observability condition (see Question I20).

O45. In measuring and recognizing the fair value of centrally cleared

derivatives for accounting purposes, may an entity rely solely on
the variation margin values that are provided by a central clearing
organization (e.g. CME, LCH)?
Generally, no. The variation margin calculation is used by a central clearing organization to determine the
daily collateral or settlement amount that is paid by or to a clearing member and may not necessarily be
the same as the fair value calculated by market participants. Central clearing organizations have required
clearing members and their end-user customers to post cash collateral (i.e. variation margin) based on
the daily changes in the amount calculated in accordance with the rules of the clearing organization for
derivative contracts.
The rules of several central clearing organizations, including the Chicago Mercantile Exchange (CME) and
the London Clearing House (LCH), treat certain variation margin payments as the legal settlement (settled-
to-market or STM) of the outstanding derivative contract exposure instead of the posting of collateral
(collateralized-to-market or CTM) in certain circumstances. We understand that the total cash flows related
to derivative contracts are the same whether they are considered STM or CTM.
The valuation technique used by the central clearing organization for both CTM and STM derivatives might
not be consistent with Topic 820 and IFRS 13. This is because each clearing organization may calculate
variation margins differently, and the margin may reflect assumptions specific to the clearing organization
rather than being consistent with those that a market participant would make. Although for derivative
contracts cleared under an STM model the value provided by a central clearing organization may be used
for daily settlements, the making of a daily settlement payment does not extinguish the transaction, and
future payments and receipts will arise in accordance with its terms and conditions. In addition, the daily
settlement amount provided by a central clearing organization is not a quoted transaction price or an exit
price in an active market as defined in Topic 820 and IFRS 13, and may not represent a price at which an
entity would be able to sell or assign its derivative exposure to another market participant.

Although the clearing organization is not a market maker, the inputs to its calculation of value for variation
margin purposes will generally reflect a selection of market data and may be close to but not necessarily
the same as a fair value calculated by market participants. Therefore, the value provided by a central
clearing organization to determine the variation margin may be a meaningful data point and may serve as a
starting point for measuring fair value.
For further discussion of management’s responsibilities when using third-party sources of information,
see Question G160.

O50. How does a day one gain or loss due to a bid-ask spread affect hedging
relationships?
820-10-35-36C The transaction price to acquire a derivative hedging instrument is an entry price, while a fair value
[IFRS 13.70] measurement is based on an exit price. When the pricing of a derivative is subject to a bid-ask spread,
there could be a difference between the entry and exit price of the derivative and the price that is most
representative of fair value may be at a different point within the bid-ask spread from the entry transaction
price (see Question G110). For example, an entity might enter into a derivative at the ask price and
measure fair value using the bid price. Therefore, a derivative entered into at then-current market terms and
with a transaction price of zero may have a fair value other than zero on initial recognition. An entity may
designate such a derivative as a hedging instrument on initial recognition.
820-10-30-3A, 55-46 As discussed in Question I20, Topic 820 permits the recognition of a day one gain or loss when an entity’s
measurement of fair value is different from the transaction price. The effect of the day one gain or loss due
to a bid-ask spread will depend on the type of hedging relationship as described below.

Shortcut method

815-20-25-102, Topic 815, Derivatives and Hedging requires, among other things, that the fair value of the hedging
25-104 − 25-106, instrument (the interest rate swap) at the inception of the hedging relationship be zero to apply the
815-20-55-71, shortcut method. Therefore, the issue is whether an interest rate swap with a non-zero fair value due to
820-10-35-9B a bid-ask spread meets this criterion and can be used as a hedging instrument in a hedging relationship
accounted for under the shortcut method.

Topic 815 clarifies that this criterion would be met for an interest rate swap with all of the following
characteristics:
• it is entered into at the inception of the hedging relationship;
• it has a transaction price of zero (exclusive of commissions and other transaction costs as described in
Question E40) in the entity’s principal (or most advantageous) market; and
• the difference between the transaction price and fair value is attributable solely to differing prices
within the bid-ask spread between the entry transaction and an assumed exit transaction.

Therefore, assuming that an interest rate swap designated as the hedging instrument in a hedging
relationship that qualifies for the shortcut method meets these criteria, the day one gain or loss on the
interest rate swap would not in itself preclude the use of the shortcut method.

Critical-terms match in cash flow hedging relationships

815-20-25-84(b), Topic 815 requires, among other things, that the fair value of the hedging instrument (forward or futures
25-104(b) contract) at the inception of the hedging relationship be zero to apply the critical-terms match method.
Therefore, the issue is whether a derivative instrument with a non-zero fair value due to a bid-ask spread
meets this criterion and can be used as a hedging instrument in a hedging relationship accounted for
under the critical-terms match method.

In our view, a derivative instrument having a non-zero fair value at inception of the hedging relationship
solely due to a bid-ask spread under Topic 820 would not preclude an entity from applying the critical-
terms match method. However, this conclusion assumes that all of the other criteria in Topic 815 are met
along with the criteria similar to those discussed above for the shortcut method related to an interest rate
swap with a non-zero fair value.
815-20-25-84(b) If the initial non-zero fair value of the hedging instrument is attributable to other factors (e.g. the terms
of the derivative do not reflect current market pricing at the time it is designated), the initial non-zero fair
value reflects a source of misalignment that is not consistent with the assumption of high effectiveness
that the critical-terms match method involves.

Other hedging relationships

815-20-25-79 A day one gain or loss on a derivative instrument that is attributable solely to the difference in the bid-
ask spread under Topic 820 and recognized in earnings at the transaction date is not considered to be a
change in the fair value of the derivative instrument as contemplated in Topic 815. Therefore, this gain or
loss would not affect the assessment of effectiveness.
815-20-25-84(b) However, subsequent to day one, changes in the fair value of the derivative instrument would incorporate
changes in the bid-ask spread and in the relative position of the price within the bid-ask spread.
Therefore, these changes would affect the assessment of effectiveness.
Unlike US GAAP, IFRS Accounting Standards do not provide specific guidance on this matter.

IFRS Accounting Standards different from US GAAP

[IFRS 9.B5.1.2A, Unlike US GAAP, as discussed in Question I20, the recognition of a day one gain or loss when an entity’s
B5.2.2A] measurement of fair value is different from the transaction price depends on the observability condition.
Shortcut method
Unlike US GAAP, the shortcut method is not allowed under IFRS Accounting Standards.
Critical-terms match – Fair value or cash flow hedging relationships
[IAS 39.AG108, Under IFRS Accounting Standards, the analysis depends on whether the entity applies the hedge
IG.F.4.7, accounting requirements of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9.
IFRS 9.B6.4.14–
Unlike US GAAP, under IAS 39, prospective effectiveness only may be demonstrated on a qualitative
B6.4.15]
basis if the critical terms of the hedging instrument and the hedged item match exactly at inception
and in subsequent periods. However, if the critical terms of a hedging instrument and a hedged item do
match exactly, in our view, for a derivative instrument that has a non-zero fair value at inception of the
hedging relationship solely due to a bid-ask spread, an entity would not be precluded from applying a
qualitative approach for assessing prospective effectiveness, like US GAAP.
Unlike US GAAP, under IAS 39, an entity that uses the critical-terms match method for prospective
effectiveness assessment should also use a long-haul method for assessing retrospective effectiveness
and measuring ineffectiveness.
Unlike US GAAP, under IFRS 9, qualification for hedge accounting requires that the hedge meet certain
effectiveness requirements, based on a general notion of offset between gains and losses on the
hedging instrument and the hedged item, rather than testing for high effectiveness. If the critical terms
of the hedging instrument and the hedged item match or are closely aligned, it may be possible to use
only a qualitative methodology to determine whether an economic relationship exists between the
hedged item and the hedging instrument. An entity should use its judgment in developing accounting
policies to identify which terms it considers critical and what it considers to be closely aligned.
Furthermore, the fact that a derivative is in or out-of-the-money when it is designated as a hedging
instrument does not by itself mean that a qualitative assessment is inappropriate. The appropriateness
depends on the circumstances and whether hedge ineffectiveness arising from that fact could be of such
a magnitude that a qualitative assessment would not adequately consider it.
Unlike US GAAP, under IFRS 9, an entity that uses a qualitative method to determine whether an
economic relationship exists between the hedging instrument and the hedged item should also use a
long-haul method for measuring ineffectiveness.

O60. Does the principal market guidance affect the assessment of

effectiveness for hedging relationships?
815-25-35-1 It depends. In a fair value hedge, an entity applies the fair value measurement concepts of Topic 820 in
[IAS 39.86((a), 89, measuring the fair value of the hedging instrument and the changes in overall fair value or fair value
IFRS 9.6.5.2(a), 6.5.8] attributable to a specific hedged risk of the hedged item. Therefore, the principal market requirements may
affect the assessment of effectiveness in a fair value hedge (see Section E).
820-10-35-5, 35-9C For example, if the hedged item is a nonfinancial asset or nonfinancial liability, the principal market
[IFRS 13.16, 26] requirements may result in a change in fair value that reflects a location different from the principal market.
Therefore, transportation costs from the actual location of the hedged item to the principal market need to
be considered.
815-30-35-10, 20-25-84, A cash flow hedge is a hedge of the exposure to variability in cash flows. Measurement of the variability of
820-10-15-1 cash flows is not in the scope of Topic 820. Therefore, the principal market requirements do not
[IFRS 13.5, 9.6.4.1(c), affect the assessment of the effectiveness of a cash flow hedge if it is based on comparing:
IAS 39.88(b)]

• changes in the present value of the cash flows on the hedged item with changes in the present value of
the cash flows on the hedging instrument; or
• the critical terms of the hedging instrument and the hedged item (i.e. a qualitative method) and
identifying adverse changes in counterparty credit risk and the entity’s own nonperformance risk.
815-30-35-10, However, an entity may apply a method that uses the hedging instrument’s fair value to assess the
820-10-35-5 effectiveness of a cash flow hedge. In that case, the assessment of effectiveness may be affected by the
[IFRS 13.16, IAS requirements of Topic 820 about the principal market in which a transaction is assumed to take place in
39.AG105, AG107] measuring the hedging instrument’s fair value.
815-30-35-10, Furthermore, the entity may assess effectiveness based on changes in the fair value of the hedged
820-10-35-5 cash flows, including, for example, by measuring the fair value of a hypothetical derivative as a proxy for
[IFRS 13.16, changes in the hedged cash flows. In this case, the principal market requirements also may affect the
IAS 39.AG105, AG107] assessment of effectiveness.

Example O60: Wheat futures and market location

Company O enters into wheat futures contracts (for delivery in Amsterdam) to hedge its exposure to
the changes in overall fair value of its wheat inventory (fair value hedge) or changes in overall cash flows
associated with the forecasted sale of wheat (cash flow hedge).
Company O typically sells its wheat in Amsterdam, but based on Topic 820, the principal market for the
wheat is in Frankfurt. The market in which a transaction for the wheat futures is assumed to take place or
the location in which delivery would be required under the futures contract is Amsterdam.
Fair value hedge
In assessing the effectiveness of a fair value hedge, Company O uses a method based on comparing
changes in the fair value of the hedged inventory with changes in the fair value of the futures contract for
delivery in Amsterdam.
In this example, although Company O sells its wheat in Amsterdam, the principal market is Frankfurt.
Therefore, under Topic 820, the adjustment to the carrying amount of the wheat inventory is based
on the price of wheat in Frankfurt less the costs to transport the wheat from its current location to
Frankfurt. This would affect the assessment of effectiveness because the location of the principal
market of the inventory is different from the principal market of the futures contract.
Cash flow hedge
If Company O assesses effectiveness based on changes in the present value of cash flows (e.g. a
statistical model such as a linear regression technique that determines how much of the change in
the cash flows of the dependent variable is caused by a change in the cash flows of the independent
variable), its effectiveness assessment is not affected because of the application of the principal market
guidance.
Even if Company O applies a method that uses the hedging instrument’s fair value change to assess
effectiveness, the principal market requirements do not affect the market in which a transaction for the
wheat futures is assumed to take place, nor the cash flows of the hedged item.
However, if Company O assesses the effectiveness of the hedge based on changes in the fair value of
the hedged cash flows or of a hypothetical derivative, the principal market requirements may affect the
assessment of effectiveness. This occurs even though the delivery location of the perfectly effective
hypothetical derivative would be the delivery location of the hedged sales rather than the principal
market of the inventory.

IFRS Accounting Standards different from US GAAP

[IAS 39.95, AG108, Under IFRS Accounting Standards, the analysis depends on whether the entity applies the hedge
IG.F.5.5, IFRS 9.6.5.8, accounting requirements of IAS 39 or IFRS 9. However, unlike US GAAP, ineffectiveness must be
6.5.11, B6.4.14, IFRS measured based on the actual results of the hedging instrument and hedged item under both IAS 39
13.16] and IFRS 9. Therefore, if the market in which the fair value of the hedged item is priced is different
from the market in which the fair value of the hedging instrument is priced, this difference may cause
ineffectiveness in the hedging relationship.
Unlike US GAAP, under IAS 39, a qualitative approach that is based on a conclusion that there is a match
between the critical terms of the hedging instrument and those of the hedged item may be used for a
fair value hedge to assess prospective effectiveness. Under IFRS 9, if the critical terms of the hedging
instrument and the hedged item match or are closely aligned, it may be possible to use only a qualitative
methodology to determine whether an economic relationship exists between the hedged item and
the hedging instrument. Therefore, the principal market requirements may affect the effectiveness
assessment in a fair value hedge under a qualitative approach if they result in the critical terms of the
hedging instrument and the hedged item not being considered to exactly match.
[IAS 39.AG108, IFRS Under both IAS 39 and IFRS 9, in many cases, the market in which a transaction is assumed to take
9.B6.4.14] place in measuring the fair value of the hedging instrument, the hedged item or both may not affect
whether the critical terms match (or are closely aligned). For example, if an entity designates an interest
rate swap as a hedge of fair value changes of a fixed-rate bond attributable to changes in a benchmark
interest rate, the match would be based on the contractual terms of the bond and the swap and whether
the interest rate index underlying the swap matches the hedged risk, and these may not be affected by
the market in which a transaction in the bond or the swap would be assumed to take place for fair value
measurement purposes.
[IFRS 13.16, 9.B6.4.14, However, a qualitative effectiveness assessment may be affected and may not be appropriate for a fair
IAS 39.AG108] value hedge if a difference arises between the market in which the fair value of the hedged item is priced
for the purposes of determining fair value changes attributable to the hedged risk and the underlying of
the hedging instrument.
[IFRS 13.26, 9.B6.4.14, Similarly, a qualitative effectiveness assessment may be affected and may not be appropriate if the
IAS 39.95, AG108, hedged item in a fair value hedge is of a nonfinancial nature and the location of the hedged item is a
IG.F.5.5, IFRS 9.6.5.8, characteristic of the hedged item that is relevant to measuring its fair value. In other words, the fair
6.5.11] value of the hedged item is measured based on the price in the principal (or most advantageous) market
adjusted for the costs that would be incurred to transport the item from its current location to the
principal market. In that case, the underlying of the hedging instrument may not exactly match (or be
closely aligned to) the hedged item due to differences in location.

Unlike US GAAP, under IAS 39, an entity that uses the critical-terms match method for the prospective
effectiveness assessment should also use a long-haul method for assessing retrospective effectiveness
and measuring ineffectiveness.
Unlike US GAAP, under IFRS 9, an entity that uses a qualitative method to determine whether an
economic relationship exists between the hedging instrument and the hedged item should also use a
long-haul method for measuring ineffectiveness.

O70. Do the requirements to include counterparty credit risk and an entity’s

own nonperformance risk in measuring the fair values of derivative
instruments affect hedging relationships?
It depends. The requirements to include counterparty credit risk and an entity’s own nonperformance risk in
the fair value measurement of derivative instruments may affect hedging relationships.
820-10-35-17 For all hedges, changes in both counterparty credit risk and an entity’s own nonperformance risk affect the
[IFRS 13.42, measurement of changes in the fair value of a derivative hedging instrument. These changes likely will
9.6.4.1(c)(ii), B6.4.7, have no offsetting effect on the measurement of the changes in the fair value of the hedged item or
IAS 39.AG109, transaction attributable to the hedged risk. Therefore, the effectiveness assessment may be affected when
IG.F.4.3] it is based on a method that uses the hedging instrument’s fair value change.
815-20-25-102 – However, for cash flow hedges and hedges of net investments in foreign operations, the effectiveness
25-106 assessment ignores the potential effect of these changes unless it is no longer probable that the
counterparty or the entity itself will not default. If it is no longer probable that the counterparty or the
entity itself will not default, the entity generally will be unable to conclude that the hedging relationship is
expected to be highly effective and will be required to discontinue the hedging relationship.
815-20-25-102 – 25-117, In summary, the requirement to include counterparty credit risk and the entity’s own nonperformance
35-9 – 35-11 risk in the fair value of derivative assets and liabilities would:
815-20-35-14 – 35-18
• not affect the assessment of effectiveness in cash flow hedges, hedges of net investments in foreign
operations, and fair value hedges applying the shortcut method, unless it is no longer probable that the
derivative counterparty or the entity itself will not default; and
• affect the assessment of effectiveness in fair value hedges (excluding those applying the shortcut
method).
815-20-35-1 An entity with derivative instruments that are part of cash flow hedging relationships or hedges of net
investments in foreign operations records the entire change in the fair value of the derivative instrument
that is included in the assessment of effectiveness (including changes related to changes in counterparty
credit risk and the entity’s own nonperformance risk) in accumulated other comprehensive income
(AOCI) or cumulative transition adjustment (CTA). An entity with derivative instruments that are part of
fair value hedging relationships records the entire change in fair value of the derivative that is included
in the assessment of effectiveness (including changes related to changes in counterparty credit risk
and the entity’s own nonperformance risk) in earnings. Further, an entity with derivative instruments
that are in fair value shortcut method hedging relationships records the change in the fair value of the
derivative instrument (including changes related to changes in counterparty credit risk and the entity’s own
nonperformance risk) as part of the basis of the hedged item.

The following is a summary of hedging relationships and how each is affected by counterparty credit risk
and an entity’s own nonperformance risk in the assessment of effectiveness.

Cash flow hedges – Accounted for under long-haul

815-20-35-14 − 35-18 A general concept in Topic 815 related to cash flow hedges is that the hedging relationship must be
highly effective in achieving offsetting changes in the cash flows for the risk being hedged. Therefore,
one of the items that an entity must analyze and monitor is whether the counterparty to the derivative
will default by failing to make contractually required payments to the entity as scheduled in the derivative
contract. Concluding that the counterparty will not default is integral for an entity to determine that the
hedging relationship will be highly effective in achieving offsetting changes in the cash flows for the risk
being hedged.

Topic 815 further clarifies this general concept by stating that for cash flow hedges an entity must
consider the likelihood of the counterparty’s compliance with the terms of the derivative contract, and
analyze the effect of counterparty credit risk on the assessment of effectiveness. Although a change in
the counterparty’s creditworthiness would not necessarily indicate that it would default on its obligation,
the change would warrant further evaluation. Also, if it ceases to be probable that the counterparty will
not default, an entity would be unable to conclude that the cash flow hedging relationship is expected to
be highly effective in achieving offsetting cash flows.

In our view, based on this general concept of cash flow hedges, as long as it is probable that the
counterparty will not default, changes in counterparty credit risk would not affect the assessment of
effectiveness. Therefore, if there is a change in counterparty credit risk, but it is still probable that the
counterparty will not default, the change in counterparty credit risk would not cause the contractual cash
flows related to the derivative instrument to change. We also believe that it is appropriate for an entity to
ignore the effect of an entity’s own nonperformance risk in the assessment of effectiveness, assuming
that it is probable that the entity will not default.

Therefore, changes in counterparty credit risk and an entity’s own nonperformance risk would not affect
the assessment of effectiveness for cash flow hedges as long as it is still probable that neither the
derivative counterparty nor the entity will default. The entire change in the fair value of the derivative
instrument that is included in the assessment of effectiveness (including changes in counterparty credit
risk and an entity’s own nonperformance risk) would be included in AOCI.

However, if it is no longer probable that the counterparty or the entity will not default, the entity will be
unable to conclude that the hedging relationship is expected to be highly effective and will therefore be
required to discontinue the hedging relationship.

Cash flow hedges – Critical-terms match

815-20-35-10, 35-14
Under Topic 815, if an entity uses the critical-terms match method in a cash flow hedge, it must assess
whether there have been adverse developments related to the risk of counterparty default. If there are
no such developments and critical terms continue to match, the entity can conclude that there is perfect
effectiveness.

In our view, this guidance could be analogized to allow an entity to ignore its own nonperformance
risk in the assumption of perfect effectiveness. The degree of change in the risk of default should be
consistent with that under the long-haul method. Therefore, assuming that it is probable that neither
the counterparty nor the entity will default, changes in counterparty credit risk and the entity’s own
nonperformance risk will not affect the assessment of effectiveness and the entire change in the fair
value of the derivative instrument that is included in the assessment of effectiveness (including changes
in counterparty credit risk and an entity’s own nonperformance risk) would be included in AOCI.
815-20-35-12, 35-15 However, if it is no longer probable that the counterparty or the entity will not default, the entity will be
unable to conclude that the hedging relationship is expected to be highly effective and will therefore be
required to discontinue the hedging relationship.

Fair value hedges – Accounted for under long-haul or critical-terms match

815-20-35-16 Topic 815 states that a change in the counterparty’s creditworthiness of a derivative instrument in a fair
[IAS 39.95, AG109, value hedging relationship would impact the fair value of the derivative instrument and would therefore
IG.F.4.3, IFRS 9.6.5.8, have an immediate effect on:
B6.4.7]
• the assessment of effectiveness; and
• the amount of mismatch between the change in the fair value of the hedging instrument and the basis
adjustment, which mismatch is recognized in earnings.
Therefore, changes in either the counterparty’s creditworthiness or the entity’s own nonperformance risk
would need to be included in the assessment of effectiveness each period and would be recognized in
earnings.

While Topic 815 permits application of the critical-terms match method for fair value hedges, we believe
the FASB intended the method to apply only to hedging relationships that will be perfectly effective. This
has the practical effect of precluding the use of the critical-terms match method for fair value hedges in the
vast majority of circumstances because fair value hedges are rarely perfectly effective. There commonly
is not perfect effectiveness in fair value hedges because changes in both counterparty credit risk and an
entity’s own nonperformance risk affect the measurement of changes in the fair value of the derivative
hedging instrument. These changes commonly have no offsetting effect on changes in the measurement
of the hedged item attributable to the hedged risk.

Shortcut – Fair value or cash flow hedging relationships

815-20-25-102 − Topic 815 states that if a hedging relationship qualifies for the shortcut method, a change in the
25-104, 35-18 creditworthiness of the counterparty of the swap would not preclude the continued use of the shortcut
method.

In our view, this guidance could be analogized to allow an entity to ignore its own nonperformance risk in
the assumption of perfect effectiveness.

Therefore, consistent with Topic 820, perfect effectiveness is assumed and the shortcut method may
continue to be used as long as it continues to be probable that neither the counterparty nor the entity will
default. Therefore, changes in counterparty credit risk and the entity’s own nonperformance risk would
not affect the assessment of effectiveness. The changes in the fair value of the derivative instrument
related to counterparty credit risk and an entity’s own nonperformance risk would be included either in
AOCI for cash flow hedging relationships or in earnings for fair value hedging relationships. The same
amount would be used as a basis adjustment to the hedged item for fair value hedging relationships and
recognized in earnings.

However, if it is no longer probable that the counterparty or the entity will not default, the use of the
shortcut method must be discontinued.

Hedges of net investments in foreign operations

815-35 Net investment hedges are subject to the criteria of accounting for foreign currency transactions,16
which requires the hedging instrument to be designated and effective as an economic hedge of the net
investment.

Assuming that it is probable that neither the counterparty nor the entity will default, in our view changes
in counterparty credit risk and an entity’s own nonperformance risk would not affect the assessment of
whether the hedging instrument is effective as an economic hedge of the net investment.

The total change in the fair value of the derivative instrument that is included in the effectiveness
assessment (including changes in counterparty credit risk and an entity’s own nonperformance risk)
would be included in CTA.

However, if it is no longer probable that the counterparty or the entity will not default, the entity must
assess whether the hedging relationship has been and is expected to continue to be effective as an
economic hedge. In this situation, the entity would be expected to have strong evidence supporting why
the hedging relationship has been, and is expected to continue to be, effective as an economic hedge.

16. Subtopic 830-20, Foreign Currency Matters – Foreign Currency Transactions.

Interaction with the application of the portfolio measurement exception

820-10-35-18D, 35-18L If an entity has a group of derivative assets and liabilities with a particular counterparty and the entity
[IFRS 13.48, 56] applies the portfolio measurement exception to that counterparty’s credit risk (see Section L), the effect
of the entity’s net exposure to the credit risk of that counterparty or the counterparty’s net exposure to
the credit risk of the entity may result in a portfolio level credit risk adjustment.
820-10-35-18F However, hedge effectiveness is assessed on an individual hedging relationship basis. This means that
[IFRS 13.50] an entity is required to consider the effect of counterparty credit risk (or its own nonperformance risk)
on each individual hedging relationship when assessing hedge effectiveness. As a result, it may be
necessary to allocate a portfolio-level individual credit risk adjustment to individual hedging relationships.
This is summarized as follows.
• In cash flow hedges, hedges of net investments in foreign operations, and fair value hedges applying
the shortcut method, an allocation is generally not required. This is because an entity is permitted
to ignore the effects of changes in both counterparty credit risk and its own nonperformance risk
when assessing effectiveness, unless it is no longer probable that the derivative counterparty or the
entity itself will not default. If it is no longer probable that either party will not default, the hedging
relationship generally must be discontinued and, therefore, there is no hedging relationship to which
to make an allocation.
• In fair value hedges (excluding those to which the shortcut method is applied), an allocation generally
is required. In some situations, it may be possible for an entity to qualitatively evaluate whether it is
necessary to allocate the portfolio-level credit risk adjustment to individual hedging relationships.

In our view, the entity should adopt a reasonable and consistently applied methodology for allocating
credit risk adjustments determined at a portfolio level to individual derivative instruments for the purpose
of measuring the fair values of individual hedging instruments that are used in assessing effectiveness
when such allocations are necessary (see also Question L60).

Additionally, an entity may be required to allocate a portfolio-level credit risk adjustment to individual
hedging derivatives to properly account for the derivatives, even if such an allocation is not necessary for
assessing effectiveness.

IFRS Accounting Standards different from US GAAP

Under IFRS Accounting Standards, the analysis depends on whether the entity applies the hedge
accounting requirements of IAS 39 or IFRS 9.

Cash flow hedges – Long-haul method

[IAS 39.IG.F.4.3] Under IAS 39, if it ceases to be probable that a counterparty will not default, an entity would be unable
to conclude that the hedging relationship is expected to be highly effective in achieving offsetting cash
flows. As a result, hedge accounting would be discontinued.
[IFRS 9.6.4.1(c)(ii), Unlike US GAAP, under IAS 39, the effectiveness assessment of cash flow hedges may be affected
B6.4.7] by the inclusion of counterparty credit risk or an entity’s own nonperformance risk in the fair value
IAS 39.96, AG109, measurement of derivative hedging instruments, even if it is probable that neither the counterparty nor
IG.F.4.3, IG.F.5.2] the entity will default.
Unlike US GAAP, under IFRS 9, the hedge accounting model is based on a general notion of offset
between gains and losses on the hedging instrument and the hedged item. Therefore, the effect of credit
risk on the value of the hedging instrument affects hedge effectiveness. Furthermore, for the hedging
relationship to be effective, the effect of credit risk cannot dominate the value changes that result from
the economic relationship under the hedge.
[IAS 39.96, AG109, Unlike US GAAP, under both IAS 39 and IFRS 9, in a cash flow hedge, even if it is probable that neither
IG.F.4.3, IG.F.5.2, the counterparty nor the entity will default, the inclusion of counterparty credit risk or an entity’s own
IFRS 9.6.4.1(c)(ii), nonperformance risk in the fair value measurements of derivative hedging instruments may result in
6.5.11(a), B6.4.7] ineffectiveness being recognized in profit or loss. However, this only occurs if the cumulative gain or
loss on the hedging instrument is greater than the cumulative change in fair value (present value) of the
hedged item (i.e. the present value of the cumulative change in the hedged expected future cash flows)
from inception of the hedge.

Fair value or cash flow hedges – Critical-terms match

[IAS 39.AG108, Unlike US GAAP, under IAS 39, a critical-terms match method can be used both for fair value and cash
IG.F.4.7, IFRS flow hedges, but only for assessing prospective effectiveness. Under this method, if it is concluded
9.6.4.1(c)(ii), B6.4.7, that there is no change in any critical term, such a test would be sufficient to satisfy the prospective
B6.4.14] effectiveness testing requirements. However, the effect of credit risk should be considered.
Under IFRS 9, if the critical terms of the hedging instrument and the hedged item match or are closely
aligned, it may be possible to use only a qualitative methodology to determine whether an economic
relationship exists between the hedged item and the hedging instrument. However, the effect of
credit risk should be considered. The hedging relationship does not meet the hedge effectiveness
requirements if the effect of credit risk dominates the value changes that result from the economic
relationship.

Unlike US GAAP, an entity that uses the critical-terms match method for prospective effectiveness
assessment also should (under IAS 39 only) use a long-haul method for assessing retrospective
effectiveness and (under both IAS 39 and IFRS 9) measuring and recognizing ineffectiveness.

Shortcut – Fair value or cash flow hedging relationships

Unlike US GAAP, the shortcut method is not allowed under IFRS Accounting Standards.

Hedges of net investments in foreign operations

[IAS 39.AG109, Unlike US GAAP, under IAS 39, even if it is probable that neither the counterparty nor the entity will
IG.F.4.3, IFRS default, the inclusion of counterparty credit risk or an entity’s own nonperformance risk in the fair value
9.6.4.1(c)(ii), B6.4.7] measurements of derivative hedging instruments would affect the assessment of effectiveness and may
result in ineffectiveness.
Under IFRS 9, the effect of credit risk on the value of the hedging instrument affects hedge effectiveness
and may result in ineffectiveness. For the hedging relationship to be effective, the effect of credit risk
cannot dominate the value changes that result from the economic relationship under the hedge.

Interaction with the application of the portfolio measurement exception

Unlike US GAAP, for the purpose of assessing hedge effectiveness and measuring ineffectiveness
for all hedge relationships, the entity needs to determine the individual risk adjustments (e.g. credit
risk adjustments). The individual risk adjustments are used to calculate the fair values of the individual
hedging derivatives or the appropriate credit risk adjustment for a group of derivatives that have been
grouped together as the hedging instrument in a single hedging relationship. Like US GAAP, in our
view the entity should adopt a reasonable and consistently applied methodology for allocating credit
risk adjustments determined at a portfolio level to individual derivative instruments for the purpose of
measuring the fair values of individual hedging instruments that are used in assessing effectiveness and
measuring ineffectiveness.

P. Application issues:
Investments in investment
funds
Overview
• The general principles discussed throughout this Handbook apply equally to investments in
investment funds.
• This section explores some of the specific application questions that arise in relation to
investments in investment funds (including a fund-of-funds).
• For a discussion of the practical expedient available for investments in investment companies
that meet certain criteria, see Section Q.

P10. What factors should an entity consider in measuring the fair value of
an investment in an investment fund?
820-10-35-59 – 35-62 The fair value guidance in Topic 820 also applies to investments in investment funds. These considerations
include exit price, market participants, principal markets, market-based measurements and maximizing
the use of observable inputs. Considerations specific to measuring the fair value of an investment in an
investment fund include:
• the nature of the investment fund (open-ended versus closed-end funds);
• the underlying assets and liabilities of the fund;
• whether NAV may be representative of fair value;
• actual transactions in units with the fund and in the secondary market;
• overall market conditions;
• the expected future cash flows of the investment, appropriately discounted; and
• other rights and obligations inherent in the ownership interest.
Because the instrument held by the entity is an ownership interest in the fund and not an interest in the
underlying assets of the fund, any fair value measurement should consider the other rights and obligations
inherent in that ownership interest. Examples of these rights and obligations relevant to an ownership
interest in a fund include:

• limitations on redemption from the investment fund which are characteristics of the investment (e.g.
lock-up periods, notice periods for redemption, holdbacks17, gates18, use of side pockets19 and fund
sponsor approval to transfer the ownership interest);
• commitments to purchase additional ownership interests; and
• fees due to the fund sponsor (e.g. redemption and advisory fees).
Any adjustments for rights or obligations (or absence of rights or obligations) should be reflective of the
unit of account (see Section C).
820-10-35-60 In many situations, NAV may be an appropriate input in the fair value measurement of the investment. An
entity should consider any factors not reflected in the NAV measurement for the fund and adjust the NAV
measurement to arrive at fair value. If NAV is used as an input in an entity’s measurement of fair value
(with or without further adjustments), the entity should understand how NAV is calculated, including the
key inputs and valuation approaches and techniques used by the fund to value the underlying assets and
liabilities.

P20. When is the NAV of an investment fund representative of fair value?

The evaluation of whether NAV is representative of fair value encompasses two steps.
• The first step is to assess whether the NAV (or another price) is representative of a quoted price in an
active market.
• If there is not a quoted price in an active market, the second step is to assess whether the NAV is
representative of the fair value of the investment in the investment fund.
820-10-20 To assess whether the NAV is representative of a quoted price in an active market, an entity should
[IFRS 13.A] consider the manner in which the fund is traded. Often units in open-ended funds are traded only with the
fund or its agent at a published price, either NAV or NAV plus or minus an adjustment. Depending on the
trading volume at these prices, the published prices may represent a quoted price in an active market.
820-10-35-41, 35-41C If there is a quoted price in an active market for an investment in a fund (i.e. a Level 1 input), the quoted
[IFRS 13.77, 79] price is determinative of fair value, whether or not it is equal to the NAV. However, in some circumstances
an open-ended fund may suspend redemptions, in which case the published NAV would not represent a
quoted price in an active market.
In some circumstances, units in open-ended investment funds may be purchased or redeemed directly
with the fund at NAV and traded in a secondary market. Units or shares in a fund may trade in secondary
markets at a premium or discount to NAV because of supply and demand or other factors specific to the
fund (see Question P10). For example, units or shares may trade at a discount because a market participant
considers an investment in the fund less attractive than a direct investment in the underlying assets of
the fund. The investment may be less attractive due to the risk of investment management changes, fees
charged by the fund sponsor, the loss of control over portfolio management decisions, or lack of liquidity or
marketability of the investment. Conversely, market participants may be willing to pay a premium to invest
in a fund managed by a specific investment manager or when a fund is closed to new subscriptions.

17. A holdback provision permits an investment fund to temporarily retain a portion of an investor’s redemption proceeds.
18. A redemption gate provision allows an investment fund to restrict the amount of redemptions during a redemption period.
19. A side pocket account is typically used by an investment fund to segregate illiquid investments from more liquid
investments. Such accounts possess inherent limits on redemption due to the illiquid nature of the investments held in the
account.

820-10-35-54J Although secondary market trading may not be sufficient to constitute an active market, it is still important
[IFRS 13.B44] to consider any secondary market transactions and transaction prices because, regardless of the level
of market activity and trading volume, transaction prices that do not represent distressed or forced
transactions should not be ignored in measuring fair value. For further discussion of determining
transactions that are forced or not orderly, see Questions M30 and M40.
820-10-35-54J(b), Even in the absence of an active market (see Section M), NAV may represent the fair value of the
35-60, 50-6A investment in the investment fund.
[IFRS 13.B44(b)]
However, the following situations may indicate that NAV may not be representative of fair value.
• NAV is not dated as of the entity’s measurement date.
• NAV is not calculated in a manner consistent with the fair value measurement principles of Topic 820
(e.g. debt is measured at amortized cost).
• The investment cannot currently be redeemed at NAV (e.g. some open-ended funds may suspend
redemptions).
• There is a significant decrease in the volume and level of activity of subscriptions or redemptions
compared to normal market activity.
• The investment is traded in a secondary market at a significant discount or premium to NAV.
• There are other uncertainties that increase the risk of the investment (e.g. deteriorated financial
condition of the investment manager, loss of key investment personnel, allegations of fraud or
noncompliance with laws and regulations).
• There are other terms attached to the investment (e.g. a commitment to make future investments).
820-10-35-60, 35-62 It also may be important to consider the nature and reliability of the evidence that supports the calculation
of NAV.

P25. When measuring the fair value of its investment, can an investor
adjust the daily NAV (that is a Level 1 input) reported by an unrelated
investment fund, following an adjustment to that NAV in the fund’s
financial statements?
No. As discussed in Question P20, an investor may deem the published NAV of an unrelated investment
fund to be representative of fair value if it represents a quoted price in an active market for the investment
(i.e. a Level 1 input). In this scenario, market participants buy units from or sell units to the fund at a price
equal to the fund’s current reported NAV, which is published daily (‘published NAV’).

However, a difference may arise between the published NAV at the measurement date of the investment
and the NAV subsequently reported by the fund for that same date for its financial statements (‘adjusted
NAV’). For example, a difference might result from an adjustment of an accounting estimate made by
the fund in the course of preparing its financial statements that would have been unknown to market
participants at the measurement date. A question arises over whether the investor should adjust the fair
value measurement of its investment based on the adjusted NAV if the investor has no right to receive or
obligation to pay compensation for the difference between the published NAV and the adjusted NAV.
820-10-35-41, 35-41C The investor should not adjust the fair value of its investment in the fund at the measurement date for the
[IFRS 13.77, 79] difference between the published NAV and the adjusted NAV. This is because any valuation that has as its
objective fair value at the reporting date should not reflect information that neither was nor would have
been reasonably available to market participants at that date. If a market participant had sold units in the
fund at the measurement date, it would have received proceeds equal to the published NAV without
adjustment. By definition, a Level 1 input is an unadjusted quoted price and should not be adjusted except
under specific circumstances (see Section G).
This conclusion assumes that the adjustment to the published NAV relates only to the valuation of the
units held. It would not apply if the adjustment was related to subsequent information that questioned the
existence of the units.
See Question Q80 for guidance on when it may be appropriate for an entity to adjust the NAV reported by
an investment fund when the entity uses NAV as a practical expedient to estimate fair value.

Example P25: Subsequent adjustment to the reported NAV

Investor B holds an investment in an open-ended mutual fund (MF). MF is not related to Investor B and
they transact on an arm’s-length basis.
Units in MF are traded only with MF (or its agent) at a published price which is MF’s daily NAV. The trading
volume is such that the reported NAV represents a quoted price in an active market. The published
NAV at December 31, 20X1 (i.e. Investor B’s reporting date) is 100. Subsequent to year-end but before
Investor B issues its financial statements, MF identifies an accounting adjustment that requires it to
revise the NAV of its units in its financial statements as of December 31, 20X1. The adjusted NAV at
December 31, 20X1 is 100.4. Investor B is not entitled to compensation for the adjusted NAV.
Investor B should use the published NAV of 100 as of December 31, 20X1 to measure the fair value of its
investment in the fund’s units.

P30. If open-ended redeemable funds do not allow daily redemptions at NAV,

is NAV representative of fair value?
It depends. If an open-ended redeemable fund does not allow daily redemptions at NAV, but allows, and
actually has, periodic subscriptions and redemptions at NAV, their existence may provide evidence that
NAV approximates fair value.
In our experience, NAV would usually be representative of the fair value of investments in open-ended
investment funds that are open to new investors and allow redemptions at NAV. In such cases, it is not
expected that a market participant would be willing to pay more than the NAV because it is possible to
invest directly in the fund or to redeem the investment at NAV.
In addition, new subscriptions to a fund at its reported NAV on or near the entity’s measurement date may
provide evidence that market participants are currently not requiring a discount to NAV or paying a premium
above NAV.
Similarly, redemptions from the fund at its reported NAV on or near the entity’s measurement date may
provide evidence that market participants are currently not demanding a premium over NAV or selling
at a discount to NAV. If both subscriptions and redemptions have occurred at NAV near the entity’s
measurement date for its investment in the fund, evidence may exist that NAV approximates fair value.
820-10-35-54J(b) In determining whether NAV approximates fair value, the weight placed on the evidence provided by
[IFRS 13.B44(b)] subscriptions and redemptions should consider:
• market changes since the transaction activity occurred;
• the volume of both subscriptions and redemptions;
• the extent to which subscriptions were received from new investors; and
• limitations or expected limitations on the entity’s ability to redeem in the future.
However, if no subscriptions and redemptions have occurred close to the reporting date, an assertion that
fair value approximates NAV may be more difficult to support.

P40. Does the sale or purchase of an investment in the fund at a discount to

NAV indicate that the transaction is not orderly?
820-10-35-2E It depends. When an entity carries its investment in a fund at fair value, it considers all of the inherent
[IFRS 13.14] rights and obligations in measuring its fair value. This may result in a fair value measurement that differs
from the NAV of the investment in the fund.
820-10-20, 35-54I, 35-60 Therefore, the existence of a discount between the NAV reported by a fund and an entity’s transaction
[IFRS 13.A, B43] price to sell or purchase the investment does not, in and of itself, result in the transaction being considered
not orderly. For example, if the transaction occurred with adequate exposure to the market, with a
customary marketing period, and did not occur under duress, it is likely that the transaction would be
considered orderly.
For a discussion of inactive markets, see Section M.

P50. What does an entity consider in determining the level of the fair value
hierarchy in which an investment in a fund should be categorized?#
820-10-35-2E When the interest in the fund is the unit of account, the characteristics of the interest in the fund, not the
[IFRS 13.14] underlying investments, should be considered in determining its level in the fair value hierarchy. Therefore,
the measurement of fair value takes into account the rights and obligations inherent in that ownership
interest (e.g. an obligation by the entity to meet future cash calls made by the fund). The entity considers
any such obligations inherent in the ownership interest in its measurement of fair value.
820-10-35-41, 35-41C The fair value measurement for an investment in a fund in which ownership interests in the fund are
[IFRS 13.77, 79] publicly traded in an active market should be based on the quoted price of the fund, a Level 1 input, if this
price is available and accessible.
820-10-20, 35-41C The units in open-ended redeemable funds are often bought and sold, but only by or to the fund or fund
[IFRS 13.A, 79] manager; the units are not traded on an exchange and cannot be sold to third parties. Because the fund
is not listed, the fund calculates the price of the units only at a specific time each day to facilitate the
daily subscriptions and redemptions of units. These transactions also may only take place at a specific
time on each day and at the price determined by the fund manager. The fair value of the units may be the
price calculated by the fund manager. Whether this is a Level 1 measurement will depend on whether the
market is considered active and whether there were significant events that took place after the time of
calculation on the measurement date.
820-10-20, 35-40 If the number of trades occurring is sufficient for the market in these units to be considered an active
[IFRS 13.A, 76] market, notwithstanding that the units are being purchased and sold by the fund and are not being
traded between unrelated third-party market participants, a fair value measurement of the units using the
unadjusted daily price for the reporting date would be categorized as a Level 1 measurement. However, if
there is a quoted price but the number of trades occurring is not sufficient for the market in these units to
be considered active, a fair value measurement of the units using the unadjusted price for the reporting
date would not be categorized as Level 1 in the fair value hierarchy.
820-10-35-37A, 35-38A, If NAV does not represent a quoted price, it may continue to be used as an appropriate input for fair value
35-54B – 35-54C measurement purposes. The appropriate categorization of the resulting fair value measurement within the
[IFRS 13.73, 75] fair value hierarchy will be within Level 2 or Level 3 based on the observability and significance of:
• the fair values of the underlying investments; and
• any adjustments for rights and obligations inherent within the ownership interest held by the entity,
including the frequency with which an investor can redeem investments in the fund.
820-10-35-38A Because many of the NAV adjustments mentioned above will be based on unobservable inputs, the
[IFRS 13.75] resulting fair value measurements that are subject to such adjustments generally are Level 3
measurements, unless those inputs are not significant to the measurement as a whole.

Q. Application issues: Practical

expedient for investments
in investment companies
[US GAAP only]
Overview
Topic 820 allows an entity to use NAV as a practical expedient to estimate the fair value when the
investment:
• does not have a readily determinable fair value; and
• is in an investment company in the scope of Topic 946, Investment Companies, or is an
investment in a real estate fund for which it is industry practice to measure investment assets
at fair value on a recurring basis and to issue financial statements that are consistent with the
measurement principles of Topic 820.

IFRS Accounting Standards different from US GAAP

Unlike US GAAP, IFRS Accounting Standards do not include an exception that allows the use of NAV as
a practical expedient. Under IFRS Accounting Standards, an entity may only measure investments on
the basis of NAV when NAV is representative of fair value (see Questions P20 and P30). Therefore, the
questions in this section are only relevant to US GAAP.

Q10. For the purpose of using NAV as a practical expedient, what is the
definition of readily determinable?
ASC Master Glossary, An equity security has a readily determinable fair value if it meets any of the following conditions.
820-10-15-5

(1) Sales prices or bid and ask quotations are currently available on a securities exchange registered with
the SEC or in the OTC market, provided that those prices or quotations for the OTC market are publicly
reported by the National Association of Securities Dealers Automated Quotations systems or by OTC
Markets Group Inc. Restricted stock meets that definition if the restriction terminates within one year.
For restrictions expiring after one year, the use of NAV as a practical expedient is prohibited if the
investment would otherwise have a readily determinable fair value except for that restriction.

(2) For an equity security traded only in a foreign market, that foreign market is of a breadth and scope
comparable to one of the US markets referred to in (1). We believe there is a rebuttable presumption
that the primary exchange in a foreign market has the breadth and scope comparable to one of the US
markets referred to in (1).
(3) For an equity security that is an investment in a mutual fund or a structure similar to a mutual fund
(i.e. a limited partnership or venture capital entity), the fair value per share (unit) is determined and
published and is the basis for current transactions.
The criteria for determining whether an equity security has a readily determinable fair value are only
intended to evaluate whether the NAV practical expedient can be applied to that equity security. The
‘readily determinable fair value’ analysis does not apply to or influence other areas of Topic 820 (e.g. fair
value hierarchy classification or determining whether there is an active market).

Q15. When would an equity security that is an investment in a structure

similar to a mutual fund have a readily determinable fair value?
ASC Master Glossary It depends. Condition (c) in the Master Glossary definition of readily determinable fair value (RDFV)
specifies that investments in fund types other than mutual funds (e.g. common or collective trust
funds, pooled separate accounts, money market funds and certain private open-ended investment
companies) have an RDFV when certain criteria are met (see Question Q10). The analysis of the RDFV
criteria in condition (c) should be characteristics-based and not form-based. All relevant characteristics
of an investment should be considered when making a determination. The application of judgment and
consideration of all facts and circumstances are necessary when determining whether these three criteria
are met:
(1) the investment is in a structure similar to a mutual fund;
(2) the fair value per share or unit is determined and published; and
(3) the fair value per share or unit is the basis for current transactions.

Structure similar to a mutual fund

The characteristics that should be considered when determining if an investment has a structure similar to
a mutual fund include:
946-20-05-1B (a) a mutual fund is an open-ended fund that issues redeemable securities. A mutual fund stands ready to
issue and buy back its shares or units at its most recently calculated NAV;
946-320-25-4 (b) a mutual fund typically determines the NAV of its shares or units when it receives an order to purchase
or sell its shares or units. NAV is the price per share or unit at which the mutual fund offers to transact;
it is not a price resulting from a transaction between buyers and sellers on an exchange;
(c) a mutual fund will make the NAV available to the general public or to its current or prospective
investors on request;
(d) a mutual fund processes subscription or redemption requests received before the close of business
at the current NAV per share or unit, and generally has to pay redemption proceeds at NAV to a
shareholder or unitholder within seven days of receiving a redemption request from the shareholder or
unitholder; and

946-10-15-4 (e) a mutual fund is an investment company that applies specialized industry guidance in Topic 946,
Financial Services--Investment Companies.
This list is not exhaustive, nor is it meant to be used as a checklist in determining if an investment is in a
structure similar to a mutual fund.

Published
The Master Glossary does not define ‘published’. We believe that it means that investors can obtain price
quotes from brokerage or investment firms or their websites or directly from their sponsor or agent on
any day that a fund offers to transact. We do not believe that a fund needs to make its NAV available to the
general public to meet the definition of published.

Basis for current transactions

Transactions using a fund’s current NAV are the best indicator that it is the basis for current transactions.
We believe that a fund that determines, publishes and transacts at the current NAV per share at least
monthly would generally be consistent with having a fair value per share or unit that is the basis for current
transactions. As the determination of NAV becomes less frequent, significantly more judgment and
consideration of all relevant facts and circumstances may be necessary to conclude that it is the basis for
current transactions.
Certain funds may place restrictions on transactions. However, the determination of whether an
investment in a structure similar to a mutual fund has an RDFV is not influenced by any one investor’s
ability to transact on any given day. Instead, the determination is focused on whether the fund publishes its
NAV and it is the basis for current transactions.

Q20. What should an entity consider in determining whether NAV reported

by the investee may be relied on?
Determining that reliance on the reported NAV as a practical expedient is appropriate requires professional
judgment. All factors relevant to the value of equity investments for which market quotations are not
readily available should be considered.
820-10-35-59 Before concluding that the reported NAV is calculated in a manner consistent with the measurement
principles of Topic 946, Investment Companies, the entity should consider whether the investee fund’s
policies and procedures for estimating fair value of underlying investments, and any changes to those
policies or procedures, follow the guidelines of Topic 820.
If the last reported NAV is not as of the entity’s measurement date, see Question Q80.
820-10-35-59 – 35-62 When the entity invests in a fund-of-funds (i.e. the investee fund invests in other funds) that does not have
readily determinable fair values, the entity might conclude that the NAV reported by the fund-of-funds
manager is calculated in a manner consistent with Topic 946. This conclusion can be made by assessing
whether the fund-of-funds manager has a process that considers the previously listed items in the
calculation of the NAV reported by the fund-of-funds, and considering whether the fund-of-funds manager
has obtained or estimated NAV from underlying fund managers in a manner consistent with Topic 820 as of
the measurement date.

Q30. Can the practical expedient be used when NAV is reported on a tax
or cost basis?
820-10-35-59 No. Funds that use the tax or cost basis of reporting NAV would not satisfy the criteria to qualify for the
practical expedient. Therefore, the use of an NAV would require an adjustment for non-GAAP measures.

Q35. Can the practical expedient be used when NAV is reported under
IFRS Accounting Standards?
820-10-15-4, 35-59 It depends. An entity might invest in an investment company in the scope of Topic 946, Investment
Companies or a qualifying real estate fund that applies IFRS Accounting Standards as its reporting
framework. For the purpose of the entity’s financial statements, the criteria to qualify for the practical
expedient might be satisfied if the measurements in the investee’s financial statements are consistent with
the measurement principles of Topic 946.
820-10-35-59 – 35-60 If the NAV reported by the investee is not (1) determined as of the measurement date or (2) calculated
in a manner consistent with the measurement principles of Topic 946, the entity considers whether an
adjustment to the most recent NAV is necessary (see Question Q80). The objective of any adjustment is
to estimate the NAV for the investment that is calculated in a manner consistent with the measurement
principles of Topic 946 as of the reporting entity’s measurement date.
820-10-35-54B Investments for which fair value is measured using the NAV practical expedient, including adjustments to
the investee’s reported NAV for the two instances described above, are not categorized in the fair value
hierarchy. However, if an entity makes adjustments to the investee’s reported NAV for reasons other
than the two instances described above, the investment is no longer measured using the NAV practical
expedient (i.e. the investment is measured at fair value) and must be categorized in the fair value hierarchy
(see Question Q85).

Q40. Is the use of NAV to estimate fair value required when the criteria are
met?
820-10-15-4 −15-5, No. The practical expedient is not a required measurement technique. It is an optional alternative to
measuring fair value for those investments that meet specified conditions. An entity decides on an
investment-by-investment basis whether to apply the practical expedient. The practical expedient would be
applied to the fair value measurement of the entity’s entire position in an investment unless it is probable
(see Question Q50) as of the measurement date that a portion of the investment will be sold at an amount
other than NAV in a secondary market.

Q45. Can an entity change between the practical expedient and other
measures of fair value to estimate fair value between reporting
periods?
820-10-35-25 It depends. Topic 820 does not address the circumstances and how often an entity can change between
the practical expedient and other measures of fair value once the measurement method is selected. In our
view, it should be applied consistently for all periods in which the investment is held. However, we believe
that a change between the practical expedient and other measures of fair value is similar to a change in a
valuation technique or its application. The change is appropriate if it results in a measurement that is more
representative of fair value.
820-10-35-25 For example, a new measurement of fair value may be appropriate in the following circumstances:
• new markets develop;
• new information becomes available;
• information previously used is no longer available;
• valuation techniques improve; and/or
• market conditions change.
If subsequent to an entity’s election to apply the practical expedient to a particular investment, the entity
determines that the investment, or a portion of the investment, is probable of being sold at an amount
other than NAV, the practical expedient can no longer be applied (see Questions Q50 and Q60). Revisions
to fair value measurements resulting from a change from the practical expedient to other measures of
fair value should be accounted for as a change in accounting estimate (similar to changes in a valuation
technique or its application).
820-10-35-61, Further, the disclosure provisions of Topic 250, Accounting Changes and Error Corrections for changes in
820-10-35-26, accounting estimates are not required for revisions to fair value measurements resulting from a change
250-10-50-5 from the practical expedient to other measures of fair value.
250-10-45-1 Generally, using NAV as a practical expedient to estimate fair value is less precise than other measures of
fair value. We believe that it would be rare for entities to change from another valuation technique to using
NAV as a practical expedient. Such a change would represent a change in accounting principle under Topic
250.

Q50. When is a sale for an amount other than NAV in a secondary market
transaction considered probable?
820-10-35-62 A secondary market transaction includes all transactions in the normal course of business that could result
in the sale of the interest (e.g. principal-to-principal transactions between private market participants). A
sale for an amount other than NAV in a secondary market transaction is considered probable if all of the
following conditions are present as of the entity’s measurement date:
• management commits to a plan to sell the investment and has the authority to approve the action;

• an active program to locate a buyer and other actions required to complete the plan to sell the
investment have been initiated;
• the investment is available for immediate sale subject only to terms that are usual and customary for
sales of such investments (e.g. a requirement to obtain the investee’s approval of the sale); and
• actions required to complete the plan indicate that it is unlikely that significant changes to the plan will
be made or that the plan will be withdrawn.
360-10-45-9, These criteria are similar to those used in assessing whether long-lived assets are held for sale under Topic
820-10-35-62 360, Property, Plant and Equipment, except there is no requirement to consider whether the sale will
occur within a stated period or to assess the reasonableness of the sales price compared to its fair value.
Although the criteria under Topic 360 are not listed as conditions in Topic 820, they may provide some
evidence about whether the sale is probable by determining whether significant changes to the plan to sell
will be made or possibly withdrawn.
In our experience, the greater the current market sales price over the current estimated fair value or the
greater the time period estimated to dispose of the investment, the greater the likelihood of significant
changes to the plan or withdrawal of the plan. If these indicators exist, the investment may not meet the
conditions of probable-of-being-sold.

Q60. When a portion of an entity’s investment is probable of being sold, how

is the practical expedient applied?
820-10-35-61 When a portion of an investment is probable of being sold, the practical expedient may continue to be
applied to the portion that is not probable of being sold. The portion to be sold is measured at fair value
under Topic 820. As a result, the entity may have two different measurements for investments in the
same investee.
In our view, for a group of investments that meet the criteria of probable-of-being-sold (see Question Q50),
except that the individual investments in a group have not been identified (e.g. if an entity decides to
sell 20% of its entire private equity portfolio and the probable-of-being-sold criteria would be met if the
individual investments were identified), the practical expedient can continue to be used to measure the fair
value of the entire portfolio until the individual investments are identified and the individual investments
meet the probable-of-being-sold criteria. However, when the individual investments have been identified,
the entity must measure the fair value of the investments under Topic 820, excluding the NAV as a
practical expedient.

Q70. [Not used]

Q80. Can an entity adjust the NAV reported by the investee?

820-10-35-59 – 35-60 It depends. Topic 820 addresses two instances in which an adjustment to the NAV reported by the investee
may be appropriate when the:
• investee’s reporting date for NAV is different from the entity’s reporting date; and
• NAV reported by the investee was not calculated in a manner consistent with the measurement
principles of Topic 946, Investment Companies.

Reported NAV is as of a date different from the entity’s financial reporting date
820-10-35-60 An entity may use the practical expedient based on the latest NAV reported by the investee, adjusted
for market changes that have occurred between the date the investee last calculated NAV and the
entity’s reporting date. The nature of the investments held by the investee, the period of time from the
last calculated NAV and changes in both the broad economy and the market for similar investments will
determine the extent of the entity’s potential adjustments. In some cases, the entity may need to involve
the management of the investee to determine possible changes in the NAV that have occurred since the
investee’s last NAV reporting date.
For example, funds investing in real estate may go longer than other funds without remeasuring fair
value, but these investments typically will have less volatility in fair values over short periods of time.
Therefore, significant adjustments may not be necessary unless specific events have occurred. In contrast,
investees that hold significant underlying investments in debt and equity securities may experience
substantial changes in market prices during short periods of time. The information needed to determine the
adjustments may be obtained from market prices for those significant underlying investment positions held
by the investee as of the entity’s measurement date as well as analysis of market trends and changes in
relevant indices.

Reported NAV not calculated in a manner consistent with measurement principles of Topic 946
820-10-15-4 – 15-5, If the entity has met the conditions to use the practical expedient under Topic 820, but the investee’s
35-60 reported NAV is not calculated consistent with Topic 946, Investment Companies, the entity is required to
adjust for all significant differences between the NAV calculated and reported by the investee and the NAV
that would be calculated in accordance with Topic 946. Examples of possible adjustments to be recorded
as of the reporting date may include:
• recording investments at fair value;
• changes in security positions on a trade-date basis;
• reflecting shares outstanding due to sales and repurchases;
• recognizing expenses, interest and other income;
• allocations of net assets between classes of the fund; and
• other adjustments to reflect the financial statements on the accrual basis of accounting.
To calculate and apply the appropriate adjustments to the investee’s reported NAV, the entity needs an
understanding of the investee’s significant accounting policies and must have sufficient information to
conform those policies to Topic 946, Investment Companies.
The entity also should consider the effect of the adjustments on its proportionate share of NAV to ensure
the adjustments are appropriately applied to its investment interest. For example, if the entity’s interest in
a fund is part of a waterfall structure, the entity should determine that any necessary adjustments to the
underlying assets to conform their measurements to Topic 946 are appropriately considered in light of the
waterfall rights and obligations.

Q85. How should investments be categorized within the fair value hierarchy
when an entity has adjusted the NAV reported by the investee?
820-10-35-59 – 35-60 It depends. Question Q80 discusses two instances in which an adjustment to the NAV reported by the
investee may be appropriate:
• when the investee’s reporting date for NAV is different from the entity’s reporting date; and
• when the NAV reported by the investee was not calculated in a manner consistent with the
measurement principles of Topic 946, Investment Companies.
820-10-35-54B, 35-37, Investments for which fair value is measured using the NAV practical expedient, including any adjustments
35-37A to NAV for the two instances described above, are not categorized in the fair value hierarchy. However,
if an entity makes adjustments to the NAV for reasons other than the two instances described above,
the investments are no longer measured using the NAV practical expedient and the investments would
be categorized in the fair value hierarchy based on the lowest level input that is significant to the entire
measurement (see Question P50).

Q90. What is the unit of account for investments in investment companies

when the entity applies the practical expedient?
820-10-35-59 The unit of account is the share or its equivalent of the investee entity. Examples of share equivalents
include members’ units or partnership interests to which net assets can be proportionately allocated. The
NAV per share multiplied by the number of shares represents the extended value of the investment.
In practice, NAV per share may not be specifically reported by an investee that otherwise meets the criteria
(including reporting investments on a fair value basis) for the entity to elect the practical expedient. In our
view, these cases do not preclude the entity from electing the practical expedient. The entity can calculate
the NAV per share (essentially arriving at P in a PxQ relationship) using financial information reported by the
investee.

Q100. How should an entity applying the practical expedient account for a
purchase for an amount that is different from its currently reported
NAV?
Topic 946 If the purchase price is different from NAV, an entity should evaluate whether the recorded NAV is
consistent with the measurement principles in Topic 946, Investment Companies. If it is, the entity should
recognize the difference resulting from purchases at a discount or premium to NAV as an unrealized gain or
loss in the period in which the investment is purchased.

Q110. [Not used]

Q120. What disclosures are required for investments measured using the
practical expedient?
820-10-15-4, 35-54B, The general disclosures required for fair value measurements (see Section N) are not required for
50-6A investments measured using the NAV practical expedient. However, additional disclosures are required to
help users understand the nature and risks of the investments and whether the investments, if sold, are
probable of being sold at amounts different from NAV per share (or its equivalent). They include information
about the investees’ significant investment strategies, redemption conditions and the entity’s unfunded
commitments related to the investees.
820-10-35-54B Because the practical expedient of using NAV is not the same as fair value, the carrying amounts of
investments measured using the practical expedient are described in the financial statement disclosures
as being reported at NAV under the practical expedient for fair value. This will enable users to reconcile the
fair value of investments included in the fair value hierarchy disclosures, and the total investments in the
statement of financial position.

Q130. What information about redemption conditions is required to be

disclosed for investments measured using the practical expedient?
820-10-50-6A For investments that are measured using the practical expedient, entities are required to disclose
information that helps users of the financial statements understand the nature and risks of the
investments, which includes conditions of redemption. Entities are required to disclose the following
redemption conditions for each class of investment:
• a general description of the terms and conditions on which the investor may redeem investments in the
class;
• the circumstances in which an otherwise redeemable investment in the class (or a portion thereof) might
not be redeemable; and
• any other significant restriction on the ability to sell investments in the class at the measurement date.
The following redemption conditions are required to be disclosed only if they are communicated by the
investee or announced publicly:
• for investments that can never be redeemed with the investees, the timing of liquidation of an investee’s
underlying assets for distributions to the entity; and
• for otherwise redeemable investments that are restricted from redemption as of the measurement date,
the timing of when a restriction from redemption might expire.
If the timing of either of these conditions is unknown, entities should disclose that fact and how long
the restriction has been in effect. In our experience, an investment’s redemption condition changes
periodically. Entities should only disclose the timing of either of these conditions if it is based on a recent
communication or announcement by the investee.

R. Application issues: Contractual

sale restrictions**
[US GAAP only]
Overview
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject
to Contractual Sale Restrictions, which:
• clarifies that a contractual restriction on the sale of an equity security is an entity-specific
characteristic and therefore should not be considered in measuring the security’s fair value;
• clarifies that a contractual sale restriction is not a separate unit of account and should not be
recognized separately (i.e. as a contra-asset or separate liability);
• requires new disclosures for all entities with equity securities that are subject to contractual
sale restrictions (see Question N20); and
• includes a new cross-reference in paragraph 820-10-35-16D that makes this new guidance
also relevant for issuers of equity securities that measure them at fair value (e.g. in a business
combination; see Question K50).

IFRS Accounting Standards compared to US GAAP

820-10-35-2B Similar to US GAAP, IFRS Accounting Standards require an entity to determine whether a restriction
[IFRS 13.11] on the sale or transfer of an asset should be considered when measuring its fair value (i.e. whether
the restriction is security-specific or entity-specific). US GAAP specifically indicates that a contractual
restriction on the sale of an equity security is an entity-specific characteristic and therefore should not be
considered in measuring fair value. However, IFRS Accounting Standards do not explicitly indicate that a
contractual restriction on the sale of an equity security is an entity-specific characteristic.

R10. What are contractual sale restrictions?**

820-10-55-52A, Contractual sale restrictions are any contractual arrangements in which certain shareholders agree not to
ASU 2022-03.BC9 sell securities for a specified period of time. The following are examples.
• Underwriter lock-up agreements or market standoff agreements executed in conjunction with initial
or secondary public offerings to prohibit the sale of equity securities owned by certain investors
(see Question C40).
• Contractual restrictions included in other capital-raising transactions that do not involve an underwritten
offering, such as private placements, private investments in public equity and business combinations
involving a special-purpose acquisition company.

R20. Should an entity consider contractual sale restrictions when

identifying the principal (or most advantageous) market for equity
securities?**
820-10-35-6B No. Although an entity needs to be able to access the market, it does not need to be able to transact in
the market at the measurement date to measure the fair value on the basis of the price in that market
(see Section E). Therefore, a contractual sale restriction on an equity security does not change the principal
(or most advantageous) market for that security.

R30. Is the guidance on contractual sale restrictions limited to equity

securities with active markets (that is, Level 1 equity securities)?**
ASU 2022-03.BC10 No. The guidance on contractual sale restrictions should be applied in the same way by an entity when
measuring the fair value of equity securities in accordance with Topic 820, irrespective of the valuation
technique the entity uses or how the fair value measurement is categorized within the fair value hierarchy.

R40. Can contractual sale restrictions be considered in fair value

measurements of financial instruments other than equity securities?**
820-10-35-36B, No. The guidance for contractual sale restrictions specifically addresses equity securities, which includes
ASU 2022-03.BC9 any security representing an ownership interest in an entity (e.g. common, preferred or other capital stock)
and the right to acquire or dispose of an ownership interest in an entity at fixed or determinable prices
(e.g. warrants, rights, forward purchase contracts, call options, put options, and forward sale contracts).
However, other types of financial instruments, such as debt securities or derivatives, may also contain
contractual sale restrictions. We believe that the guidance on contractual sale restrictions for equity
securities should be applied by analogy to other types of financial instruments because contractual sale
restrictions are entity-specific characteristics and should not be considered in the unit of account of those
financial instruments. Therefore, contractual sale restrictions on other types of financial instruments also
should not be considered in measuring their fair values under Topic 820 (see Question C30).

R50. Can contractual sale restrictions be considered in fair value

measurements by the issuers of equity securities?**
820-10-35-16D, 35-18B No. When measuring the fair value of a liability or an equity instrument held by another party as an asset,
if that asset contains a characteristic restricting its sale, the fair value of the corresponding liability or
equity instrument also would include the effect of the restriction (see Section K). The guidance in Topic
820 for measuring the fair value of a liability or an equity instrument held by another party as an asset
includes a cross-reference to the guidance on contractual sale restrictions. This cross-reference implies that
issuers of equity securities that are party to contractual sale restrictions apply similar guidance. Therefore,
because contractual sale restrictions are excluded from the fair value of equity securities held as an asset,
we believe that they are similarly excluded from fair value measurements by the issuers of those equity
securities.
For example, a reporting entity may issue equity securities as consideration for the purchase of a business.
Under Topic 805, Business Combinations, these securities are measured at fair value to determine the
purchase consideration. If there are contractual sale restrictions that prevent the shareholders from selling
these securities, the issuer of the securities would not consider the restrictions in measuring the fair value
of the consideration transferred in the business combination.

R60. Should the issuer of equity securities with contractual sale restrictions
adjust amounts from a previous business combination when initially
adopting ASU 2022-03?**
ASU 2022-03.BC21 No. Before ASU 2022-03, there was diversity in practice as to whether contractual sale restrictions were
considered security-specific or entity-specific characteristics. Therefore, in previous business combinations,
a reporting entity may have considered contractual sale restrictions when measuring the fair value of equity
securities issued as consideration. Upon adoption of ASU 2022-03, an entity should not revise the carrying
amount of an asset or a liability that was previously measured at fair value on a nonrecurring basis if the
measurement date occurred before the adoption date. Similarly, we believe that it would not be appropriate
to adjust amounts from a previous business combination and remeasure consideration transferred (and
therefore goodwill) as part of adopting ASU 2022-03.

R70. What is the transition guidance for the adoption of ASU 2022-03?**
820-10-65-13, ASU 2022-03 is effective for fiscal years, including interim periods within those fiscal years, beginning
ASU 2022-03.BC20-23 after December 15, 2023 for public business entities and beginning after December 15, 2024 for all other
entities. Early adoption is permitted. All entities, except those that meet the definition of an investment
company under Topic 946, Investment Companies, apply ASU 2022-03 to all equity securities with
contractual sale restrictions prospectively, with the change in accounting policy reflected as an adjustment
to current period earnings.
In contrast, investment companies that hold equity securities with contractual sale restrictions entered
into or modified before the adoption date will continue to apply their existing accounting policy until those
restrictions either expire or are modified. Therefore, if investment companies currently have an accounting
policy to apply a discount in determining the fair values of equity securities with contractual sale
restrictions, they will continue to apply a discount for equity securities with existing restrictions, but will
not apply a discount for equity securities with restrictions entered into or modified after the adoption date.
Investment companies are required to apply the requirements of ASU 2022-03 as an adjustment to current
period earnings when the restrictions are modified.
Investment companies have specialized transition guidance because of the direct effect that ASU
2022-03 will have on the computation of their net asset values. Without this transition period, investment
companies may be reporting significant unrealized gains on the adoption date that would disproportionately
affect transaction values based on those net asset values. This specialized transition guidance is intended
to avoid non-market-based volatility on the computation of net asset values and to help minimize the effect
of adoption of the ASU by applying only to securities entered into or modified after the adoption date.

R80. What disclosures are required for entities that hold equity securities
which are subject to contractual sale restrictions?**
820-10-50-6B, 50-1D An entity should disclose the following information if it holds equity securities that are subject to
contractual sale restrictions:
• the fair value of equity securities subject to contractual sale restrictions;
• the nature and remaining duration of the restriction(s); and
• circumstances that could cause a lapse in the restriction(s).

Entities with multiple investments in equity securities subject to contractual sale restrictions should
determine the appropriate level of disaggregation for their disclosure (see Question N35). Equity securities
that are restricted from sale because they are pledged as collateral and are already subject to other
disclosure requirements are excluded from the above disclosure requirements. We believe that these
disclosure requirements are applicable to both recurring and nonrecurring fair value measurements.
820-10-65-13(d), 65-13(e) In addition to the above disclosure requirements, entities that meet the definition of an investment
company under Topic 946, Investment Companies should disclose the fair value of equity securities subject
to contractual sale restrictions to which the entity continues to apply a discount during the transition
period.
All other entities should disclose the amount recognized as an adjustment to current period earnings in the
initial period of adoption of ASU 2022-03.

Appendix: Index of questions and

answers
Questions marked ** are new to this edition and those marked # were significantly updated or revised in this edition.

Page
B. Scope 9
B10.# What are some examples of assets and liabilities that are measured at fair value based on Topic 820? 9

B20. Does Topic 820 apply to measurements that are similar to but not the same as fair value? 12

B30. Are cash equivalents that meet the definition of a security in the scope of Topic 820? 12

B40. Does Topic 820 apply to impairment measurement of loans measured using the practical expedient in the 13
applicable Subtopic?
B50. In a plan sponsor’s financial statements, does Topic 820 apply to pension plan assets measured at fair value? 14

B60. Does Topic 820 apply to the financial statements of an employee benefit plan? 15

B70. Do the fair value concepts apply in measuring the change in the carrying amount of the hedged item in a fair 15
value hedge?

B80. Does Topic 820 apply to fair value measurements under Topic 842, Leases? 16

B90. Under what circumstances would an entity look to Topic 820 when applying the requirements under 17
Topic 606, Revenue from Contracts with Customers?

B100. Does Topic 820 apply to the measurement of share-based payment transactions? 18
C. The item being measured and the unit of account 19
C10. How should an entity determine the appropriate unit of account (unit of valuation) in measuring fair value? 19

C15. What is the appropriate unit of account for an investment held through an intermediate entity? 21

C20. If an asset requires installation in a particular location before it can be used, should the measurement of fair 22
value of the installed asset consider these costs?

C30. Do restrictions on the sale or transfer of a security affect its fair value? 22

C40.# What are some common restrictions on the sale or transfer of a security? 23

C50. SEC Rule 144 allows the public resale of certain restricted or control securities if certain conditions are met. 25
During the period before the restrictions lapse, should the fair value measurement reflect such restrictions?

C60. How should executory contracts be considered in measuring the fair value of an asset that is the subject of 26
an executory contract?

C70. In measuring the fair value of a financial instrument, how should an entity consider the existence of a 27
separate arrangement that mitigates credit risk exposure in the event of default?

Page
C80. Does a requirement to post collateral affect the fair value measurement of the underlying instrument? 27

C90. What is the unit of account for investments in subsidiaries, equity method investees and joint ventures? 28
D. Market participants 29
D10. Does an entity need to specifically identify market participants? 29

D20. Can a market participant be a related party? 29

D30. How should an entity determine what assumptions a market participant would make in measuring fair 30
value?

D40. If the entity is unwilling to transact at a price provided by an external source, should that price be 30
disregarded?

D50. How should an entity adjust the fair value measurement for risk inherent in the asset or liability? 30
E. Principal and most advantageous markets 32
E10. If an entity identifies a principal market for the asset or liability, should it disregard the price in that market and 32
instead use the price from the most advantageous market?

E20. How should an entity identify the principal market, and how frequently should it reevaluate its analysis? 33

E25. What common challenges might an entity encounter when identifying the principal (or most advantageous) 34
market for an asset?

E30. Can an entity have multiple principal or most advantageous markets for identical assets and liabilities within 36
its consolidated operations?

E40. How are transaction costs and transportation costs treated in identifying the principal or most advantageous 36
market and in measuring fair value?

E50. Should transportation costs be included in the entity’s measurement of fair value using an identified basis 37
differential?
E55. Should a forward price be used to measure the fair value of an asset that is not located in the principal 37
market when both spot and forward prices are available?

E60. How should future transaction costs be treated when the fair value is measured using discounted cash 38
flows?

E70. If an entity sells its loans to market participants that securitize them, should the market for securities issued 39
by these market participants (securitization market) be the principal market?

E80. How do transaction costs affect the initial measurement of a financial asset or financial liability? 39

E90. How is fair value measured when there appears to be no market for an asset or liability? 40
F. Valuation approaches and techniques 41
F10. What are some examples of the different valuation techniques used? 42

F20. When more than one valuation approach or technique is used, what factors should an entity consider in 43
weighting the indications of fair value produced by the different valuation approaches and techniques?

F25.** Can an entity change the valuation technique used to estimate fair value between reporting periods? 44

Page
F30. In using the income approach to measure the fair value of a nonfinancial asset or nonfinancial liability, 44
what are some of the key components that will have the most significant effect on the overall fair value
measurement?

F40. How should the fair value of an intangible asset acquired in a business combination be measured if the 45
acquirer plans to discontinue its active use?

F50. Is the cumulative cost of construction an acceptable technique for measuring the fair value of real estate 45
property?

F60. Is the initial cost (transaction price) of an investment in a private operating company an acceptable proxy for 46
fair value at subsequent measurement dates?

F70. Is the par amount of a loan an acceptable proxy for fair value at subsequent measurement dates? 47

F80. How should the fair value of loan assets be determined? 47

F90. Should an entity measure the fair value of a group of loan assets with similar risk characteristics on a pooled 48
basis?

F100. What techniques are used to measure the fair value of a financial guarantee? 49
G. Inputs to valuation techniques 51
G10. If quoted prices in an active market are available and readily accessible, is it permissible for an entity to use a 51
lower level input as a starting point for measuring fair value?

G20. If Level 1 inputs are not available, does that change the objective of the fair value measurement? 52

G30. Should a blockage factor be considered in measuring the fair value of financial assets? 52

G40. Should a liquidity adjustment be considered in measuring the fair value of financial assets? 52

G50. [Not used] 53

G60. When an investment company holds a controlling interest in an entity, should it include a control premium 53
(or market participant acquisition premium) in its measurement of fair value?
G70. What criteria must be met to qualify for the practical expedient not to use Level 1 inputs? 54

G80. How is the fair value measurement of an asset or liability affected by the transaction price for similar or 54
identical assets or liabilities?

G90. In measuring the fair value of loans, should an entity consider the current transaction price for the securities 55
that would be issued by a market participant that securitizes the loans?

G100. How should the fair value of a reporting unit that is a subsidiary be measured if the entity owns a 60% 55
controlling interest and the remaining noncontrolling interest shares are publicly traded?

G110. If an entity has adopted a convention for prices subject to a bid-ask spread, but evidence exists that the price 56
under the convention is not representative of fair value, should the entity adjust its valuation?

G120. Is it appropriate for an entity that historically measured the fair value of individual positions using a mid- 56
market pricing convention to use a different point within the bid-ask spread, to achieve a desired reporting
outcome?

G130. In measuring the fair value of exchange-traded securities, at what time of the day should the security 57
be priced?

Page
G140. When might a quoted price in an active market not be representative of fair value at the measurement date? 57

G150. How might an entity determine the necessary adjustment when the quoted price is not representative of 58
fair value at the measurement date?

G160. If an entity uses a pricing service to obtain inputs to a fair value measurement, what is management’s 59
responsibility for evaluating the appropriateness of those inputs?

G170. When an IPO is a likely event for a private company, does the expected IPO price represent the fair value of 60
the company’s own equity instruments before the IPO?

G180. Should the price established in an orderly, recent round of equity financing be considered in measuring the 61
fair value of an existing equity investment that is similar but not identical?
H. Fair value hierarchy 62
H10. How are fair value measurements categorized in the fair value hierarchy? 62

H20. If fair value is measured using inputs from multiple levels of the hierarchy, how should an entity determine 63
the significance of an input for categorizing the fair value measurement within the hierarchy?

H30. When an entity uses the practical expedient in G70 to deviate from a Level 1 input, how is the resulting fair 64
value measurement categorized in the hierarchy?

H40. In what level of the hierarchy should an entity categorize a fair value measurement of an equity investment 64
that is subject to a security-specific restriction?

H45. In what level of the hierarchy should an entity categorize the fair value measurement of publicly traded 65
equity investments held indirectly through an intermediate entity?

H50. In what level of the hierarchy should an entity categorize a fair value measurement of an equity investment 66
in a privately held company?

H60. For assets or liabilities that have maturities longer than instruments for which market pricing information is 66
available, how should the fair value measurement be categorized?
H70. How should an entity determine whether entity-derived inputs are corroborated by correlation to observable 67
market data for the purpose of determining whether they are Level 2 inputs?

H80. How does an adjustment for information occurring after the close of the market affect the categorization of 68
the measurement in the hierarchy and an entity’s ability to make other adjustments?

H90. If an entity obtains prices from a third-party pricing service to use in its fair value measurement of an asset 68
or liability, how should it categorize the resulting measurement in the hierarchy?

H100. When prices derived from consensus valuations are used for measuring fair value, where in the hierarchy 70
does the resulting measurement fall?

H110. Should a fair value measurement be categorized in Level 1 of the hierarchy when the asset or liability 70
measured has a bid price and an ask price?

H120. Should executable prices be considered quoted prices? 70

H130. If a credit spread is used as an input to measure the fair value of an instrument, how does it affect its 71
categorization in the fair value hierarchy?

Page
I. Fair value on initial recognition 72
I10. Can there be a difference between the transaction price and fair value on initial recognition? 72

I20. Is an entity required to recognize a day one gain or loss if the transaction price differs from the fair value 74
measurement on initial recognition?

I30. Can there be a day one difference for a hybrid instrument if the entity has access to a market for the 75
components of the hybrid that would result in a more advantageous measurement of the entire hybrid
instrument?

I40. Can a gain or loss arise at initial measurement for an investment when fair value is measured using a mid- 76
market pricing convention?
J. Highest and best use 77
J10. Can an entity assume a change in the legal use of a nonfinancial asset in determining its highest and best 77
use?

J20. When an acquirer in a business combination plans to use an acquired intangible asset defensively, who are 79
the market participants?

J30. Should an entity use entity-specific assumptions about its future plans in measuring the fair value of an 79
intangible asset acquired in a business combination?

J40. Can an entity use differing valuation premises for nonfinancial assets within a group of assets and liabilities? 80

J50. Does the highest and best use concept apply to financial assets? 80
K. Liabilities and own equity instruments 81
K10. How does a fair value measurement based on a transfer notion differ from a valuation based on a settlement 81
notion?

K20. How should an entity measure the fair value of a liability or own equity instrument? 82

K30. Does an entity consider its own risk of nonperformance in measuring the fair value of its liabilities? 84
K40. Other than the entity’s own credit risk, what factors are considered in determining nonperformance risk? 85

K50.# How should a restriction on transfer be taken into account when measuring the fair value of a liability or own 85
equity instrument?

K60. Should an inseparable third-party credit enhancement be included in the fair value measurement of a 86
liability?

K70. What is the fair value of a liability payable on demand? 87

K80. How is the fair value of an asset retirement obligation measured? 87

K90. When an unquoted financial liability is assumed in a business combination, should the assumptions for the 89
fair value measurement be from the perspective of the combined entity?
L. Portfolio measurement exception 90
L10. When is it appropriate for an entity to measure the fair value of a group of financial assets and financial 91
liabilities on a net portfolio basis?

Page
L20. When the portfolio measurement exception is applied, how does this affect the unit of account? 91

L30. When considering whether the exception applies for a group of financial assets and financial liabilities, what 92
degree of risk offsetting is necessary?

L40. What factors need to be considered in determining whether a particular market risk within the group of 92
financial assets and financial liabilities could be offset in measuring fair value on a net portfolio basis?

L50. Does the portfolio measurement exception also apply to financial statement presentation? 92

L60. How is a net portfolio basis adjustment resulting from the application of the exception allocated to the 93
individual financial assets and financial liabilities that make up the portfolio?

L70. Are net portfolio basis adjustments that have been allocated to the individual financial assets and financial 94
liabilities in the portfolio considered in determining the categorization in the fair value hierarchy for
disclosure purposes?

L80. In applying the exception, how should an entity consider the existence of an arrangement that mitigates 95
credit risk exposure in the event of default?
M. Inactive markets 96
M10. What is considered an active market? 96

M20. How does a decrease in volume or level of activity affect how fair value is measured? 97

M30. What are the characteristics of a transaction that is forced or not orderly? 98

M40. How extensive is the analysis expected to be to determine whether a transaction is orderly? 99
N. Disclosures 100
N10. What is the difference between recurring and nonrecurring fair value measurements? 100

N20.# What disclosures are required? 100

N30. Are all of the disclosures required in interim financial reports? 105
N35. What should an entity consider in determining an appropriate level of disaggregation for its disclosures? 105

N40. Which fair values should be disclosed if the measurement occurs at a date that is different from the 106
reporting date?

N50. As of what date should transfers into or out of Level 3 of the fair value hierarchy be presented? 107

N60. Does the guidance on how to measure fair value apply to assets and liabilities that are not measured at fair 107
value but for which fair value is disclosed?

N70. [Not used] 108

N80. For the purpose of disclosures about recurring Level 3 measurements, how should an entity calculate the 108
amount attributable to the change in unrealized gains or losses that is recognized as part of the total gains or
losses for the period?

N90. If an entity uses the liquidation basis of accounting, do the disclosures apply? 112

N100. Are the disclosures required for a feeder fund whose sole investment is in a master fund? 113

Page
N110. Is an entity required to make quantitative disclosures about significant unobservable inputs that have not 114
been developed by the entity?

N120. Is a nonpublic entity required to disclose the range and weighted average of significant unobservable inputs 115
used to develop Level 3 fair value measurements?

N130. What are ‘purchases and issues’ that a nonpublic entity should disclose for recurring Level 3 115
measurements?

N135. Should a nonpublic entity disclose purchases, issues and transfers for recurring Level 3 fair value 116
measurements by class and in a tabular format?

N140. Can a nonpublic entity present the changes in derivative assets and liabilities attributable to purchases and 116
issues, and transfers into or out of Level 3 of the fair value hierarchy, on either a gross or a net basis?
O. Application issues: Derivatives and hedging 117
O10. For derivative instruments that are recognized as liabilities, what should an entity consider in measuring fair 117
value?

O20. How are credit valuation adjustments (CVA) for counterparty credit risk and debit valuation adjustments 118
(DVA) for an entity’s own nonperformance risk determined in measuring derivatives at fair value?

O30. What discount rates are used in practice to measure the fair value of centrally cleared or fully cash- 122
collateralized derivative instruments?

O35. What discount rates are used in practice to measure the fair value of uncollateralized or partially 122
collateralized derivative instruments?

O40. For a derivative contract between a dealer and a retail counterparty, if the dealer has a day one difference, 123
does the retail counterparty have the same difference?

O45. In measuring and recognizing the fair value of centrally cleared derivatives for accounting purposes, may 124
an entity rely solely on the variation margin values that are provided by a central clearing organization (e.g.
CME, LCH)?
O50. How does a day one gain or loss due to a bid-ask spread affect hedging relationships? 125

O60. Does the principal market guidance affect the assessment of effectiveness for hedging relationships? 128

O70. Do the requirements to include counterparty credit risk and an entity’s own nonperformance risk in 131
measuring the fair values of derivative instruments affect hedging relationships?
P. Application issues: Investments in investment funds 138
P10. What factors should an entity consider in measuring the fair value of an investment in an investment fund? 138

P20. When is the NAV of an investment fund representative of fair value? 139

P25. When measuring the fair value of its investment, can an investor adjust the daily NAV (that is a Level 1 140
input) reported by an unrelated investment fund, following an adjustment to that NAV in the fund’s financial
statements?

P30. If open-ended redeemable funds do not allow daily redemptions at NAV, is NAV representative of fair value? 142

Page
P40. Does the sale or purchase of an investment in the fund at a discount to NAV indicate that the transaction is 142
not orderly?

P50.# What does an entity consider in determining the level of the fair value hierarchy in which an investment in a 143
fund should be categorized?
Q. Application issues: Practical expedient for investments in investment companies [US GAAP only] 144
Q10. For the purpose of using NAV as a practical expedient, what is the definition of readily determinable? 144

Q15. When would an equity security that is an investment in a structure similar to a mutual fund have a readily 145
determinable fair value?

Q20. What should an entity consider in determining whether NAV reported by the investee may be relied on? 146

Q30. Can the practical expedient be used when NAV is reported on a tax or cost basis? 147

Q35. Can the practical expedient be used when NAV is reported under IFRS Accounting Standards? 147

Q40. Is the use of NAV to estimate fair value required when the criteria are met? 147

Q45. Can an entity change between the practical expedient and other measures of fair value to estimate fair value 148
between reporting periods?

Q50. When is a sale for an amount other than NAV in a secondary market transaction considered probable? 148

Q60. When a portion of an entity’s investment is probable of being sold, how is the practical expedient applied? 149

Q70. [Not used] 149

Q80. Can an entity adjust the NAV reported by the investee? 149

Q85. How should investments be categorized within the fair value hierarchy when an entity has adjusted the NAV 151
reported by the investee?

Q90. What is the unit of account for investments in investment companies when the entity applies the 151
practical expedient?
Q100. How should an entity applying the practical expedient account for a purchase for an amount that is different 151
from its currently reported NAV?

Q110. [Not used] 152

Q120. What disclosures are required for investments measured using the practical expedient? 152

Q130. What information about redemption conditions is required to be disclosed for investments measured using 152
the practical expedient?
R. Application issues: Contractual sale restrictions [US GAAP only] 153
R10.** What are contractual sale restrictions? 153

R20.** Should an entity consider contractual sale restrictions when identifying the principal (or most advantageous) 154
market for equity securities?

R30.** Is the guidance on contractual sale restrictions limited to equity securities with active markets (that is, 154
Level 1 equity securities)?

Page
R40.** Can contractual sale restrictions be considered in fair value measurements of financial instruments other 154
than equity securities?

R50.** Can contractual sale restrictions be considered in fair value measurements by the issuers of equity 154
securities?

R60.** Should the issuer of equity securities with contractual sale restrictions adjust amounts from a previous 155
business combination when initially adopting ASU 2022-03?

R70.** What is the transition guidance for the adoption of ASU 2022-03? 155

R80.** What disclosures are required for entities that hold equity securities which are subject to contractual sale 155
restrictions?

Appendix:
Effective dates – US GAAP
This table shows the effective dates of ASUs that are not yet effective for all entities and have affected the
guidance in this Handbook or will at a future date (i.e. once the ASU becomes effective). For completeness, this
table also includes the interim periods in which ASUs are effective.
Unless otherwise stated, the effective date should be read as periods in fiscal years beginning after the
stated date.

In this table: Public business entities

A = annual periods SEC filers SEC filers

I = interim periods that are not that are
eligible to be eligible to be Not an All other Early
Ref. SRCs SRCs SEC filer entities adoption?
Reference Rate Reform (Topic 848) Section O A/I Effective for all entities through Dec. 31, 2024 N/A
C40, K50,
ASU 2022-03, Fair Value Measurement of Equity
N20, A/I Dec. 15, 2023 Dec. 15, 2023 Dec. 15, 2023 Dec. 15, 2024 Yes
Securities Subject to Contractual Sale Restrictions
Section R
ASU 2021-08, Accounting for Contract Assets
and Contract Liabilities from Contracts with B10 A/I Dec. 15, 2022 Dec. 15, 2022 Dec. 15, 2022 Dec. 15, 2023 Yes
Customers
ASU 2017-04, Simplifying the Test for Goodwill
B10, C10 A/I Effective Dec. 15, 2022 Dec. 15, 2022 Dec. 15, 2022 Yes
Impairment
ASU 2016-13, Measurement of Credit Losses on
B10, B40 A/I Effective Dec. 15, 2022 Dec. 15, 2022 Dec. 15, 2022 Yes
Financial Instruments

Public business entities

A public business entity is a business entity (which excludes not-for-profit entities and employee benefit
plans) that meets any of the following criteria:
• it is required by the SEC to file or furnish financial statements, or does file or furnish financial statements
(including voluntary filers), with the SEC (including other entities whose financial statements or financial
information are required to be or are included in a filing);
• it is required by the Securities Exchange Act of 1934, or rules or regulations promulgated under the 1934
Act, to file or furnish financial statements with a regulatory agency other than the SEC;
• it is required to file or furnish financial statements with a foreign or domestic regulatory agency in
preparation for the sale of or for purposes of issuing securities that are not subject to contractual
restrictions on transfer;
• it has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or
an over-the-counter market; or
• it has one or more securities that are not subject to contractual restrictions on transfer, and it is required
by law, contract or regulation to prepare US GAAP financial statements (including notes) and make them
publicly available on a periodic basis (e.g. interim or annual periods). An entity must meet both of these
conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or
financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public
business entity for purposes of financial statements that are filed or furnished with the SEC.

Smaller reporting companies

An entity that is eligible to be a smaller reporting company (or SRC, a type of SEC filer) may elect to adopt
certain new accounting standards using the effective dates applicable to all other entities.
An entity qualifies as an SRC if it has:
• public float of less than $250 million; or
• annual revenues of less than $100 million as of the most recent fiscal year, and either no public float or a
public float of less than $700 million.
Broadly, US SEC filers determine their SRC eligibility annually on the last business day of their most recent
second quarter.

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Acknowledgments
This edition has been produced jointly by KPMG LLP (the US member firm) and the KPMG International
Standards Group (part of KPMG IFRG Limited).
We would like to acknowledge the following contributors to this edition:
KPMG LLP: Kimber Bascom, Frederik Bort, Michael Hall, Timothy Jinks, Mahesh Narayanasami, Robin Van
Voorhies.
Past and present members of the KPMG International Standards Group: Jim Calvert, Beakal Desta,
Colin Martin, Hayley Pang, Chris Spall, Avi Victor.
We would also like to thank other members of the KPMG International Standards Group and the
Department of Professional Practice, Advisory Valuation and Economic & Valuation Services of KPMG LLP
for the time that they committed to this project.

Publication name: Fair value measurement handbook

Publication number: 137859

Publication date: November 2023

© 2023 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
© 2023 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member
firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization.

KPMG International Standards Group is part of KPMG IFRG Limited.

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each of which is a separate legal entity. KPMG International Limited is a private English company limited by guarantee and does not
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or
entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate
as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without
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