Page History

Fair value measurement became an important topic during the global financial crisis in 2008. Some people argued that fair value could lead to a deterioration in banks’ financial reports. On the other hand, as it is the purpose of IFRS, fair value enables investors to have a clearer picture of an entity’s financial situation.

Therefore fair value principles are at the core of IFRS:

• Numerous types of financial instruments are to be measured at fair value.
• The fair values of all financial instruments have to be shown in reporting/notes.

The key challenges in practice include

• Development of the necessary IT infrastructure across all classes of instruments.
• Mark-to-model valuation of classical illiquid instruments (e.g. retail loans).

The solution computes fair value for all financial instruments and presents the figures either directly in the financial statements or in the notes (e.g. for loans).

Financial accounting requires certain granular measures as each valuation component shows up on separate accounts. The sum of all posted valuation components for one single deal build the measure called for by IFRS. Hence, the valuation is fully compliant with the requirements in IFRS.

All financial instruments are initially measured at fair value plus or minus transaction costs, in the case of a financial asset or financial liability not at fair value through profit or loss. IFRS 9 requires that all financial assets are subsequently measured at amortised cost, FVOCI or FVPL based on the business model for managing financial assets and their contractual cash flow characteristics (SPPI-Test).

For the measurement of fair value in view of IFRS, the following general determination hierarchy orginiating from IAS 39 48A states:

“The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the entity uses that technique. The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity-specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments.”

Fair Value is calculated taking into account the latest market movements and credit-worthiness.

Based on the idea that only changes in fair value from the secured risk in a hedging relationship have to be compared between hedging instruments and hedged items, both the concepts of Fair Value DCF and Fair Value DCF with constant credit spread are considered in the solution.