Fair Value in Accounting:
From Theory to Practice

Fair value is defined by IFRS 13 and ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. While the rule-based US Generally Accepted Accounting Principles (US GAAP) do not widely adopt fair value as a measurement basis, this is not the case with the International Financial Reporting Standards (IFRSs). The latter currently use fair value quite extensively, both for measurement and disclosure purposes, with one of the key differences lying in the revaluation of investment property and property, plant & equipment (PPE) allowed only under IFRS.

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Chapter 1 - Background

1. Overview
2. Use of Fair Value in IFRSs Compared to US GAAP
3. Key Principles
4. Differences between IFRS 13 and ASC Topic 820
5. Academic Research Pertaining to the Use of Fair Value

Chapter 2 - Definition and Scope of Fair Value

1. Definition of Fair Value and the Fair Value Measurement Approach
2. Items within the Scope of the Standards
   1. Overview
   2. Exceptions to the Measurement and Disclosure Requirements of IFRS 13
   3. Exemptions Applicable Only to the Disclosure Requirements of IFRS 13
   4. Exceptions to the Measurement and Disclosure Requirements of ASC 820

Chapter 3 - Identifying the Asset or Liability to be Measured

1. Overview
2. Characteristics of an Asset or Liability vs. Characteristics of the Entity Holding the Asset
3. The Unit of Account of the Asset or Liability

Chapter 4 - Determining the Market in which the Transaction will Take Place

Chapter 5 - Identifying Market Participants

Chapter 6 - Defining the Transaction Price

1. Exit Price
2. Transaction Costs
3. Transfer Tax and Other Transaction Costs Relating to Investment Property (IFRS only)
4. Transport Costs

Chapter 7 - Definition of an orderly transaction

1. Guiding Principle
2. Identifying Transactions that are Not Orderly
3. Measuring Fair Value When the Volume or Level of Trading Activity for an Asset or a Liability has Significantly Decreased

Chapter 8 - Fair Value at Initial Recognition

1. Does the Transaction Price Represent the Fair Value?
2. The Manner of Recognizing the Difference between Fair Value and Cost at Initial Recognition

Chapter 9 - Application to non-financial assets

1. Overview
2. The Highest and Best Use Premise
   1. Guiding Principle
   2. Defensive Use of Non-Financial Assets
3. Valuation Premise for Non-Financial Assets
   1. Guiding Principle
   2. A Non-Financial Asset’s Highest and Best Use is in Combination with Other Assets and/or Liabilities
   3. A Non-Financial Asset’s Highest and Best Use is on a Standalone Basis
   4. Valuation Premise vs. Unit of Account

Chapter 10 - Measuring Fair Value of Liabilities and Equity Instruments

1. Guiding Principle
2. “Transfer” vs. “Settlement”
3. Liabilities and Equity Instruments Held by Other Parties as Assets
   1. Measurement Hierarchy
   2. Adjustments to the Quoted Price of the Corresponding Asset
   3. Restrictions Placed on the Transfer of the Corresponding Asset
4. The Measured Item is not Held by Other Parties as Assets
5. Non-Performance Risk
   1. Overview
   2. The Underlying Assumption – the Non-Performance Risk is Identical Before and After the Transfer
   3. Practical Considerations in Adjusting Fair Value in Respect of a Reporting Entity’s Own Non-Performance Risk
6. Restriction on the Transfer of a Liability or Equity Instrument
   1. Financial Liability with a Demand Feature (IFRS only)
   2. Overview
   3. Potential Exceptions in Connection with the Minimal Fair Value Restriction under IFRS

Chapter 11 - Application to Financial Instruments with Netting Positions

1. Overview
2. Relevant Definitions
3. Scope of the Exception
4. Qualifying Offsetting in Respect of Market Risk Exposure
5. Qualifying Offsetting in Respect of the Credit Risk of the Reporting Entity and the Counterparty
6. The Relationship between the Measurement of the Fair Value of a Net Position and its Presentation in the Statement of Financial Position
7. Allocation of the Portfolio-Level Adjustments to Individual Instruments

Chapter 12 - Valuation Techniques

1. Overview
2. Considerations in Selecting a Valuation Technique
   1. Guiding Principle
   2. The Quoted Price Restriction When There is an Active Market for an Identical Asset or Liability
3. Principal Approaches of Valuation Techniques
   1. Overview
   2. The Market Approach
   3. The Cost Approach
   4. The Income Approach
4. Using Multiple Valuation Techniques
5. Calibration of Valuation Techniques
6. Changing the Valuation Techniques
7. Adjusting Inputs Used in the Valuation or Adjusting the Valuation Techniques Themselves
   1. Overview
   2. The Connection between Making Adjustments and the Unit of Account
8. Selecting the Inputs Used in the Valuation Technique and the Fair Value Hierarchy
   1. Overview
   2. Observable vs. Unobservable Inputs
   3. Inputs Based on Bid and Ask Prices
   4. The Fair Value Hierarchy
   5. Level 1 Inputs
   6. Level 2 inputs
   7. Level 3 inputs

Chapter 13 - Disclosure Provisions

1. Overview
2. The Scope of the Disclosure Requirements
3. The Objective of the Disclosure
4. Recurring and Non-Recurring Fair Value Measurements
5. Determining Appropriate Classes of Assets and Liabilities
6. Summary of Disclosure Requirements
7. Disclosure Requirements for Assets and Liabilities Measured at Fair Value
8. The Meaning of the Term “End of the Reporting Period”
9. Policy Regarding Transfers between Levels within the Fair Value Hierarchy
10. Disclosure Provisions that Apply to Fair Value Used Only for the Notes to the Financial Statements
11. Other Required Disclosures
12. Disclosure Examples
    1. Example of Disclosure regarding Fair Value Hierarchy Categorization
    2. Example of Disclosure in respect of Reconciliation from Opening to Closing Balances
    3. Example for Disclosure about Valuation Techniques and Quantitative Data Used
13. Disclosures for investments Subject to the NAV Practical Expedient (US GAAP Only)

Yael Gerassi, Partner, Head Israel Accounting Consulting Services / PwC Israel
“The professional topics covered by the book are important and common, and therefore would be of practical importance to those working in financial reporting and valuers. The book addresses the different approaches taken by the international and US accounting standard frameworks (IFRS and US GAAP, respectively) on a number of issues, and in that provides a solid added value. The book is written in a clear language and includes good and useful examples that illustrate the theory being laid out. It also dives deeper into different issues and, in my opinion, can serve as a strong tool with helpful inputs for professionals in the relevant disciplines.”
 
Yoram Eden, Department Chair for Economics and Accounting and Head of Interdisciplinary School for Society and Community / Hadassah Academic College, Israel
“The book will appeal to valuators interested in sharpening their understanding of the accounting rules for fair value measurement. The accounting rules pretty much mandate the concept of fair value for valuations performed for accounting, as well as other—such as legal—purposes. The book should be especially useful in situations where a very thorough or keen understanding of the framework is required to ‘gain an edge’—such as when providing expert opinions for discussions with regulators about specific valuation issues, during legal procedures, etc. This is also because some of the views and explanations provided are very comprehensive, and, in some cases, original when compared to other sources.”