Following the introduction of IFRS 13, Fair Value has become formalised in the world of financial reporting. For users of Financial Statements, the concept of an asset measured at fair value is very understandable. Also, SOFP valuations based on fair value are more reliable than values based on other accounting criteria such as depreciated historic cost, amortised cost and value in use.
Additionally Fair value measurements are also easier to compare to other fair value measurements.
However, despite the obvious benefits of Fair Value, the introduction of IFRS 13 Fair Value has not been without challenges for users of Financial Statements. In this article we will look at some of the challenges that arise from the narrow scope of the IFRS 13 standard.
IFRS 13 based Fair Value measurement criteria do not apply to all situations where standards explicitly require measurements based on Fair Value. This situation can be very confusing for users of Financial Statements. One situation where this occurs is IFRS 2 Share Based Payments. In IFRS 2, the measurement of the SOFP equity or liability at year end is based on the Fair Value at Grant date of the instrument (for Equity Settled) or the Fair Value at year end of the instrument (for Cash Settled) .
However, despite the reference to Fair Value in the IFRS 2 standard, this Fair Value does not require application of IFRS 13. Instead a method based on options valuation techniques is used to determine the Fair Value of the instrument.
Another situation where the Fair Value mentioned in a standard does not refer to IFRS 13 Fair Value measurements is IFRS 5 Assets held for Sale. IFRS 5 uses the concept of Fair Value less Cost to Sell to re-measure an Asset or Business Unit that has been classified as held for sale. Strangely the Fair Value referenced here is a specific exclusion from the scope of IFRS 13.
Finally, many standards use measurement bases that, conceptually, are very similar to Fair Value. These include IAS 2 Inventories, which are measured at the lower of cost or Net Realisable value. Even though Net realisable value is conceptually very similar to Fair Value, once again IFRS 13 does not apply in this case.
So, in summary, even though Fair Value is a desirable measurement basis to improve understandability, reliability and comparability of Financial information, the inconsistent application of Fair Value measures can often undermine some of these advantages.