Calibration under IFRS 13 is tough nut to crack

BVWireIssue #128-2
May 8, 2013

This past January 1, International Financial Reporting Standard No. 13 (IFRS 13) went into effect. It provides guidance on how to measure an asset’s fair value, but many companies haven’t even begun to implement it. Plus, certain aspects of the new rules will be particularly troublesome.

Speaking on a recent webcast, David Larsen (Duff & Phelps) said IFRS 13 applies to most corporations because it requires disclosures of fair-value measurement for M&A activity, asset impairment, or activity involving certain investment entities. During the webcast, attendees were asked: Have you started implementing IFRS 13? About half (47%) said they had started it, but over a third (38%) said they had not. The rest (16%) said they had completed full implementation.

Stumbling block: IFRS 13 now requires a lot more substantiation of the valuation techniques used in obtaining fair value, such as comparisons of different measurements to observable market data. This is known as "calibration," and it is “one of the most important tools in IFRS 13 … and likely one of the least understood and least applied,” Larsen said.

Under IFRS 13, companies now must disclose fair values according to a “fair value hierarchy,” which categorizes the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs.

In its disclosures, a company must also explain qualitative sensitivity analysis if changing inputs would result in alternative assumptions about fair value. There must also be a quantitative disclosure for Level 3 inputs.

Larsen noted: “The expansion of disclosures could be a new thing for many; a lot of judgment goes into the disclosure area.”

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