Fair values and other issues in IFRS

Richard Martin Head of Financial Reporting

Fair values and other issues

General problems with 2005 transition

Increasing use of fair values

Problems with IFRS in Europe

Problems with IFRS

New for the EU Different starting points across Europe Extensive disclosures in areas of subjective measurements such as impairments Sensitive areas such as related parties

Complex measurements
Some written in a way that is hard to understand Sometimes in a language that is hard to translate

Problematic standards
Deferred tax (IAS12) Pensions (IAS19) Financial instruments (IAS32 & 39) Impairments (IAS36) Provisions (IAS37) Intangibles (IAS38) Share based payments (IFRS2) Business combinations (IFRS3)

What if we dont like them?

Driven by conceptual framework needs of investors and definitions of assets & liabilities Pragmatic arguments by preparers not very effective Set by independent standards setter Lesser role for governmental influence

US and EU tensions the SEC and the Commission

IFRS will not stand still

Keeps evolving agenda for new standards, plus improvements to others, interpretations Trends Framework driven US convergence

Principles rules
Fair values and historical costs

The trend to fair values

Measurement bases in IFRS

Depreciated Cost

Share of net assets (equity accounting)

Value in use (VIU) Net realisable value (NRV) Fair value (FV) Lower of cost and NRV Recoverable amount (higher of VIU and NRV) Entity-specific or market values Exit or entry values

Fair values used when costs fail

Used on initial measurement

Swaps of non-monetary assets cost of assets, revenue

Business combinations (IFRS 3)

FV of equity consideration
Allocation of net assets acquired and goodwill Share-based payments value of options granted Derivatives Agricultural assets Provisions

Fair value accounting

Where changes in fair values affect profit for the year

Financial instruments (IAS39)

Investment properties (IAS40) option only Agriculture (IAS41) Where holding the assets for trading/dealing/investment purposes Revaluations (options) Property, plant and equipment (IAS16) Intangible assets (IAS38) Through equity, but recycled into P&L Financial instruments available for sale and cash flow hedges

How far will FV accounting spread?

Measurement project Business combinations Part 2 full goodwill and exchange of fair values notions Insurance contracts - Part 2 Revenue recognition Full fair value model for financial instruments

Comprehensive income project

Business implications of FV

More costs

Reliability of fair values

Reported results will change Earlier recognition of profits Volatility of the results as markets change Presentation issues to help understanding

Conclusions

Some conclusions
IFRS are not straightforward - Problematic standards EU adoption has been difficult

Trend to fair value

Where costs fail Where changes in FV are very important Some only as options Will probably expand, but there are important consequences