The concept of "fair market value" is known to domestic accountants from international theory and practice. Russian accounting regulations use a similar term in meaning. In PBU there is the concept of "current market value." However, the rules do not contain a clear definition of it. Moreover, there are no recommendations for its assessment. In this matter, foreign theory and practice of accounting is significantly ahead of domestic. IFRS 13 has recently introduced IFRS 13. It defines the fair value of an asset . Let's consider some provisions of the standard.
Definition
Fair value is the amount that can be received on sale of fixed assets or paid on the transfer of liabilities in ordinary transactions between participants in the turnover at the measurement date. It is worth saying that earlier in the standard there was a different definition. This is not to say that the new section completely changed it. However, in IFRS 13 the concept is significantly expanded and clarified. From the previous definition it was not clear what the value is - the amount of the purchase or sale. Questions arose during the preparation of IFRS 3. During the process, it became clear that according to US GAAP, fair value is the amount of output (sale), while in IFRS it was an indicator of exchange - purchase (entry). Another ambiguity was associated with the date on which the measurement is carried out.
Exit price
According to IFRS 13, fair value is the amount of the exit. That is, it is an indicator of demand, not supply. Exit price - the amount that the seller can get, not the one at which he would like to sell something. Price and cost are different indicators. And the latter is of practical importance. A similar rule applies to a liability. What is the cost in this case? It is the amount that the creditors expect to accept as repayment, and not the amount that the debtor would like to pay for getting rid of the obligation. As part of an active turnover, price and value may vary. This is especially true for operations with exchange-traded securities and other financial instruments.
Nuances
Fair value is the amount that is determined by the expectations of future cash flows (outflows and inflows) associated with property or liabilities from the point of view of the parties involved in the transaction that own them at the measurement date. There are two ways to get finances. An asset or liability can be used or sold. Even if the participant will exploit the property, then the exit price will be determined by the expected flow from the sale to its entities, which after the acquisition will receive money from the application. In other words, when acquiring an asset, any person will pay only for the benefits that he expects to receive subsequently. Exit price, therefore, always acts as a relevant definition of fair value. It does not matter if the company intends to use the property or to realize it.
SFD 16
In this standard it is allowed to use 2 OS accounting models: at cost and operating cost. The first is considered traditional. It is used in accounting for operating systems in all national systems. The second model involves the reflection of objects at revalued amounts. Appropriate procedures should be carried out with such a frequency that is sufficient so that at any time the carrying value of the OS does not differ much from the exit price. This model has a rationale. In developed countries, the annual inflation rate is negligible. In this regard, its effect on the value of assets can be neglected. However, for operating systems with a long period of use, the inflationary effect will accumulate over time. The reflection of these objects at cost will lead to the fact that in the balance sheet there will be many "heterogeneous indicators". Regular recounting of the OS will make it possible to bring them to the same denominator. It is believed that this will give greater reliability to the reflection of objects in the statements.
IFRS 38
These standards also allow the use of 2 accounting models. However, unlike an operating system, there is one condition under which fair value can be applied to intangible assets . This is the presence of an active turnover. This is due to the following. The cost of intangible assets in an active market will be fair - the one used for accounting purposes. This means the recognition of unrealized losses or gains from a decrease / increase in property value. They are reflected in other total income. These amounts are not included in the statement of loss and profit. On disposal of revalued assets, all revaluation accrued on them is written off to retained earnings.
IAS 41
This standard defines the recognition and measurement of a particular type of asset - biological. Their feature is the process of transformation - growth, reproduction, degeneration. These phenomena cause quantitative or qualitative changes. The standard prescribes the accounting of biological assets and agricultural products at fair value, from which sales expenses on the date of harvest are deducted. Thus, the results of the transformation from the moment of their appearance are reflected. In accordance with the traditional model, changes in such assets do not show when they occurred, but when they are realized. This period for some types of products can last up to several years or tens of years. If revenue is recognized at the time the biotransformation is completed, and expenses arise evenly over its entire period, the principle of correlation of income and expenses will be violated. Consequently, the financial result is distorted. The IASB notes that biotransformation is a unique and fundamental feature of bioactive assets. In this regard, reporting should be carried out as soon as it occurs. Only in this case, the valuation of assets will allow users to best analyze the financial results and future prospects of the enterprise engaged in agricultural production.
Investment property
The standard of IAS 40 is dedicated to it. Such real estate is the property that is owned to receive rental payments from them or capital gains (not for sale or use for production purposes). The standard establishes that such property should be accounted for at fair value at each reporting date, with changes in value for the period attributed to the statement of profit or loss. It should be noted that in a number of countries the turnover of real estate is not very active. Accordingly, the valuation of assets is significantly difficult. For such cases, the Board provides an opportunity to choose an accounting model, as in IAS 16.
Exceptions
IFRS 13 is used when other standards permit or require fair value measurements. However, there are exceptions. These include:
- Stock-based payouts according to IFRS 2.
- Lease agreements.
- Measurements that are similar to fair value, but are not.
The latter, in particular, include the net realizable value, in accordance with IFRS 2, as well as the value of use, in accordance with standard 36. Net realizable value is the amount that an enterprise expects to receive from the sale of its inventories in the ordinary course of business.