Many Australian Accounting Standards require some form of fair value measurement for assets and liabilities that are to be reported in company financial statements and these requirements are generally consolidated in the newly applicable AASB 13 Fair Value Measurement. This new standard is applicable to Australian companies with a 31 December 2013 year-end and will also be mandatory for companies reporting at 30 June 2014 which prepare general purpose accounts.
Accountants will find the newly consolidated and detailed guidance in AASB 13 useful when considering the valuation of assets and liabilities included in their monthly and annual reporting. The detailed guidance covers a variety of matters including determining the valuation premise for an asset, considering the valuation techniques to be adopted in undertaking a valuation, understanding inputs to a valuation and considering the valuation hierarchy for financial reporting disclosure.
Fair value is defined by the standard 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". The concept of fair value in this context can be considered an exit price, meaning the value is related to the funds received to exit an asset or liability.
AASB 13 also consolidates disclosure requirements from some accounting standards and, in conjunction with AASB 7 Financial Instruments: Disclosures, provides the framework for disclosure in annual financial reports. The disclosure hierarchy for fair value measurements can be summarised as:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that an entity can access at measurement date. Share market prices obtained from the Australian Securities Exchange (ASX) would typically meet the requirements for level 1 of the valuation hierarchy.
Level 2 - Valuation inputs, other than quoted prices, which are observable for the asset or liability, either directly or indirectly. Many real estate and property market transactions will fit into level 2 of the valuation hierarchy.
Level 3 - Valuation inputs for assets or liabilities that are not observable. Typically these valuation inputs will include factors such as risk adjusted discount rates to be used in net present value (NPV) calculations.
AASB 13 requires that general purpose financial statements include disclosures of fair value measurements in accordance with the hierarchy described above. Companies with 'for-profit' reporting requirements should take the opportunity to consider their disclosure obligations prior to their year-end so as to avoid a difficulty in meeting their reporting timeframes. Entities with 'not-for-profit' reporting requirements should consider their obligations and determine whether early adoption of the 'Reduced Disclosure Requirements' regime will be to their benefit and enable them to avoid some of the complexity of the full disclosures required under AASB 13.
For additional information on the disclosures of fair value measurements in financial statements please speak with your usual Hanrick Curran Adviser or contact Matthew Green on 07 3218 3900.