5. Measurement Cross Cutting Issues
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Transcript of 5. Measurement Cross Cutting Issues
International Financial Reporting Standards
The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IFRS measurements: cross-cutting issues
Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
KThe views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.
Myth 1 2
Everyone knows what ‘best
estimate’ means
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
What does ‘best estimate’ mean? 3
Most likely outcome?
Median outcome?< 50% chance of higher cash flows< 50% chance of lower cash flows
Expected value?Average (mean) of range
Whatever amount feels ‘best’?
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Myth 2 4
The IASB prefers fair value
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
IASB does not always prefer fair value
• Provisions
• Impairment of property, plant, equipment, intangibles
• Revenue recognition
• Insurance contracts
• Leases
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Myth 3 6
The IASB prefers expected value
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Expected value might be best...
• if objective is to measure current value of asset or liability
• if transactions recur frequently
• if users are concerned about extreme outcomes (outliers)
• if expected value is as easy to estimate as other measures
• if the timing of cash flows is uncertain
• you don’t know…
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Most likely or median might be better...
• if objective is to predict future cash flows• if transactions do not recur frequently• if outliers are less important or more uncertain than
central outcomes• if expected value is more difficult to measure
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Myth 4 9
Expected value needs accurate data about all
outcomes
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measuring expected value
• use any suitable technique for estimating average (mean) of range
• if identifying range of possible outcomes:
– use same data as would use to identify most likely or median outcome
– include everything you know
– but don’t make up what you don’t know...
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measuring expected value continued 11
We have evidence that...
Most likely outcome is 100 currency units (CU)
We have no evidence that...
Distribution is other than normal (bell-shaped)
We would estimate expected value to be...
CU 100
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measuring expected value continued 12
Outcome Estimated outflows
Relative likelihood
Best case CU 100
Most likely outcome CU 200 About twice as likely as best case
Worst case CU 1,000 Unlikely, but possible
Estimate of expected value
CU 100 X 30% CU 30
CU 200 X 60% CU 120
CU 1,000 X 10% CU 100
CU 250© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Myth 5 13
Expected values take
account of risk
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Expected values may need risk adjustments
Asset 1
Probability Inflows
100% CU 500
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Asset 2
Probability Inflows
50% CU 25050% CU 750
• Expected value is CU 500 for each asset
• But risk averse entity would put lower value on asset 2
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Myth 6 15
Risk always increases
discount rates
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Risk adjustments for liabilities
• risk aversion typically increases transaction prices for uncertain liabilities
• in which case, account for risk by:
1. increasing estimates of cash outflows, or
2. adjusting estimates of probabilities, or
3. reducing rates at which cash outflows are discounted to present value, or
4. adjusting the expected present value
• adjusting discount rate doesn’t always work
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions or comments?
The IASB encourages its members and staff to express their individual views.
The views expressed in this presentation are those of the presenters.
Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
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The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.
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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org