Essential Corporate News – Week ending 16 June, 2023

FRC: Thematic Review – IFRS 13 ‘Fair value measurement’

On 13 June 2023, the Financial Reporting Council (FRC) published a thematic review of ‘fair value measurement’. The FRC points out that IFRS 13 ‘Fair Value Measurement’, has featured in the Corporate Reporting Review (CRR) team’s Top Ten matters of challenge several times in the past. While the application of IFRS 13 is, based on the FRC’s work, generally satisfactorily applied by larger companies and its principles are well understood by certain sectors such as banking, insurance and real estate, the FRC notes that smaller companies can struggle with the requirements.

Different IFRSs require or permit companies to measure or disclose the fair value of assets, liabilities or own equity instruments. IFRS 13 provides a framework for measuring fair value and enhances the disclosures about fair value measurements. The FRC believes that the challenging economic environment and the risks posed by climate change may increase the degree of estimation uncertainty and management judgement in this area. Consequently, clear and transparent disclosures of fair value measurements are likely to become increasingly important. While this thematic review is not intended to be a guide to valuations, it does discuss the CRR's experiences with IFRS 13 and has a particular focus on disclosure matters, although some measurement issues are also discussed.

• Fair value measurements should use market participants’ assumptions rather than the company’s own assumptions.  Whilst the transaction price usually reflects fair value, there may be circumstances where this is not the case, for example, in transactions with related parties. Companies should ensure that appropriate adjustments are made to fair value measurements in such cases.
• Where a company is required to value a material item, and where no internal expertise exists, the FRC expects companies to consider whether specialist third party input is required. Where such advice has been obtained, companies are encouraged to disclose that fact.
• High quality disclosures are key. So, for example, the following should be taken into account:  IFRS 13 disclosures should be provided for each class of assets and liabilities, determined on the basis of their nature (for example, debt versus equity investments), characteristics and risks (including climate change); companies should ensure that the minimum disclosures required by the standard are provided (including recurring Level 3 measurements); companies should address the overall disclosure objective of the standard, not only the specific requirements; companies should avoid boilerplate and immaterial information; where climate-related matters materially affect fair value measurement, the FRC expects companies to explain how the impact has been incorporated into the measurement and, if relevant, to quantify any significant estimation uncertainty; and information on fair value measurements should be consistent across the annual report and accounts.

Case studies and examples of good practice

Although the thematic review focuses on disclosure matters, it includes two case studies to highlight measurement issues the FRC found in its routine monitoring of corporate reporting. 

To encourage improvement in the general quality of company disclosures, the thematic review also includes examples of good practice, each of which demonstrates a particular characteristic of a better disclosure.

(FRC, Thematic Review – IFRS 13 ‘Fair value measurement’, 13.06.2023)