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Practical caseIFRS 13L4 · Expert

Level 3 instruments: classification, reconciliation and sensitivity

5 documents8 tasks≈ 90 min
0 / 11 items completed
Standards
IFRS 13 — Fair Value Measurement
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Orbis Capital (fictitious entity) is an investment company whose financial instruments are measured at fair value. For the 31 December 20X5 closing, the valuation department sends the instruments, the level 3 movements and sensitivities; you prepare the classification in the hierarchy, the reconciliation and the note.

Your assignment

Analyse the inputs of each instrument and classify it in the hierarchy, with justification; reconcile the level 3 balance and compare it with the reported balance; prepare the table by level and the sensitivity note, flagging the missing information; record the gains of the period and present their effect; conclude.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

5 documents: open each one to read it.

Document 1Table

Instruments at fair value

Orbis Capital's instruments at fair value at 31 December 20X5. A: shares listed on an active market, unadjusted quoted price, 2,400,000 EUR. B: bond traded on an inactive market, valued on the yield curve and quotes of similar bonds, with no adjustment, 1,350,000 EUR. C: unlisted convertible note, cash flows discounted with a revenue growth rate and an illiquidity premium taken from the entity's data (significant), 3,700,000 EUR. D: interest rate swap valued on the observable curve, with a credit adjustment of 12,000 EUR based on a counterparty spread estimated internally, 800,000 EUR.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Fair value of instrument A (listed shares)€2,400,000.00
Fair value of instrument B (bond)€1,350,000.00
Fair value of instrument C (unlisted convertible note)€3,700,000.00
Fair value of instrument D (interest rate swap)€800,000.00
Credit adjustment of swap D (counterparty spread estimated internally)€12,000.00
Level 3 balance at the beginning of the period€3,100,000.00
Gains recognised in profit or loss€240,000.00
Gains recognised in other comprehensive income€60,000.00
Purchases€500,000.00
Sales and settlements€400,000.00
Transfers into level 3€350,000.00
Transfers out of level 3€150,000.00
Level 3 balance reported at the end of the period€3,700,000.00
Change in fair value if the growth rate used rises by 1 point€310,000.00
Change in fair value if the growth rate used falls by 1 point€280,000.00
Change in fair value if the illiquidity premium rises by 1 point€260,000.00
Change in fair value if the illiquidity premium falls by 1 point€300,000.00
Return target of the strategic plan8%

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort5

  • Instruments at fair value

  • Level 3 movements

  • Sensitivity of instrument C

  • Transfers policy

  • Strategic plan

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Which inputs does each instrument use and are they observable?

      2. Task 2Professional judgement

        In which level should each instrument be classified? Justify, in particular for swap D.

      3. Task 3Calculation

        Reconcile the level 3 balance and compare it with the reported balance.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Reconcile the level 3 balance and compare it with the reported balance.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Difference: reported − rebuilt

      4. Task 4Analysis

        Prepare the table by level and the level 3 sensitivity note.

      5. Task 5Missing information

        What information is missing for the sensitivity note?

      6. Task 6Journal entries

        Record the gains of the period.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      7. Task 7Effects on the financial statements

        What is their effect on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      8. Task 8Conclusion

        Write the conclusion.

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 11).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 13 §81
      • IFRS 13 §85
      • IFRS 13 §86
      • IFRS 13 §93
      • IFRS 13 §94