IFRS 13 · Case studies (Step 3 of 5)
Case study
Groupe Halvern (fictitious entity) combines an industrial division and a financial division. For the 31 December 20X5 closing, you prepare the fair value measurement file: copper lot, industrial site, warranty, level 3 instruments, an instrument acquired during the year and a derivatives portfolio. A reviewer will check the file and may ask questions. Teaching simulation: the review trail of the file (preparation, reviewer notes and final sign-off) is simulated for demonstration purposes; it is neither a real review nor a validation of the content.
Your assignment
Build the file: frame the items and the exit price; justify the principal market; determine the highest and best use of the site and cross-check it with a present value technique; measure the warranty taking own credit risk into account and classify it in the hierarchy; reconcile level 3; deal with the day one difference; assess the portfolio exception and measure the net position; record and present the effect; prepare the disclosure; answer the reviewer's points; conclude.
You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.
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.
10 documents: open each one to read it.
Document 1Memo
Engagement letter of the file: six items of the group are measured or documented at fair value at 31 December 20X5 (a lot of metal, the Brenno site, a performance warranty, level 3 instruments, an instrument acquired during the year and a portfolio of interest rate derivatives). The unit of account is, for each, the one set by the standard that applies to the item.
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Transactions per year in the Hamburg market | 300 units | |
| Transactions per year in the Singapore market | 90 units | |
| Value under the current use of the Brenno site | €3,600,000.00 | |
| Conversion costs of the current use | €0.00 | |
| Value under the data centre use | €4,900,000.00 | |
| Conversion costs into a data centre | €800,000.00 | |
| Net exit price in 1 year: high scenario | €4,500,000.00 | |
| Probability of the high scenario | 60% | |
| Net exit price in 1 year: central scenario | €4,100,000.00 | |
| Probability of the central scenario | 30% | |
| Net exit price in 1 year: low scenario | €3,400,000.00 | |
| Probability of the low scenario | 10% | |
| Discount rate of the site (risk-free rate adjusted for a risk premium) | 5% | |
| Number of discounting periods of the site | 1 year | |
| Expected cost of the warranty in 2 years (market participants' estimate) | €2,646,000.00 | |
| Number of discounting periods of the warranty | 2 years | |
| Discount rate of the warranty (3% risk-free rate + 2% own credit spread) | 5% | |
| Change in fair value for a 10% change in the estimated flow | €240,000.00 | |
| Level 3 balance at the beginning of the period | €4,200,000.00 | |
| Gains recognised in profit or loss | €310,000.00 | |
| Gains recognised in other comprehensive income | €90,000.00 | |
| Purchases | €600,000.00 | |
| Sales and settlements | €500,000.00 | |
| Transfers into level 3 | €200,000.00 | |
| Transfers out of level 3 | €100,000.00 | |
| Level 3 balance reported at the end of the period | €4,800,000.00 | |
| Transaction price of the instrument acquired | €5,000,000.00 | |
| Fair value of the instrument by the technique (observable inputs only) | €5,120,000.00 | |
| Long positions of the derivatives portfolio | €90,000,000.00 | |
| Short positions of the derivatives portfolio | €62,000,000.00 | |
| Broker quotation for the open net position | €210,000.00 | |
| Spread adjustment on the net position | €15,000.00 | |
| Training budget 20X6 | €150,000.00 |
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.
Engagement letter
Markets for the copper lot
Brenno site
Income approach cross-check
Performance warranty
Level 3 movements
Instrument acquired in October
Interest rate derivatives portfolio
Reply from the risk department
Training budget
Organise your work freely: deal with each point, then argue your conclusion.
Task 1Analysis
Frame the six items: unit of account, exit price, market participants.
Task 2Professional judgement
What is the principal market of the copper lot?
Task 3Calculation
Compute the net value of the site under each use.
Part 1 · Calculation
Compute the net value of the site under each use.
Result: Net value under the data centre use
Task 4Calculation
What is the value under the highest and best use?
Part 1 · Calculation
What is the value under the highest and best use?
Task 5Calculation
Compute the expected net exit price of the converted site.
Part 1 · Calculation
Compute the expected net exit price of the converted site.
Task 6Calculation
Discount it at the rate retained.
Part 1 · Calculation
Discount it at the rate retained.
Task 7Professional judgement
Which indication should be retained for the site? Justify.
Task 8Calculation
Compute the fair value of the warranty.
Part 1 · Calculation
Compute the fair value of the warranty.
Task 9Professional judgement
In which level should the warranty be classified? Justify.
Task 10Calculation
Reconcile the level 3 balance with the reported balance.
Part 1 · Calculation
Reconcile the level 3 balance with the reported balance.
Result: Level 3 reconciliation difference: reported − rebuilt
Task 11Calculation
Compute the initial difference of the instrument acquired.
Part 1 · Calculation
Compute the initial difference of the instrument acquired.
Task 12Professional judgement
Which treatment should be used for the initial difference? Justify.
Task 13Professional judgement
Is the derivatives portfolio eligible for the portfolio exception? Justify.
Task 14Calculation
Compute the net position.
Part 1 · Calculation
Compute the net position.
Task 15Calculation
Compute the fair value of the net position.
Part 1 · Calculation
Compute the fair value of the net position.
Task 16Journal entries
Record the acquisition of the instrument.
Part 1 · Journal entry · Journal entries
Entry 1 of 1
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Line 3
Task 17Effects on the financial statements
What is its effect on the financial statements?
Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
Financial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
Result: Amount of the effect — Equity
Task 18Analysis
Prepare the disclosure: table by level, techniques and inputs, reconciliation.
Task 19Conclusion
Write the conclusion of the file.
Points raised during the review of this file: read them as the preparer would.
Your working draft for this file: points noted, leads, intermediate calculations.
Saved on this device only; never graded.
Complete every item of the file to submit it (0 / 21).
Document this file
These working papers use the data and results of this case.
Normative references