Observable and unobservable inputs

Learning objectives

• Distinguish observable and unobservable inputs and justify the priority given to observable inputs.L2

Normative references

• IFRS 13 §67Valuation techniques maximise the use of relevant observable inputs and minimise the use of unobservable inputs.
• IFRS 13 §68Examples of markets whose prices serve as observable inputs: exchange markets, brokered markets, dealer markets, principal-to-principal markets.
• IFRS 13Liability not held by another party as an asset (for example a decommissioning liability) measured using a present value technique: the entity estimates the cash outflows that market participants would expect to incur in fulfilling the obligation, including the compensation they would require for undertaking the activity and for assuming the risk that the actual outflows differ from the expected outflows (risk premium, para. B33).
• IFRS 13Example of a non-financial liability with no contractual rate of return and no observable market yield: the components of the required return may be indistinguishable (fixed-fee price of a third-party contractor) or may need to be estimated separately (cost-plus price of a contractor, who does not bear the risk of future cost changes).
• IFRS 13The risk premium for a liability or an entity's own equity instrument not held by another party as an asset is included either by increasing the cash outflows or by reducing the discount rate; the entity must neither double-count nor omit the risk adjustment.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• Which general rule applies to the inputs used by a fair value valuation technique?L2
• Which of the following sources can provide prices used as observable inputs?L2
• In a review of a valuation file, a controller examines four practices relating to inputs. Which one is contrary to the standard?L2
• To value a debt security, Salvane uses a model whose inputs are: (1) an interest rate published daily by dealers in their market and (2) a margin set internally, with no reference to market data. How should the entity treat these two inputs?L2