Fair value disclosures

Learning objectives

• Explain that the difference between fair value at initial recognition and the transaction price gives rise to disclosures when the measurement is based on unobservable inputs.L2
• Determine whether the fair value of an instrument must be disclosed or whether its carrying amount is a reasonable approximation of fair value.L3

Normative references

• IFRS 7 §25Except as set out in para. 29, the entity discloses, for each class of financial assets and financial liabilities, the fair value of that class in a way that permits it to be compared with its carrying amount; the requirement therefore also applies to instruments measured at amortised cost.
• IFRS 7 §28When the entity does not recognise a gain or loss on initial recognition because fair value is evidenced neither by a quoted price in an active market for an identical instrument (Level 1) nor by a valuation technique that uses only data from observable markets, it discloses, by class: its accounting policy for recognising in profit or loss the difference between fair value at initial recognition and the transaction price, the aggregate difference yet to be recognised at the beginning and end of the period with a reconciliation of changes, and why the transaction price was not the best evidence of fair value.
• IFRS 7 §29Fair value need not be disclosed when the carrying amount is a reasonable approximation of fair value (for example short-term trade receivables and payables) or for lease liabilities; items (b) and (c) have been deleted.

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

5 questions

• Tigre SA acquires a financial instrument for a transaction price of 1,000. Its fair value at inception, estimated using unobservable inputs, is 940 (case facts). What does IFRS 7 provide about this difference of 60?L2
• Kelp SA, which has no lease liabilities (case fact), omits the disclosure of an instrument's fair value only if its carrying amount is a reasonable approximation of it (IFRS 7, para. 29). A working file applies this rule to Kelp's instruments. Which of its conclusions is wrong?L3
• Where are the fair value hierarchy and the valuation techniques found to which the IFRS 7 fair value disclosures refer?L2
• Four employees comment on the IFRS 7 fair value disclosures. Which of their sentences is wrong?L2
• Mira SA holds a portfolio of loans measured at amortised cost, which form a class of financial assets; none of the exemptions provided by the Standard applies to this class (case data). What does IFRS 7 require about the fair value of this class?L3