ILLUSTRATIVE EXAMPLES TO ACCOMPANY

IFRS13 FAIR VALUE MEASUREMENT

UNQUOTED EQUITY INSTRUMENTS WITHIN
THE SCOPE OF IFRS9 FINANCIAL INSTRUMENTS
INTERNATIONAL FINANCIAL REPORTING BULLETIN
2013/06
Summary
In December2012, the IFRS Foundation published education material to accompany IFRS13 Fair Value
Measurement for measuring the fair value of unquoted equity instruments that are within the scope of
IFRS9 Financial Instruments. IFRS13 is effective for periods beginning on or after 1January2013.
IFRS9 applies to investments in equity instruments where the investor holds a non controlling interest
(e.g. 10% of the ordinary shares) which:
In its consolidated or individual financial statements, is not required to be accounted for as an
associate, joint venture, or joint arrangement
In its separate financial statements, if the investment is not an interest in a subsidiary, associate,
joint venture or joint arrangement unless the investor has elected to measure those investments in
accordance with IFRS9.
IFRS9 requires all investments in equity instruments that are within its scope to be measured at fair
value, regardless of whether they are quoted or unquoted. The educational material is intended to assist
entities in measuring the fair value of their investments in unquoted equity instruments because the fair
value of those instruments is not typically available.
The education material describes, at a high level, the application of various valuation techniques in the
context of the requirements of IFRS13. It illustrates, with examples, how to measure the fair value of an
unquoted equity instrument even if only limited financial information is available. The threevaluation
approaches and techniques described are:
1) Market approach:
a) Transaction price paid for an identical or a similar instrument in an investee
b) Comparable company valuation multiples.
2) Income approach:
a) Discounted cash flow method
b) Dividend discount model
c) Constant growth dividend discounted model
d) Capitalisation model.
3) Adjusted net asset method.
The education material does not prescribe a specific valuation technique, but encourages the use of
professional judgment together with consideration of all facts and circumstances surrounding the
measurement.
The educational material has been developed and published by the IFRSFoundation, and as such is nonauthoritative.

STATUS
Final
EFFECTIVE DATE
N/A
ACCOUNTING IMPACT
May be significant for entities with
investments in unquoted equity
instruments that are within the
scope of IFRS9.

IFRB 2013/06 ILLUSTRATIVE EXAMPLES TO ACCOMPANY IFRS13 FAIR VALUE MEASUREMENT UNQUOTED EQUITY INSTRUMENTS WITHIN THE SCOPE OF

IFRS9 FINANCIAL INSTRUMENTS

Background
The IFRSFoundation has been tasked by the International Accounting
Standards Board (IASB) to develop education material to address
the application of the principles in IFRS13 on different topics. The
guidance for fair value measurement of unquoted equity instruments
forms a chapter of that education material. Chapters addressing fair
value measurement of other topics within the context of IFRS13 will
be published as they are finalised.
IFRS9 requires all investments in equity instruments within its scope
to be measured at fair value. This represents a change from IAS39
Financial Instruments: Recognition and Measurement, which contains
a very limited exception from fair value measurement. During the
development of IFRS9, respondents to the exposure draft raised
concerns about the elimination of the limited exemption in IAS39
with some of these concerns being based on the cost and difficulty in
determining fair value on a recurring basis.
IFRS9 does note that, in certain limited circumstances, cost may be
an appropriate estimate of fair value for unquoted equity instruments.
That may be the case if there is not enough recent information
available to measure fair value, or if there is a wide range of possible
fair value measurements and cost represents the best estimate of fair
value within the range. However, IFRS9 is clear that the use of cost as
an approximation of fair value applies in very limited circumstances,
and includes a range of indicators of circumstances in which this
approach would not be appropriate. The IASB also noted in its Basis for
Conclusions to IFRS9, that the use of cost as an approximation of fair
value would never apply to equity instruments held by entities such as
financial institutions or investment funds.
The educational material has been published to assist entities with
measuring fair value for their unquoted equity instruments. It
accompanies IFRS13, which is effective for periods beginning on or
after 1January2013. The educational material describes, at a high
level, the application of various valuation techniques that can be used
to measure the fair value of an unquoted equity instrument despite
having limited financial information.
The IFRSFoundations intention in issuing the educational material
is to provide support to personnel responsible for measuring the fair
value of unquoted equity instruments that are within the scope of
IFRS9. It is not intended to be a comprehensive document to support
non-valuation specialists in performing complex valuations.

Approaches to valuation
The educational material describes three different valuation
approaches, and the different valuation techniques under those
approaches that are in accordance with the principles in IFRS13 and
could be applied in determining the fair value of an unquoted equity
instrument. However, regardless of the valuation technique used,
the fair value measurement of those equity instruments must reflect
market conditions at the investors reporting date.
1) Market approach
The market approach uses prices and other relevant information
generated by market transactions involving identical or
comparable (i.e. similar) assets. The following valuation techniques
are described under the market approach in the document:
a) Transaction price paid for an identical or
a similar instrument in an investee
b) Comparable company valuation multiples.

a) Transaction price paid for an identical or a similar instrument in an

investee
If an investor has recently acquired an investment in another
equity instrument that is identical or similar to the unquoted
equity instrument being valued, then the price for that transaction
might be a reasonable starting point for measuring fair value.
(i) Identical instrument
If the equity instrument that was recently acquired isidentical
to the unquoted equity instrument being valued, the investor
should assess whether factors or events that have occurred
after the purchase date that could affect the fair value of the
unquoted equity instrument at measurement date. If so, the
investor should adjust the transaction price for those factors.
Factors could include changes in market conditions that
have affected the investees growth prospects or expected
milestones, or internal matters such as fraud, commercial
disputes, changes in management or strategy.
(ii) Similar instrument
If the equity instrument that was recently acquired issimilar
to the unquoted equity instrument being valued, theinvestor
needs to understand, and make adjustments for, any
differences between the two equity instruments. Differences
might include different economic rights (e.g. dividend rights,
priority upon liquidation etc) and control rights (i.e. control
premium in a controlling interest vs. a non-controlling
interest).
b) Comparable company valuation multiples
This technique assumes that the value of an unquoted asset can
be measured by comparing that asset to similar assets where
market prices are available. Information can usually be sourced
from quoted prices and/or observable data from transaction such
as mergers and acquisitions. This technique involves the following
four steps:
(i) Step one: Identify comparable company peers.
(ii) Step two:
Select the performance measure that is most relevant to
assessing the value of the investee (earnings, equity book
value or revenue)
Once selected, derive and analyse possible valuation
multiples and select the most appropriate one (e.g. EBIT,
EBITA, EBITDA, or P/E for earnings, P/B for book value)
Adjust the relevant multiple as appropriate for general
qualitative differences between the investee and its
company peers (e.g. size in terms of revenues or assets,
level and rate of growth of earnings, diversity of product
range, diversity and quality of customer base, leverage
location, lack of liquidity).
(iii) Step three: Apply the appropriate valuation multiple to the
relevant performance measure of the investee to obtain an
indicated fair value of the investees equity or the enterprise
value.
Note: for the purposes of the educational material, enterprise
value is the fair value of all financial claims attributable to all
capital providers (i.e. debt and equity holders).
(iv) Step four: Make appropriate adjustments for differences that
are directly related to the characteristics of equity instruments
being valued (e.g. non-controlling interest discount, lack of
liquidity).

IFRB 2013/06 ILLUSTRATIVE EXAMPLES TO ACCOMPANY IFRS13 FAIR VALUE MEASUREMENT UNQUOTED EQUITY INSTRUMENTS WITHIN THE SCOPE OF
IFRS9 FINANCIAL INSTRUMENTS

2) Income approach
The valuation techniques under the income approach convert
future amounts to a single current (i.e. discounted) amount. The
following valuation techniques are described in the document:
a) Discounted cash flow method
b) Dividend discount model
c) Constant growth dividend discounted model
d) Capitalisation model.
a) Discounted cash flow method
Under this method, the investor would discount the expected
cash flows amounts to a present value at a rate of return that
represents the time value of money and the relative risks of the
investment. Equity instruments can be valued directly using free
cash flow to equity (i.e. an equity valuation), or indirectly, by
obtaining the enterprise value using free cash flow to firm and
then subtracting the fair value of the investees debt net of cash.
b) Dividend discount model
This model assumes that the price of the equity instrument equals
the present value of all its expected future dividends in perpetuity.
It is often used when the investee pays dividends consistently.
c) Constant-growth dividend discount model
This model determines the fair value of the equity instrument by
referring to a forecast of growing dividend streams. This model is
sensitive to the assumptions about the growth rate. The model is
best suited for investments that both:
Are growing at a rate that is equal to or lower than the nominal
growth rate in the economy
Have a well established dividend payout policy that the
investee intends to continue into the future.
d) Capitalisation model
This model applies a rate to an amount that represents a measure
of economic income (e.g. free cash flows to firm or free cash flows
to equity) to arrive at an estimate of present value. The model is
useful as a cross-check when other approaches have been used.

3) Adjusted net asset method

The adjusted net asset method is a combination of the market
and income approach. It involves directly measuring the fair
value of the recognised and unrecognised assets and liabilities of
the investee. This method is likely to be appropriate for entities
that derive value from holding assets (such as property holding
companies or investment entities) and may also be appropriate for
entities in their early stages that have little financial history and
may not yet have developed products.
Typically, the adjusted net asset method involves making
adjustments to the balance sheet carrying amounts of assets
and liabilities. Items that are commonly subject to adjustments
include:
Intangible assets
Property plant and equipment
Receivables
Inter-company balances
Financial assets not measured at fair value
Unrecognised contingent liabilities.
Once an equity valuation has been derived, the investor would also
need to consider making the following adjustments for its share of
the investees equity instruments held:
Non controlling interest
Lack of liquidity
The passage of time that could have an effect on the changes
in fair value of the assets and liabilities or any additions/
disposals
Any other contractual agreements specific to the equity
instruments held etc.

IFRB 2013/06 ILLUSTRATIVE EXAMPLES TO ACCOMPANY IFRS13 FAIR VALUE MEASUREMENT UNQUOTED EQUITY INSTRUMENTS WITHIN THE SCOPE OF

IFRS9 FINANCIAL INSTRUMENTS

Use of judgement

Common oversights

When determining a price that is most representative of the fair value,

an investor needs to consider:

The educational guidance also sets out a list of common oversights

when applying the valuation techniques it describes, or determining
their inputs. While not exhaustive, these may assist entities in avoiding
potentially significant errors.

Which valuation technique makes the least adjustment to the

inputs used (and, consequently, which technique maximises the
use of relevant observable inputs, which is the valuation approach
that IFRS requires)
The range of values indicated by the techniques used and whether
they overlap
The reasons for the differences in value under different techniques.
Depending on the circumstances, one valuation technique might be
more appropriate than another. Some of the factors that need to be
considered when selecting the most appropriate valuation technique
include:
Information that is reasonably available to an investor
The market conditions (i.e. bullish or bearish markets might require
an investor to consider different valuation techniques)
The investment horizon and the type of investment
The life cycle of the investee (some valuation techniques are better
at capturing the market sentiment when measuring the fair value
of a short-term financial investment)
The nature of an investees business (some valuation techniques
are better at capturing the volatile or cyclical nature of an
investees business)
The industry in which the investee operates.
Judgement needs to be applied both in the application of a particular
valuation technique and in the selection of the valuation technique.
For example, an investor is likely to place more emphasis on the
comparable company valuation multiples techniques, where there is a
sufficient number of comparable peers.

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