47) IFRS - Explain Fair value hierarchy for Financial Instruments...

Monday, May 10, 2010

Hint

As per IFRS 7, Fair Valuation of Financial Instruments has following hierarchy:

  • Level 1
    - in Active Markets
    - for identical assets or liabilities or instruments
    - Valued using Quoted Prices (unadjusted)
    e.g. Listed instruments
  • Level 2
    - Valued by reference to inputs that are observable:
        > Direct (prices), or
        > Indirect (derived from prices)
    - other than quoted prices included within Level 1
    e.g. derivatives such as interest rate swaps or forward currency contracts where inputs are mostly observable and OTC (Over-the-counter) securities
  • Level 3
    - using inputs that are based on unobservable market data
    - Valued by reference to valuation techniques
    e.g. Unquoted private equity or venture capital holdings
Disclosure requirement for the hierarchy is as follows:
  • Levels
    The levels in the fair value hierarchy into which the fair value measurements are categorised
  • Transfers (between Level 1 and 2)
    - significant transfers between Level 1 and Level 2, if any, and
    - the reasons for those transfers
  • Reconciliation (Level 3)
    - a reconciliation for fair value measurements in Level 3
       >  from the beginning balances to the ending balances,
       >  highlighting purchases, sales, and gains and losses,
       >  identify transfers into or out of Level 3, and
    - the reasons for such transfers.



    NOTE:

    Disclosure of fair values is not required (just information is quoted) in following cases:
    • when the carrying value is reasonable approximation of fair value,
      such as short-term trade receivables and payables, or
    • for instruments whose fair value cannot be measured reliably

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