HKFRS 13 - Fair Value Measurement (Condensed)

1. Objective & Scope

Objective

HKFRS 13 has three primary objectives:

• Defines fair value as a market-based measurement
• Establishes a single framework for measuring fair value
• Requires disclosures about fair value measurements

Scope

Applies when another HKFRS requires or permits fair value measurements or disclosures.

Excluded from Disclosure Only: Plan assets under HKAS 19, retirement benefit investments under HKAS 26, assets where recoverable amount is fair value less costs of disposal under HKAS 36.

2. Definition & Core Concepts

Fair Value Definition

Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Critical Characteristics

• Exit price - selling price, not purchase price
• Orderly transaction - not forced or distress sale
• Market participants - independent, knowledgeable, willing, able
• Measurement date - current market conditions

Principal vs. Most Advantageous Market

Transaction Costs vs. Transport Costs

3. Non-Financial Assets

Highest and Best Use

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use.

Valuation Premise

4. Liabilities & Equity

General Principles

• Liability would remain outstanding - not settled on measurement date
• Equity instrument would remain outstanding - not cancelled on measurement date

Non-Performance Risk

Restriction Preventing Transfer

Do NOT include a separate input or adjustment for a restriction preventing transfer of a liability or equity instrument. The effect is already implicitly or explicitly included in other inputs.

Financial Liability with Demand Feature

The fair value of a financial liability with a demand feature (e.g., a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.

5. Portfolio Exception & Initial Recognition

Portfolio Exception for Financial Assets and Liabilities

Permits measuring fair value of a group of financial assets and liabilities on the basis of net exposure to market risks or credit risk.

Conditions for Using Exception:

1. Manages group on basis of net exposure to particular market risk(s) or counterparty credit risk
2. Provides information on that basis to key management personnel
3. Required or elected to measure those instruments at fair value

Fair Value at Initial Recognition

6. Valuation Techniques

General Principles

An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

Three Valuation Approaches

Present Value Techniques

Components: Estimate of future cash flows, expectations about variations, time value of money, risk premium, other factors, and for liabilities: non-performance risk.

7. Fair Value Hierarchy

Overview

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

Key Rules

• Level 1: Must be used without adjustment whenever available. Blockage factor NOT permitted.
• Level 2: May require adjustments for condition/location, comparability, or volume/activity level.
• Level 3: Reflect assumptions market participants would use; include assumptions about risk.

8. Disclosures & Transition

Disclosure Objectives

1. For assets/liabilities measured at fair value (recurring or non-recurring): valuation techniques and inputs used
2. For recurring Level 3 measurements: effect on profit or loss or OCI

Minimum Disclosure Requirements (per class)

• Fair value at end of reporting period; for non-recurring: reasons for measurement
• Level in fair value hierarchy (1, 2, or 3)
• Transfers between Level 1 and 2 (recurring only) - amounts, reasons, policy
• Description of valuation techniques and inputs used (Level 2 and 3); quantitative info about significant unobservable inputs (Level 3)
• Level 3 reconciliation (recurring only) - opening to closing balances
• Level 3 unrealised gains/losses (recurring only)
• Description of valuation processes (Level 3)
• Sensitivity analysis (Level 3 recurring) - narrative description; for financial instruments: quantitative effect of reasonably possible alternative assumptions
• If highest and best use differs from current use (non-financial assets)

Effective Date and Transition

Transition: Prospective application from beginning of annual period of initial application. Comparative information for periods before initial application need not include HKFRS 13 disclosures.