IFRS 13 and its application is well known by accounting specialists who prepare international financial statements. The purpose is to measure an asset at its fair value. In accordance with IFRS 13, there are three measurement levels in a measurement hierarchy for this purpose. And it is precisely these measurement levels that must be viewed extremely critically in their presentation and application. This paper presents the practicability of IFRS 13 in detail and attempts to critically examine this and the application of IFRS 13.
Table of Contents
1 Introduction and problem definition
2 Theoretical principles on the topic of fair value
2.1 The development of the fair value concept
2.2 Structure and Overview of IFRS 13
2.3 Key objectives and areas of application
2.4 Definition: Fair Value
2.5 Possible applications of the fair value approach
2.5.1 Application to non-financial assets
2.5.2 Application to liabilities and equity instruments of an enterprise
2.5.3 Application to financial assets and financial liabilities offsetting positions with respect to market or counterparty risks
3 Fair-Value-Measurement / IFRS 13-Performance
3.1 The Fair Value Hierarchy
3.2 Closer examination and presentation of the measurement hierarchy
3.3 Fair value measurement methods
3.3.1 The Approach to Fair Value Measurement
3.3.2 Valuation assumption for non-financial assets
3.3.3 Fair value on first-time recognition
3.3.4 Market Approach (market approach method / market price oriented method)
3.3.5 Income approach (income approach / capital/yield-oriented)
3.3.6 Detailed description and analysis of the income-based approach
3.3.7 Cost Approach (cost approach / cost-oriented procedure)
4 Critical analysis of fair value measurement
4.1 Critical analysis in determining fair value in general
4.1.1 Criticism about the presentation of the reference market and market participants
4.1.2 Criticism of the topic of the valuation hierarchy and its valuation procedures
4.2 Critical analysis of the problem of determining fair value based on discretionary powers and complexity
4.3 Effects of the use of discretionary powers in the application of IFRS 13
5 Theses summary of the results and outlook
Objectives and Topics
The primary objective of this work is to provide a critical and comprehensive examination of IFRS 13, focusing on its interpretation and practical application within accounting. The central research question explores how the fair value measurement, through its valuation hierarchy and associated methods, introduces significant discretionary scope and complexity, thereby impacting the objectivity and transparency of financial reporting.
- Theoretical foundations and development of the fair value concept within IFRS.
- Methodological analysis of the fair value hierarchy (Levels 1, 2, and 3) and specific valuation techniques.
- Critical investigation into the discretionary power granted to management during the valuation process.
- Evaluation of the impact of fair value accounting on financial statement analysis and the resulting challenges for external stakeholders.
Excerpt from the book
Critical analysis of the problem of determining fair value based on discretionary powers and complexity
It became apparent in the previous chapter that the hierarchy levels of IFRS for determining fair value are not an effective, transparent and reliable method. In this chapter, the points of criticism will be embedded in the further analysis in order to better understand the resulting scope for discretion.
In the critical analyses it can be clearly deduced that, for example, a large number of permissible fair value valuations are explicitly possible in the third valuation hierarchy level. The possibilities of representing a fair value already begin with the data - so-called inputs - which are actually not observable. Developments in earnings or the use of assets that increase or decrease the carrying amount, depending on their nature, are further decisive options for broadening the scope of discretion. On these uncertain databases, forecasts and other influencing factors (such as interest rate trends, market developments, political authority in case law, etc.) are now included. Thus, a wide range of discretionary leeway can be assumed.
Summary of Chapters
1 Introduction and problem definition: Provides an overview of the IAS/IFRS transition and establishes the research focus on the practical implementation and critical issues surrounding IFRS 13.
2 Theoretical principles on the topic of fair value: Examines the development of the fair value concept, the structure of IFRS 13, and the fundamental valuation methods and application fields.
3 Fair-Value-Measurement / IFRS 13-Performance: Details the three-level valuation hierarchy and the specific technical approaches, such as market, income, and cost methods, used to determine fair value.
4 Critical analysis of fair value measurement: Offers a deep analytical critique of the valuation hierarchy, focusing on the subjective and complex nature of discretionary management choices and their implications for transparency.
5 Theses summary of the results and outlook: Synthesizes the findings, contrasting the fair value principle with the acquisition cost principle and assessing the future outlook for fair value accounting.
Keywords
IFRS 13, Fair Value, Valuation Hierarchy, Financial Reporting, Discretionary Scope, Market Approach, Income Approach, Cost Approach, Management Discretion, Accounting Policy, Financial Crisis, Transparency, Valuation Techniques, Balance Sheet Analysis, Asset Valuation.
Frequently Asked Questions
What is the fundamental focus of this publication?
The work provides a comprehensive presentation of IFRS 13 for practical application, specifically focusing on a critical examination of how fair value is interpreted and applied in real-world accounting scenarios.
What are the central thematic fields covered?
The core themes include the theoretical development of the fair value concept, the technical implementation of the fair value hierarchy (Levels 1-3), the specific valuation methods, and an analytical critique of the discretionary scope allowed under these regulations.
What is the primary research objective?
The primary goal is to assess whether IFRS 13 provides a uniform and transparent basis for measurement or if it inadvertently creates opportunities for subjective management influence and reduced financial transparency.
Which scientific methods are employed?
The publication utilizes a descriptive, analytical, and critical examination approach, relying on literature review and normative analysis of IFRS 13 standards and their application in financial practice.
What topics are addressed in the main part?
The main part covers the theoretical foundations (Chapter 2), the specific mechanics of Fair Value Measurement and IFRS 13 performance (Chapter 3), and a critical analysis regarding the complexity and discretionary power inherent in the valuation process (Chapter 4).
Which keywords characterize this work?
Key terms include Fair Value, IFRS 13, Valuation Hierarchy, Discretionary Scope, Accounting Policy, Management Discretion, and Financial Statement Analysis.
How does the hierarchy level influence management discretion?
The work demonstrates that higher hierarchy levels (Level 1) rely on observable market data, limiting discretion, while lower levels (Level 3) rely on unobservable inputs and estimation models, significantly increasing the risk of subjective manipulation by management.
What is the relationship between the financial crisis and fair value accounting?
The publication highlights that fair value was a central trigger in the financial crisis due to difficulties in determination during volatile market conditions, leading to calls for stricter rules and a potential shift back toward the cost principle.
- Arbeit zitieren
- PhD Maged Hassanien (Autor:in), 2019, A critical examination of the interpretation and application of IFRS 13, München, GRIN Verlag, https://www.grin.com/document/496625
