This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our privacy statement for more information on the cookies we use and how to delete or block them.
Article:

Changes to disclosure requirements of fair value hierarchy

14 April 2016

Section 11 of FRS 102 requires all companies with financial instruments measured at ‘fair value through profit or loss’ to make certain disclosures.

In March 2016, the FRC issued amendments to the fair value hierarchy disclosures contained within section 34 of FRS 102 that are intended to increase the consistency with disclosures required by EU-adopted IFRS. These amendments are effective for accounting periods beginning on or after 1 January 2017 although early adoption is permitted, subject to that fact being stated in the financial statements. The amendments change the description of the fair value hierarchy in FRS 102 used in section 34 from one based on section 11 paragraph 27 to one that is more consistent with the fair value hierarchy included within EU-adopted IFRS 13.

The changes mean that inconsistencies may arise where an entity has applied the recognition and measurement criteria of sections 11 and 12 of FRS 102, instead of those of the IFRS standards (as permitted by paragraph 11.2 and 12.2). For example, some financial instruments measured in accordance with part (c) of paragraph 11.27 may fall within Level 2 of the IFRS hierarchy as set out in the section 34 amendments, as they are based on observable inputs. However, as FRS 102 (unlike IFRS) doesn’t require any additional disclosures where a financial instrument falls within Level 3 the impact of this difference is reduced. The Accounting Council has advised the FRC that, as part of the first triennial review of FRS 102, consideration should be given to revising paragraph 11.27.

The table below sets out the current and the amended section 34 disclosure requirements under to the fair value hierarchy:

 

Current section 34 disclosure requirement
Amended section 34 disclosure requirement
… for each class of financial instrument, an analysis of the level in the fair value hierarchy (as set out in paragraph 11.27) into which the fair value measurements are categorised. 
 
… for each class of financial instrument, an analysis of the level in the following fair value hierarchy into which the fair value measurements are categorised.
Paragraph 11.27 hierarchy. 
A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement in its entirety.
a)  The best evidence of fair value is a quoted price for an identical asset in an active market. 
Quoted in an active market in this context means quoted prices are readily and regularly available and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted price is usually the current bid price.
Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
b)    When quoted prices are unavailable, the price of a recent transaction for an identical asset provides evidence of fair value as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place. If the entity can demonstrate that the last transaction price is not a good estimate of fair value (eg because it reflects the amount that an entity would receive or pay in a forced transaction, involuntary liquidation or distress sale), that price is adjusted.
Level 2: Inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.
 
c)     If the market for the asset is not active and recent transactions of an identical asset on their own are not a good estimate of fair value, an entity estimates the fair value by using a valuation technique. The objective of using a valuation technique is to estimate what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations.  

Level 3: Inputs are unobservable (ie for which market data is unavailable) for the asset or liability.