An orderly transaction between market participants?

The impact of IFRS 13 for investment funds

Since 1 January 2013, entities adopting International Financial Reporting Standards 'IFRS' have been subject to the requirements of IFRS 13 Fair Value Measurement. No doubt this is something of an unpleasant prospect for all the triskaidekaphobics in the accountancy community, but is it actually a significant concern or an unlucky development for those in the investment funds sector specifically?

In short, for the majority answer is probably no.

For those invested solely in financial instruments, the measurement and disclosure requirements do not differ substantially from those that have become familiar since IFRS 7 became effective in 2007. The fair value hierarchy and tabular disclosure format, for instance, remain unchanged and, in the vast majority of cases, there will be no need to revise the valuation technique adopted. Although there is now significantly more guidance provided on how an appropriate valuation might be achieved.

The impact of IFRS 13 is thus likely to be most keenly felt by the relatively small subset of the sector invested in assets (or, less likely, liabilities) held at fair value but outside the scope of IFRS 7, such as property, chattels or bloodstock. For such assets the necessary disclosures will increase significantly in order to align with those required for financial assets or liabilities held at fair value. 

As such, at a high-level, each non-financial asset or liability (or class thereof) will be categorised in the fair value hierarchy and details of the valuation technique applied will be required. Given the equivalence to information that has been presented for financial instruments for more than half a decade this seems eminently sensible, however beware the triskaideka-effect! It is likely that the nature of most non-financial assets and liabilities will result in a plethora of level 2 and 3 classifications, which could increase the volume of disclosure well beyond what has been required in the past for traded financial instruments alone.

Take, for example, an investment in an office block held at fair value as assessed annually by a surveyor or commercial agent. Assuming that the block is in an area with a reasonably active market for office block sales (a pre-2008 utopia perhaps), it is likely that this would be considered to be level 2 in the fair value hierarchy, as the value would in all likelihood be based on the recent transactions for similar properties.

By changing the assumption though and considering a situation (a dystopian c.2010 ex-London UK?) where there are minimal transactions in dissimilar assets should this now be considered a level 3 asset valued on the basis of cash flows and adjusted historical prices? 

Without a more detailed scenario it is, of course, difficult to make the judgement required, however it is notable that IFRS 13 focuses heavily, in its application guidance, on financial instruments. So, while the application of IFRS 13 may increase the weight of disclosure there is not likely to be much unfamiliar to those used to IFRS 7. The notable issue for those invested beyond financial instruments though is, perhaps, making the assessment of how to classify assets and liabilities affected both initially and in the future.

If you require any additional support or advice on this matter please contact Geoff Woodhouse.


Geoff Woodhouse

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