IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

demonstrate the last transaction does not reflect fair value (e.g., because it was not on arm's-length terms but a distress sale), the last transaction price is adj usted, as appropriate. The fair value of a portfolio of financia l instruments is the product of the number of units of the instrument and its quoted market price. Therefore, portfolio factors are not considered in determining fair value. For instance, a control premium associated with holding a controlling interest or a liquidity discoun t associated with holding a large block of instruments that cannot be rapidly sold in the market would not be considered in determining fair value. Although such factors may affect the price that is paid for a group of instruments in an actual transaction, the effect of such factors is in pract ice diffi cult to quantify. (b) For assets or liabilities that are not quoted in active markets, fair value is determined using valua tion techniqu es, such as discount ed cash flow models or option pricing models. Such valuation techn iques estimate the price that would have been paid in an arm's-length trans– action motivated by normal business considerations on the balance sheet date. If an ent ity uses a valuation technique to determine fair value, that technique should incorporate all factors that market participants would consider in setting a price, be consistent with ac– cepted economic methodologies for pricing financial instruments, and maximize the use of market inputs. The fair value of financial liabilit ies incorporates the effect of the entit y' s own credit risk; that is, the higher the credit risk, the lower the fair value of the liability . However, the fair value of a financial liability that has a demand feature (e.g., a demand deposit liability) is not lower than the amount repayable on demand, discount ed from the first date the amount could be required to be repaid. Practical Insight Often the fair value of a debt instrument that does not have a quoted rate or price can be de– termined by scheduling the cash flows and discounting them using the applicable current mar– ket interest rate for debt instruments that have substantially the same terms and characteristics (similar remaining maturity, cash flow pattern, credit quality, currency risk, collateral, and interest basis) for which quoted rates in active markets exis t. These and other techn iques for determining fair value are discussed in finance and valuation textbooks. Assume Entity A on December 15. 2006. acquires 1.000 shares in Entity B at a per share price of $55 fo r a total of $55.000 and classifies them as at fa ir value through profit or loss. On Decem– ber 31. 2006. the quoted price ofEntity B increases to $62. such that the fair value ofall shares held in Entity B /IOW equals $62.000. On January 1. 2007, Entity A sells the shares for a total of $62.000. In this case. the journal entries would be December 15 2006 Dr Financial asse ts atfair value through profit or loss 55,000 Cr Cash 55.000 December 31 2006 Dr Financial assets at fai r value through profit or loss Cr Profit or loss January I 2007 Dr Cash Cr Financial assets at fair value through profit or loss 62,000 62.000 7.000 7,000 Examples Financial Assets at Fair Value through Profit or Loss