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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.
7.000
7,000
Examples
Financial Assets at Fair Value through Profit or Loss
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