IFRS FOR INVESTMENT FUNDS September 2012, Issue 5 In this issue: Fair value measurement of financial assets and financial liabilities Fair value measurement lies at the heart of accounting for investment funds (’funds’) that invest in financial instruments because they would commonly measure such investments at fair value for reporting purposes. Here we cover the following questions on the fair value measurement of financial assets and financial liabilities. 1. What is fair value? 2. How do you apply the fair value hierarchy? 3. Is the price quoted in an active market? 4. Bid, mid, ask or something else? 5. What if a transaction is not orderly? 6. What are the main considerations when applying a valuation technique? 7. What inputs into valuation techniques are commonly used by market participants? 8. What if fair value estimates are sourced from brokers or pricing services? 9. How do you determine the fair value of an investment in an open-ended investment fund? 10. How do you determine the fair value of a financial liability? 11. Are there instances when fair value cannot be reliably measured? 12. Is it possible to recognise a gain on initial recognition of a financial asset or financial liability? This issue does not cover fair value measurement of an entity’s own equity instruments. Welcome to the series Our series of IFRS for Investment Funds publications addresses practical application issues that investment funds may encounter when applying IFRS. It discusses the key requirements and includes guidance and illustrative examples. This series considers accounting issues from currently effective IFRS as well as forthcoming requirements. For details of previous issues, see page29. Further discussion and analysis about IFRS are included in our publication Insights into IFRS. 2 | IFRS for Investment Funds © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Introduction Funds that invest in securities that are traded in an active market and whose prices are readily available will find the fair value measurement process relatively straightforward. Other funds that invest in instruments that, although not traded in an active market, are valued using observable inputs and well-established valuation models will need to put in place more involved processes to measure fair value. Arriving at fair value is likely to be most complex and involve most judgement for funds, such as private equity funds, that invest in securities whose valuation relies on significant unobservable inputs. In addition, fair value considerations for funds are not limited to their investments but extend to the units issued, which are often regarded as liabilities under IFRS. The current guidance on measuring the fair value of financial instruments is included in IAS 39 Financial Instruments: Recognition and Measurement. This guidance will be superseded by IFRS 13 Fair Value Measurement, which is effective for annual periods beginning on or after 1 January 2013. IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs, including IAS 39, with a single framework for fair value measurement. The principal requirements of IFRS 13 relating to financial instruments are largely similar to those in IAS 39. However, some of the key definitions, such as the definition of fair value, have been changed, resulting in subtle differences that may potentially impact application of the standard. IFRS 13 expands and articulates in more detail the concepts and principles behind fair value, including introducing some new concepts such as the ‘principal market’. Each question in this publication deals with the relevant requirements of both IAS 39 (and, where applicable, its interactions with currently effective requirements of IFRS 7 Financial Instruments: Disclosures and IFRS 9 Financial Instruments) and IFRS 13 and explains any differences between the two standards in the area discussed. However, market practice in applying IFRS 13 may be further refined once the standard becomes effective and as potential new implementation issues are identified and considered. IFRS for Investment Funds | 3 © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 1. What is fair value? ‘Fair value’ is defined in IAS 39 as the amount for which an asset could be exchanged or a liability settled, between knowledgeable and willing parties in an arm’s length transaction. The objective of determining fair value is to estimate the price at which an orderly transaction would take place between market participants at the measurement date. Fair value is a market-based measurement, rather than an entity-specific measurement. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability. For example, the fact that a fund asserts that prices in orderly transactions are too low relative to its own expectations, and that accordingly it would be unwilling to sell at such prices, is not relevant. Generally, fair value is determined on an instrument-by-instrument basis. See Question 4 for a discussion of the open net position valuation for funds with assets and liabilities with offsetting market risks. Some funds use industry valuation guidance. In our view, although the valuation determined using these methods may be used as a starting point in determining fair value, adjustments may be required to determine an IFRS-compliant fair value. Valuations using these methods may result in a more conservative measure of value than current market-based fair value, which is the objective of fair value measurement under IFRS. IFRS 13 Definition of fair value IFRS 13 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. Therefore, fair value is an exit price. The amended definition no longer refers to an amount at which a liability could be ‘settled’ – see Question 10 for further discussion. Market participants are independent (not related parties under IAS 24 Related Party Disclosures), knowledgeable, able and willing to enter into a transaction, although the price in a related party transaction may be used as an input to a fair value measurement if the fund has evidence that the transaction was entered into on market terms. The exit transaction is assumed to take place either: • in the principal market for that asset or liability; or • in the absence of a principal market, in the most advantageous market for the asset or liability. See Question 3 for a discussion of the concepts of ‘principal’ and ‘most advantageous’ markets. Unit of account and unit of valuation IFRS 13 does not generally specify whether an individual asset or liability or a group of assets or liabilities is considered for fair value measurement. The unit of account is usually determined under the IFRS that requires or permits the fair value measurement. For example, the unit of account in IAS39 or IFRS 9 is generally an individual financial instrument. Although it is not defined in IFRS, the term ‘unit of valuation’ is used in this publication for convenience, to indicate the level at which an asset or a liability is aggregated or disaggregated for the purpose of measuring fair value. Generally, the unit of account and the unit of valuation are the same. However, there could be situations in which the unit of valuation is different. For example, IFRS 13 permits an entity to measure the fair value of a group of financial assets and liabilities on the basis of the net risk position in certain circumstances. In such cases, the unit of valuation for a particular risk exposure would be the net risk position (group of financial assets and financial liabilities), whereas the unit of account determined under IAS 39 or IFRS 9 would be an individual financial instrument. 4 | IFRS for Investment Funds © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2. How do you apply the fair value hierarchy? IAS 39 requires entities to maximise the use of market data in determining the fair value of a financial instrument. If a published price in an active market is available for a particular instrument, then that price is used. If no published price in an active market is available and so a fund estimates fair value using a valuation technique, then that technique has to maximise the use of observable inputs. However, although it prioritises the use of published prices in an active market and the use of other observable inputs, IAS 39 does not explicitly refer to a fair value hierarchy. The levels in the fair value hierarchy are included in IFRS 7, which requires disclosure of the fair value hierarchy for financial instruments measured at fair value in accordance with IAS 39. The flowchart below summarises the approach to determining the classification of fair value measurements under IFRS 7. Level 3 Quoted price for an identical item in an active market available? Any significant unobservable inputs? Price requires adjustment? Level 1 Level 2 No No Ye s Ye s Ye s No Financial assets and financial liabilities are measured using quoted prices if a published price quotation in an active market is available for the instruments. Generally, quoted prices should not be adjusted when valuing large holdings. For example, a fund cannot depart from the quoted price in an active market solely because independent estimates indicate that it would obtain a higher or lower price by selling the holding as a block. See Question 3 for a discussion of how to determine whether a market in a financial instrument is active. When a financial instrument is not traded in an active market, its fair value is determined using a valuation technique. Such a measurement is Level 2 or Level 3 in the fair value hierarchy. Sometimes quoted prices are readily available from brokers or pricing services on enquiry, but the prices are not published. A fund may hold a large number of such investments; in this case, the fund may use a pricing service that does not rely exclusively on quoted prices for each identical instrument – i.e. a matrix-pricing methodology – as a practical expedient on cost- benefit grounds. This is permitted only if the fund obtains evidence that provides reasonable assurance that the resulting value represents fair value. The evidence should support a conclusion that there would be no more than trivial differences between the prices used and the quoted prices that would be obtained from a relevant broker or dealer. If fair value is determined using a matrix-pricing methodology, then the fair value measurement would not be Level 1. This is despite the fact that the investment is regarded as quoted in an active market. See Question 8 for further discussion of the fair value sourced from pricing services or brokers. A fair value measurement is classified in its entirety into one of the levels of the fair value hierarchy based on the lowest- level input that is significant to the fair value measurement. When multiple unobservable inputs are used, in our view the unobservable inputs should be considered individually and in total for the purposes of determining their significance. When factors such as volatility inputs are used, a fund could apply some form of comparability methodology – e.g. a stress test on an option’s volatility input or a ‘with-and-without’ comparison – to assist in determining significance. IFRS for Investment Funds | 5 © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Valuation techniques that are based on inputs that are observable result in Level 2 measurements. Valuation techniques that use inputs requiring significant adjustments based on unobservable inputs result in Level 3 measurements. Differentiating between Level 2 and Level 3 fair value measurements – i.e. assessing whether inputs are observable and whether unobservable inputs are significant – may require judgement and a careful analysis of the inputs used to measure fair value, including consideration of factors specific to the asset or liability. An input is observable if it can be observed as a market price or can be derived from an observed market price. In each case, it is not necessary for the market to be active. See Question 6 for further discussion of valuation techniques. Irrespective of the level in the fair value hierarchy used to measure the fair value of a financial instrument, the method chosen must maximise the use of relevant observable inputs and minimise the use of unobservable inputs. IFRS 13 Fair value hierarchy Guidance on the fair value hierarchy currently included in IFRS 7 has been incorporated into IFRS 13 (for measurement as well as disclosure). The guidance has been expanded considerably but is largely consistent with the general concepts currently in IAS 39. However, there are some changes. In its discussions about quoted prices in active markets, IAS 39 refers to prices in the most advantageous active market to which the entity has immediate access (see Question 3). In defining a Level 1 input, IFRS 13 states that the published price quotation is to be sourced from the entity’s principal market or, in the absence of a principal market, from its most advantageous market. As under IAS 39 and as discussed earlier in this chapter, adjustments to Level 1 prices are not generally permitted under IFRS 13. However, as a practical expedient, a fund may measure the fair value of certain assets and liabilities using an alternative method (such as matrix pricing) that does not rely exclusively on quoted prices. This practical expedient is appropriate only when: • the entity holds a large number of similar assets and liabilities that it measures at fair value; and • a quoted price in an active market is available but not readily accessible for each instrument individually. The matrix-pricing method involves using a selection of data points (usually quoted prices) or yield curves to calculate prices for separate financial instruments that share characteristics similar to the data points. Matrix pricing using observable market-based data points will usually result in Level 2 fair value measurements. It appears that the use of such an alternative method as a practical expedient is also subject to the condition that it results in a price that is representative of fair value. We believe that application of a practical expedient is not appropriate if it would lead to a measurement that is not representative of an exit price at the measurement date. Specific guidance on blockage factors and discounts and premiums A fund selects inputs that are consistent with the characteristics of the asset or liability that market participants would take into account when determining the exit price of an asset or a liability. Sometimes it may be appropriate to make an adjustment to a preliminary value indication in respect of a control premium or a non-controlling interest discount in measuring fair value of an asset or a liability. A fund does not apply a premium or discount if: • it is inconsistent with the item’s unit of account; • it reflects size as a characteristic of the entity’s holding – e.g. a blockage factor; • the characteristic is already reflected in the preliminary value indication; or • there is a quoted price in an active market for an identical asset or liability – i.e. a Level 1 input. 6 | IFRS for Investment Funds © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. A fund may hold a large number of identical financial instruments where the market for the instruments does not have sufficient trading volume to absorb the quantity held without affecting the price. IFRS 13 provides specific guidance for such circumstances. It defines a ‘blockage factor’ as a discount that adjusts the quoted price of an asset or a liability because the market’s normal trading volume is not sufficient to absorb the quantity held by the fund. The standard clarifies that a blockage factor is not a characteristic of an asset or a liability but a characteristic of the size of the entity’s holding, and it expressly prohibits application of a blockage factor. There is currently some uncertainty about the application of valuation adjustments under IFRS13. This arises in part because: • the IFRS that requires a fair value measurement may not be explicit in identifying the appropriate unit of account; and • IFRS 13 is not explicit in identifying all circumstances in which the unit of account guidance in the IFRS giving rise to the fair value measurement is overridden by the unit of valuation guidance in IFRS 13. In particular, the interaction of IFRS 13’s and other IFRSs’ guidance on the unit of account may be inconsistent in certain cases with its requirement to use Level 1 prices without adjustment, when they are available. IFRS for Investment Funds | 7 © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 3. Is the price quoted in an active market? Under IAS 39, a published price quotation in the most advantageous active market to which the fund has immediate access (a Level 1 fair value measurement) is the best indicator of the fair value of a financial asset or financial liability and, if one is available, is used. Therefore, determining whether the market is active is the first step in valuing a financial instrument. A financial instrument is regarded as being quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. In our view, whether transactions are taking place ‘regularly’ is a matter of judgement and depends on the facts and circumstances of the market for the instrument. Quoted market prices may not be indicative of the fair value of an instrument if the activity in the market is infrequent, the market is not well-established, only small volumes are traded or bid-ask spreads are very wide. Determining whether a market is active involves judgement. In our view, characteristics of an inactive market (Level 2 or Level 3 fair value measurements) include the following. • There is a significant decline in trading volume and level of trading activity. • Available prices vary significantly over time or between market participants. • Available prices are not current. • A significant trading volume is between related parties. • There are restrictions on trading. Example 1 – Active market Fund of funds F holds units in an open-ended unlisted Fund B. Units in B are not traded on a stock exchange and can be bought from and sold to the fund only. This means that transactions cannot take place directly between investors. B calculates the price of the units only at a specific time each day to facilitate the purchase and sale of the units. Transactions take place only at that specific time each day at the price determined by B. Are units in B quoted in an active market? In our view, it is not necessary for there to be a large number of dealers or brokers for an active market to exist. As long as F is able to dispose of or acquire a reasonable quantity of a particular financial instrument at a price that is not discounted significantly or does not include a significant premium, then it may be concluded that the financial instrument is traded in an active market. In this example, whether units in B are quoted in an active market will depend on whether daily pricing is sufficient to meet the ‘readily and regularly available’ criterion and whether the number and frequency of trades that occur in the units qualify as ‘regularly occurring transactions’. Daily pricing is likely to constitute evidence of regularly available prices. Judgement will then have to be applied to determine whether the number of trades occurring is sufficient to meet the ‘regularly occurring transactions’ criterion. If it is concluded that actual transactions occur regularly then, notwithstanding that the units are being bought from and sold to the fund only, the units would be regarded as quoted in an active market. If for some reason the quoted price does not represent fair value at the measurement date – e.g. because significant events occur after the close of the market but before the measurement date – then the quoted price is adjusted to arrive at fair value and the fair value measurement is not a Level 1 measurement. 8 | IFRS for Investment Funds © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Example 2 – Adjusted quoted price Fund P invests in shares of Company C that are listed on a national stock exchange. On the last day of the reporting period, P obtains the closing price of the shares from the exchange. However, subsequent to the close of the market but still on the last day of the reporting period, C makes a public announcement that has an impact on the fair value of the shares as evidenced by prices for a small number of after-market transactions in depository receipts of the shares of C that are traded in another jurisdiction. Should P adjust the closing price from the exchange to reflect the after-market transactions? In this case, P uses the after-market prices to make appropriate adjustments to the closing price from the exchange to arrive at the fair value of the shares at the measurement date. The resulting fair value measurement is a Level 2 measurement because the exchange price has been adjusted for events occurring subsequent to the closing of the market and those subsequent events are observable. It is explicit in the concept of a Level 1 measurement that the instrument being valued is the same as other existing instruments of the same type. In some cases, instruments may be similar but not exactly the same. For example, over-the-counter derivative contracts are individual agreements between specific counterparties and therefore cannot be the subject of a Level1 measurement because there is unlikely to be an active market for an identical instrument. In some cases, conditions attached to a financial instrument may not be reflected in the quoted price in an active market and in our view this may justify an adjustment to the quoted price to arrive at the instrument’s fair value. For example, assume that an investor is contractually bound by lock-up provisions that prohibit or restrict the sale of the instrument for a specified period. In our view, it can be argued that these contractual lock-up provisions are characteristics of the instrument held by the investor and that this instrument is therefore not identical to the one with the quoted price. If the contractual lock-up provisions are considered characteristics of the instrument held by the investor, then we believe that it is appropriate to use a valuation model to make adjustments to the quoted price. IFRS 13 More detailed guidance As noted in Question 2, IFRS 13 provides more detailed guidance on applying the fair value hierarchy. The elements of this guidance with specific relevance to Level 1 measurement are highlighted below. Active market IFRS 13 amends the definition of an active market to “a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis”.  We do not expect the amendment to represent a significant change and we expect that in practice it is likely to be interpreted in the same way as the current definition in IAS 39. Principal and most advantageous market IFRS 13 introduces the concepts of ‘principal’ and ‘most advantageous’ markets. It states that fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in the principal market for the asset or liability – i.e. the market with the greatest volume and level of activity. In the absence of a principal market, the transaction is assumed to take place in the most advantageous market. This is the market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after considering transaction costs and transport costs. In many cases, the principal market and the most advantageous market will be the same. A fund must be able to access the market in which the transaction is assumed to occur at the measurement date. The concepts of principal and most advantageous markets are considered from the perspective of the fund, allowing for differences between entities with different activities. For example, when a transaction takes place between an investment bank and a fund, the former may have access to wholesale and retail markets whereas the latter may have access only to retail markets. IFRS for Investment Funds | 9 © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. IFRS 13 does not provide detailed guidance on: • how an entity should identify the principal market; • over what period it should analyse transactions in the asset or liability to determine what is the principal (or most advantageous) market; or • how often it should update its analysis. It appears that a fund should update its analysis to the extent that events have occurred or activities have changed in a manner that could change its determination of the principal (or most advantageous) market for the asset or the liability. A fund is not required to undertake an exhaustive search of all possible markets to identify the principal market or, in the absence of a principal market, the most advantageous market. However, it should take account of all information that is reasonably available. In the absence of evidence to the contrary, the principal (or most advantageous) market is presumed to be the market in which the fund normally enters into transactions to sell the asset or transfer the liability. Characteristics of the asset or liability being measured A fund should take into account characteristics of the asset or liability that market participants would take into account in a transaction for the asset or liability at the measurement date. In the case of a financial asset, these characteristics include, for example, restrictions, if there are any, on the sale or use of the asset. It is important to distinguish a characteristic of an asset or liability from a characteristic arising from an entity’s holding of the asset or liability, which is an entity-specific characteristic. Factors used to evaluate whether a restriction on an asset is a characteristic of the asset or entity-specific may include whether the restriction is: • transferred to a (potential) buyer; • imposed on a holder by regulations; • part of the contractual terms of the asset; or • attached to the asset through a purchase contract or another commitment. For example, Fund D offers securities in a public offering and enters into an underwriting agreement with Company E. The underwriting agreement between D and E contains a lock-up provision that prohibits D and its founders, directors and executive officers from selling their securities for a period of 180 days. The lock-up provision may be based on a contract separate from the security (i.e. resulting from the underwriting agreement) and apply only to those parties that signed the contract (e.g. the issuing entity, D) and their affiliates. In that case, these restrictions may represent entity-specific restrictions that would not be considered in the fair value measurement of the securities. However, there may be situations in which a lock-up provision is determined to be a characteristic of the security and not entity-specific based on the specific terms and nature of the restriction. In that case, the restriction would be considered in the fair value measurement of the securities. Explicit requirement for a policy on adjustments to market price IFRS 13 explicitly requires entities to establish a policy for identifying events that might affect fair value measurement, including events that might indicate that a quoted price in an active market does not represent fair value at the measurementdate. 10 | IFRS for Investment Funds © 2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4. Bid, mid, ask or something else? If a published price quotation in an active market is used to determine fair value, then a question arises over which price should be used: bid, mid, ask or something else? IAS 39 generally requires the use of bid prices for financial assets and ask prices for financial liabilities when they are available. However, it allows entities that have assets and liabilities with offsetting market risksto: • use mid-market prices as a basis for establishing fair value for the offsetting risk positions; and • apply the bid or ask price to the open net position as appropriate. Problems are often encountered by funds as they offer unit-linked investment products – i.e. when the fund’s obligation to unit holders is linked to the value of the fund’s underlying investments. The units are often redeemable on demand and the fund is required by its prospectus to issue and redeem units to its investors at a unit price that reflects mid-market prices for its assets. For the purposes of the fund’s financial statements, the investments held by the fund are valued at bid prices. The units issued are valued in accordance with the contractual agreement between it and the unit holders – i.e. in this example, reflecting mid- market prices for its assets. This causes a presentation issue because a mismatch arises between: • assets of the fund valued at bid prices; and • unit liabilities valued on the basis of mid-market prices for the fund’s assets. In our view, one solution may be to present the unit liability in a two-line format. • The first line would be the amount of the net assets attributable to holders of redeemable shares measured at the redemption amounts determined in accordance with the prospectus, which reflects the actual redemption amount at which redeemable shares would be redeemed at the end of the reporting period. • The next line would include an adjustment for the difference between this and the amount recognised in the statement of financial position. This reflects the fact that, for a fund with no equity, or with minimal equity, all, or almost all, recognised income and expenses should be attributed to unit holders, which also means that a dilution levy of that amount would be required if all units were redeemed. See our publication Illustrative financial statements: Investment funds for an illustration of this presentation. When current bid and ask prices are not available, a fund may use the price of the most recent transaction in the particular financial instrument, provided that there has been no significant change in economic circumstances since that transaction. Adjustments are made if significant changes have occurred since. IFRS 13 Bid and ask prices For assets measured at fair value that have a bid and an ask price, IFRS 13 requires the use of the price within the bid-ask spread that is most representative of fair value in the circumstances. The bid-ask spread includes transaction costs and may include other components. A price in the principal or most advantageous market is not adjusted for transaction costs. Therefore, an entity makes an assessment of what the bid-ask spread represents when determining the price that is most representative of fair value within the bid-ask spread. The use of bid prices for long positions and ask prices for short positions is permitted but not required. [...]... adjustments and counterparty credit risk adjustments in measuring derivative assets and liabilities In principle, and assuming no differences in the unit of account, the credit risk adjustments made in the fair value measurement of a financial instrument should be the same for both counterparties to the instrument The credit risk of both counterparties may be relevant to measuring the fair value of an instrument... guarantee All rights reserved IFRS for Investment Funds | 19 8 What if fair value estimates are sourced from brokers or pricing services? Funds often obtain prices from brokers or pricing services to determine the fair value of their holdings of financial instruments When assessing the appropriateness of using such prices for the purposes of fair value measurement in financial statements, a fund has to... guidance on measurement in IAS 39 with the definitions in IFRS 13 Under the amended IAS 39 guidance, the initial measurement of the financial instrument is based on fair value as defined in IFRS 13, but the carrying amount of the financial instrument is adjusted to defer any difference between the fair value measurement and the transaction price An exception arises when the fair value measurement is... overall fair value measurement of the financial instrument to fall into Level 3 of the fair value hierarchy (see Question 2) Assessing whether inputs are observable and whether the unobservable inputs are significant may require judgement and a careful analysis of the inputs used to measure fair value, including the consideration of factors specific to the asset or liability Examples of observable and. .. determine the fair values of investments IFRS 9 Using cost as an approximation of fair value Under IFRS 9, investments in equity instruments are measured at fair value The exception currently in IAS 39 to use cost to measure certain equity investments and derivatives linked to them has been removed However, in certain limited circumstances the standard allows cost to be used as an approximation of fair value. .. IFRS for Investment Funds | 27 12 Is it possible to recognise a gain on initial recognition of a financial asset or financial liability? Sometimes, a fund acquires a financial instrument in one market and intends to sell it or to issue an offsetting instrument in a different market An issue arises over whether the instrument may be initially measured at its fair value in the selling market and therefore... price may not be representative of fair value Financial assets and liabilities with offsetting positions in market risk(s) or credit risk IFRS 13 permits an exception to measure the fair value of a group of financial assets and liabilities that are within the scope of IAS 39 or IFRS 9 on the basis of net exposure to a particular market risk(s) and/ or credit risk if certain conditions are met The flowchart... represents the fair value of the relevant financial instrument; and •• the level in the fair value hierarchy that the price represents Does the price represent the fair value of the financial instrument? Prices sourced from a broker or pricing service may represent fair value estimated in accordance with IAS 39, but it cannot be automatically assumed that they do A fund has to obtain an understanding of how... From the perspective of the holder, the individual unit may be the combined instrument containing both the amount due from the investment fund and the guarantee From the investment fund’s point of view, the fair value measurement of the units issued follows the unit of account of the liability for financial reporting purposes If that unit excludes the guarantee, then the fair value of the obligation excludes... fair value estimates at the same measurement date, and for both estimates to meet the objective of fair value measurement in IAS 39 Different fair value estimates reflect the inherent uncertainty of estimating the fair value of instruments that do not have prices quoted in an active market A single entity, however, has to ensure that it applies its judgement consistently (across time and by type of instrument) . objective of fair value measurement in IAS 39. Different fair value estimates reflect the inherent uncertainty of estimating the fair value of instruments. IFRS FOR INVESTMENT FUNDS September 2012, Issue 5 In this issue: Fair value measurement of financial assets and financial liabilities Fair value measurement