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ACCA Strategic Professional · Strategic Business Reporting (International) · Fair value measurement

Beta Group acquires a subsidiary and measures an acquired customer-relationship intangible at fair value using a multi-period excess earnings method. Which statement is correct under IFRS 13 regarding the valuation technique and inputs?

The technique must maximise relevant observable inputs and minimise unobservable ones. Because an excess earnings model for customer relationships relies on significant unobservable inputs such as attrition rates, the fair value measurement is categorised as Level 3 in the hierarchy.

  1. AInputs must be maximised for unobservable data because the asset is unique
  2. BThe technique must be chosen to maximise the use of relevant observable inputs and minimise unobservable inputs, with the measurement classified as Level 3 if significant inputs are unobservableCorrect
  3. COnly the market approach is permitted for intangible assets acquired in a business combination
  4. DThe measurement is Level 1 because the acquisition price is observable

Explanation

IFRS 13 requires valuation techniques to maximise relevant observable inputs and minimise unobservable inputs. Excess earnings models normally rely on significant unobservable inputs such as customer attrition, so the result is Level 3. Any of the three approaches may be used if appropriate, and the deal price does not make it Level 1.

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