ACCA Strategic Professional · Strategic Business Reporting (International) · Fair value measurement
Borealis Group measures an unlisted investment at fair value using a discounted cash flow model. Observable market yields support the discount rate, but the forecast cash flows rely on management's own internal projections, which are significant to the valuation. How should the fair value be categorised and what is the consequence for disclosure?
The measurement is Level 3. IFRS 13 classifies the whole fair value by the lowest-level input that is significant, and management's own cash flow forecasts are unobservable. Level 3 also triggers fuller disclosures, including a reconciliation of opening to closing balances and information on significant unobservable inputs.
- ALevel 2, because the discount rate is observable and drives the valuation
- BLevel 1, because the model uses market yields
- CLevel 3, because the lowest level input significant to the whole measurement determines the category; additional disclosures such as a reconciliation of opening and closing balances applyCorrect
- DLevel 3, but no extra disclosures are needed beyond those for Level 2
Explanation
IFRS 13 categorises the whole measurement by the lowest level input that is significant to it. Management's internal cash flow projections are unobservable and significant, so the measurement is Level 3. Level 3 recurring measurements require extra disclosures, including a reconciliation of opening to closing balances and quantitative information on significant unobservable inputs.
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