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

Delphi Co holds a bond that was previously actively traded. Trading volumes have fallen sharply and quoted prices vary widely between dealers, so the market is no longer active. Delphi uses a broker quote for the bond adjusted by observable credit spreads for similar bonds. Which statement is correct under IFRS 13?

Fair value is still required, and the measurement will probably be Level 2 where observable inputs such as adjusted broker quotes and credit spreads are used. A decline in market activity does not switch measurement to cost or Level 1, but entities must judge whether quoted prices reflect orderly transactions.

  1. AFair value must now be measured at cost, because the market is inactive
  2. BThe transaction price is the quoted price, so Level 1 still applies
  3. CFair value is still the objective, and the measurement is likely Level 2 if inputs are observable, with further judgement on whether the quoted prices represent orderly transactionsCorrect
  4. DFair value measurement is prohibited for this bond until activity recovers

Explanation

A fall in activity does not remove the fair value objective, which remains an exit price in an orderly transaction between market participants. Where Level 1 prices are no longer available for an active market, observable inputs such as adjusted broker quotes and credit spreads from similar bonds give a Level 2 measurement. Judgement is needed about whether quotes reflect orderly transactions.

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