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

During a business combination, Corvus plc acquired a subsidiary whose brand name has no active market. Corvus's finance director suggests assuming a higher royalty rate than market evidence supports, using unobservable inputs, in order to raise the brand value and reduce goodwill, which is subject to impairment testing. The valuation is Level 3. Which response is most consistent with IFRS 13 and professional ethics?

Corvus should use assumptions that market participants would use, maximising observable inputs and using its own data only where no market information is reasonably available. Level 3 does not permit biased inputs. Deliberately inflating the royalty rate breaches IFRS 13 and the ethical duty of objectivity, and disclosure would not correct it.

1. AAccept the rate, since Level 3 inputs are by definition the entity's own judgement and cannot be challenged
2. BUse the higher rate but disclose that it is a Level 3 measurement, which resolves any concern
3. CUse the rate that market participants would use, maximising relevant observable inputs and using the entity's own data only where no market information is reasonably available, and challenge the director's biasCorrect
4. DReplace the valuation with the brand's historical cost, because Level 3 values are unreliable