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

Orla plc issued a bond with no quoted price for the identical liability and no identical item held by another party as an asset. Orla's credit standing has deteriorated since issue. Which statement about measuring the fair value of this liability under IFRS 13 is correct?

The fair value of the liability must reflect non-performance risk, including Orla's own credit risk, assuming that risk is the same for the transferee. Ignoring own credit or using the holder's credit risk would not give the IFRS 13 transfer price.

  1. AFair value should reflect Orla's non-performance risk, including its own credit risk, which is assumed to be the same before and after transferCorrect
  2. BOwn credit risk must be excluded so the liability is valued at a risk-free rate
  3. COwn credit risk is excluded because gains on deteriorating credit cannot be recognised in any circumstances
  4. DFair value should use the credit risk of the holder of the bond rather than that of Orla

Explanation

IFRS 13 states the fair value of a liability reflects the effect of non-performance risk, which includes the entity's own credit risk. The risk is assumed to be the same before and after the transfer. Excluding own credit risk or using the holder's risk contradicts this requirement.

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