The International Accounting Standards Board (IASB) on May 1, 2011 issued the International Financial Reporting Standard 13 Fair Value Measurement in order to give one unified definition of fair value that will substitute fair value measurement guidance provided in the other IFRSs. Besides giving a unified definition of fair value, the standard also explains how it can be ascertained. The effective date of the standard is on January 1 2013. For financial translation and financial document translation in general this standard is of particular importance.
The IFRS 13 establishes a single set of requirements for measuring all fair values in order to ensure that there is consistency and less complexity in the application of the principles of fair value measurement. The standard also aims at clarifying the definition of fair value so as to clearly communicate the measurement objective. Another objective of the IFRS 13 is to increase the overlapping of the IFRSs and US GAAP. It is also the goal of the standard to enhance transparency by improving disclosures concerning fair value measurements.
Scope of the standard
IFRS 13 is obtainable when IFRS demands or allows measurement and disclosures of fair value. There are some exemptions which include:
- all transactions of share-based payment covered by IFRS 2
- leasing transactions covered by the International Accounting Standard (IAS) 17
- measurements that are similar to fair value but are not the same with it (this includes values applied in IAS 36 and net realizable value in IAS 2)
- measuring retirement benefit plan at fair value in keeping with IAS 26
- measuring plan assets at fair value in compliance with the requirements of IAS 19
What is fair value?
Fair value according to IFRS 13 is the price at which an asset will be sold or the price at which a liability will be transferred at the measurement date in a well arranged business deal between market participants. The above definition indicates that fair value is not an entity-specific measurement rather it is a market-based measurement that considers the conditions of the market at the measurement date. The US GAAP defines fair value in the same way as IFRS 13.
In order for an entity to determine the right fair value measurement, the standard established the following elements:
- the specific asset or liability to be valuated
- the right valuation methods to be applied when fair value is measured
- the market where the asset or liability will be transferred in an orderly transaction (The orderly transaction can take place either in a principal market or most advantageous market when the principal market is not available. The principal market is the normal market where the entity will ordinarily carry out the transaction to sell or transfer the asset and liability respectively)
The standard requires an entity to consider the features of the asset or liability when valuating fair value. It also gives guidelines on how to measure fair value of a liability when there is no quoted price in an active market as well as guidelines on how to measure fair value in a non-active market.
The goal of the disclosures which provide information on how fair value should be measured by an entity is to eliminate obscurity and to ensure that quality information is provided to the financial statements users. IFRS 13 provides specific disclosure requirements.
How IFRS Will Benefit a Financial Translator
Before the introduction of the International Financial Reporting Standards (IFRS) by the International Accounting Standards Board (IASB), companies and other entities in various nations have been presenting their financial statements using their own version of generally accepted accounting principles (GAAP). This presents a very big challenge to a financial translator. This is because a financial translator that offers financial document translation service to a firm doing business in several nations has to deal with several standards in order to understand them fully and the terms employed by the body that prepares each of them. However, the introduction of IFRS by IASB has solved this problem for a financial translator that works for a multinational company. Though, there are still other accounting standards used in some parts of the world, many companies across Europe have adopted IFRS as their standard for preparing financial statements. This means that in financial document translation, financial translators have to deal with only one standard.