Brief facts of the enquiry

The Accounting Standards Board (the Board) received an enquiry about the determination of fair value of unquoted equity instruments under IFRS 13, Fair Value Measurement, in a specific fact pattern. The fact pattern is summarized below:

–A publicly listed company (Company A), in June 2019, made a strategic investment in a start-up company (Company B) by purchasing a specific number of voting and non-voting shares at a mutually agreed purchase price.

–Company A, at the reporting dates of June 30, 2019, June 30, 2020 and December 31, 2020, determined the fair value of its investment in Company B using the services of an independent valuer.

–In June 2021, Company B issued equity shares to an unrelated third party at a price above the fair value determined at previous reporting date (i.e. December 31, 2020).

Along with the above fact pattern, the submission referring to paragraph B 5.4.15 of IFRS 9, Financial Instruments, also noted that after June 2021, there were no significant changes to Company B’s performance and products, global economy or the comparable entities. Additionally, there were no indications of fraud or any transfer of any external transactions. In view of above, the submission noted that it would be appropriate to use the most recent transaction price (i.e. price of a share issued in June 2021) as the measurement price as at December 2021, in accordance with IFRS 13.

The enquirer, based on the above understanding, asked whether Company A can measure fair value of its investment in Company B, at the reporting date of December 2021, using the transaction price (per share) in the most recent transaction i.e. price at which Company B issued its shares in June 2021.

The Accounting Standards Board comments and conclusion

1.The Board noted that in accordance with paragraphs 57-60 of IFRS 13, an entity:

a)can consider the transaction price for unquoted equity instruments in a recent transaction as a reasonable starting point for measuring the fair value of such instruments at the measurement date;

b)is also required to assess whether the transaction price in the most recent transaction needs to be adjusted. The adjustment could be owing to the existence of factors noted in paragraph B 5.4.15 of IFRS 9 or if other evidence indicates that the transaction price might not be representative of fair value at the measurement date; and

c)would need to adjust the most recent transaction price for the aforementioned factors to arrive at the fair value at the measurement date. The nature and amount of adjustment (if any) will depend on the specific facts and circumstances.

2.The Board, based on the fact pattern and above principle-based guidance of IFRS 13, concluded that determination of fair value as well as the consideration of factors that could influence and change the fair value involve exercise of management judgement. Entity’s management would be required to apply judgment based on the specific information and circumstances.

3.The Board also considered it pertinent to explain that it considers accounting enquiries and provides clarification on the matters relating to interpretation of the requirements of accounting and reporting standards as applicable in Pakistan. The enquired matter of appropriateness of a particular amount of fair value involves management judgement considering the specific information and circumstances. In the submitted fact pattern, determination of fair value of unquoted equity instruments at the measurement date does not involve interpretation of IFRS 13.

(Issued in September, 2021)