Valuations

IFRS 9 requires a fair value measurement to be categorized within the three levels of the fair value hierarchy for disclosure purposes. The categorization within the fair value hierarchy is based on the inputs to valuation techniques used to measure the fair value. In principle, observability and market activity determine the categorization of an input. IFRS 13 notes that valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.

Financial instruments are grouped into the following three levels, according to the IFRS 13 guidelines:

• Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities that the entity can access at the measurement date.

For example:

• Financial instruments (shares, exchange-traded options, futures contracts, and so on) are traded on active markets.
• Commodities (corn, soybeans, crude oil, gold, silver, and so on) traded on active markets.
  • Level 2: Other observable inputs not included within Level 1 of the fair value hierarchy.

For example:

• Recently observed prices in markets that are not active (quoted prices in inactive markets).
• Quoted prices for similar assets or liabilities in active markets (inputs derived from yield curves when observable at commonly quoted intervals).
• The unadjusted price per square meter for a building is derived from observable market data (prices derived from observed transactions involving comparable buildings in similar locations).
  • Level 3: Unobservable inputs for the asset or liability.

For example:

• Credit spread calculated using unobservable internal data.
• Management's cash flow projections (future revenue level and other financial forecasts).
• Adjustments to the price per square meter for similar buildings derived from observable market data (adjustments reflecting differences in physical conditions and location of the properties).

For more information on HM Valuations, see the HM Valuations Processing chapter.