A Consistent Implementation of IFRS 13 and IAS 36 for Non-current Assets


There is much debate for both the academic community and accounting professionals with respect to the use of fair value and cost accounting, as well as the application of impairment to current and non-current assets. Fair value and impairment are two related concepts, the reason being that in order to proceed with the latter, the current market price of an asset should first be measured. IAS 36 came into force to stipulate that no asset should be valued above its current actual value. Assets’ revaluation affects not only the companies’ outcome but also the applied depreciation method, which must be adjusted accordingly to the new data. Assets that cannot be measured to their fair value, in accordance with the IAS instructions, are grouped to form identifiable units within the company that was able to generate cash inflows and be tested for impairment as a whole. In this article, we focused on presenting a methodology from a technical approach on these issues, whilst at the same time remaining compatible with the principles of both accounting and finance. Real-life data from existing companies have been used not only for the valuation of the same following their transformation into cash-generated units, but also for non-current assets by controlling both the impairment and the depreciation process. We use cash flow generation models through the business plan process and apply certainty and uncertainty techniques such as sensitivity analysis and Monte Carlo simulation. After having reviewed the estimations and bearing in mind the structure of the model, we have concluded that specific parameters are affecting the fair value measurement on non-current assets. The value of this article is to develop a methodology that can be easily applied to different companies and is compatible with the spirit and provisions of both the international accounting standards as well as those of financial accounting.

Keywords: FVA, cost accounting, finance, impairment, OR

[1] Noll DJ. Valuation of privately-held-company equity securities issued as compensation. New York; 2013.

[2] Brealey RA, Myers SC, Allen F, Mohanty P. Principles of corporate finance, 12/e, vol. 12. McGraw-Hill Education; 2018.

[3] Bingham D, Conrad KC. An analysis of discount for lack of marketability models and studies. NACVA QuickRead [Internet]. 2012 Nov 28. Available from: https://quickreadbuzz.com/2012/11/28/an-analysis-of-discount-for-lack-ofmarketability- models-and-studies/

[4] Pratt SP. Business valuation discounts and premiums. John Wiley & Sons; 2009.

[5] Damodaran A. Volatility rules: Valuing emerging market companies. Stern School of Business; 2009.

[6] Damodaran A. The dark side of valuation: Valuing young, distressed, and complex businesses. Ft Press; 2009.

[7] Damodaran A. Investment valuation: Tools and techniques for determining the value of any asset. John Wiley & Sons; 2012.

[8] Fernández P. Company valuation methods. The most common errors in valuations. IESE Business School. 2007;449:1–27.

[9] Halsey RF. Using the residual-income stock price valuation model to teach and learn ratio analysis. Issues in Accounting Education. 2001;16(2):257–272.

[10] Koller T, Goedhart M, Wessels D. Valuation: Measuring and managing the value of companies, vol. 499. John Wiley and sons; 2010.

[11] Hodder L, Hopkins P, Schipper K. Fair value measurement in financial reporting. Foundations and Trends® in Accounting. 2014;8(3–4):143–270.

[12] Bhamornsiri S, Guinn RE, Schroeder RG. The economic impact of SFAS No. 157. International Advances in Economic Research. 2010;16(1):65–79.

[13] Song CJ, Thomas WB, Yi H. Value relevance of FAS No. 157 fair value hierarchy information and the impact of corporate governance mechanisms. The Accounting Review. 2010;85(4):1375–1410.

[14] Lawrence A, Siriviriyakul S, Sloan RG. Who’s the fairest of them all? Evidence from closed-end funds. The Accounting Review. 2016;91(1):207–227.

[15] Lev B, Zhou N. Unintended consequence: Fair value accounting informs on liquidity risk. SSRN Electronic Journal. 2009.

[16] Badia M, Duro M, Penalva F, Ryan S. Conditionally conservative fair value measurements. Journal of Accounting and Economics. 2017;63(1):75–98.

[17] Hsu P-H, Lin YR. Fair value accounting and earnings management. Eurasian Journal of Business and Management. 2016;4(2):41–54.

[18] Lin Y-H, Lin S, Fornaro JM, Huang H-WS. Fair value measurement and accounting restatements. Advances in Accounting. 2017;38:30–45.

[19] Curtis A, Raney RA. Fair value estimates and delayed updating. SSRN. 2016.

[20] Busso D. Does IFRS 13 improve the disclosure of the fair value measurement? GSTF Journal on Business Review (GBR). 2014;3(4):1–7.

[21] Sundgren S, Mäki J, Somoza-López A. Analyst coverage, market liquidity and disclosure quality: A study of fair-value disclosures by European real estate companies under IAS 40 and IFRS 13. The International Journal of Accounting. 2018;53(1):54–75.

[22] Hammami A, Moldovan R. Fair value measurement disclosure by US closed-end funds. SSRn. 2016.

[23] Du N, McEnroe JE, Stevens K. The joint effects of management incentive and information precision on perceived reliability in fair value estimates. Accounting Research Journal. 2014;27(2):188–206.

[24] Palea V, Maino R. Private equity fair value measurement: A critical perspective on IFRS 13. Australian Accounting Review. 2013;23(3):264–278.

[25] Chung SG, Goh BW, Ng J, Yong KO. Voluntary fair value disclosures beyond SFAS 157’s three-level estimates. Review of Accounting Studies. 2017;22(1):430–468.

[26] Liapis KJ, Christofakis MS, Papacharalampous HG. A new evaluation procedure in real estate projects. Journal of Property Investment & Finance. 2011;29(3):280–296.

[27] Liapis KJ, Kantianis DD. Depreciation methods and life-cycle costing (LCC) methodology. Procedia Economics and Finance. 2015;19:314–324.

[28] Raychaudhuri S. Introduction to monte carlo simulation. Winter Simulation Conference. 2008: 91–100.

[29] Harrison RL. Introduction to Monte Carlo simulation. AIP Conference Proceedings. 2010;1204(1):17–21.

[30] Rubinstein RY, Kroese DP. Simulation and the Monte Carlo method. John Wiley & Sons; 2016.

[31] Kuipers L, Niederreiter H. Uniform distribution of sequences. Courier Corporation; 2012.

[32] Davis R. Teaching note—Teaching project simulation in Excel using PERT-beta distributions. INFORMS Transactions on Education. 2008;8(3):139–148.

[33] Mulligan DW. Improved modeling of three-point estimates for decision making: Going beyond the triangle. Monterey, California: Naval Postgraduate School; 2016.

[34] Premachandra IM. An approximation of the activity duration distribution in PERT. Computers & Operations Research. 2001;28(5):443–452.