5 measurement questions

IFRS measurements: cross-cutting issuesJoint World Bank and IFRS Foundation train the trainers workshop hosted by the ECCB, 30 April to 4 May 2012K

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.International Financial Reporting StandardsThe views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org1Myth 12Everyone knows what best estimate means IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org2BGWhat does best estimate mean?3Most likely outcome?Median outcome?< 50% chance of higher cash flows< 50% chance of lower cash flowsExpected value?Average (mean) of rangeWhatever amount feels best? IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG3Myth 24The IASB prefers fair value IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org4BGIASB does not always prefer fair valueProvisionsImpairment of property, plant, equipment, intangiblesRevenue recognition Insurance contractsLeases5 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG5Myth 36The IASB prefers expected value IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org6BGExpected value might be best...if objective is to measure current value of asset or liabilityif transactions recur frequentlyif users are concerned about extreme outcomes (outliers)if expected value is as easy to estimate as other measuresif the timing of cash flows is uncertainyou dont know7 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG7Most likely or median might be better...if objective is to predict future cash flowsif transactions do not recur frequentlyif outliers are less important or more uncertain than central outcomesif expected value is more difficult to measure

8 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG8Myth 49Expected value needs accurate data about all outcomes IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org9BGMeasuring expected valueuse any suitable technique for estimating average (mean) of rangeif identifying range of possible outcomes:use same data as would use to identify most likely or median outcomeinclude everything you know but dont make up what you dont know...

10 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG10Measuring expected value continued11We have evidence that...Most likely outcome is 100 currency units (cu)We have no evidence that...Distribution is other than normal (bell-shaped)We would estimate expected value to be...cu 100 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG11Measuring expected value continued12OutcomeEstimated outflowsRelative likelihoodBest casecu 100Most likely outcomecu 200

About twice as likely as best caseWorst casecu 1,000Unlikely, but possibleEstimate of expected value cu 100 x 30% cu 30 cu 200 x 60% cu 120cu 1,000 x 10% cu 100cu 250 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG12Myth 513Expected values take account of risk IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org13BGExpected values may need risk adjustmentsAsset 1ProbabilityInflows100%cu 50014Asset 2ProbabilityInflows50%cu 25050%cu 750Expected value is cu 500 for each assetBut risk averse entity would put lower value on asset 2 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG14Myth 615Risk always increases discount rates IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org15BGRisk adjustments for liabilitiesrisk aversion typically increases transaction prices for uncertain liabilitiesin which case, account for risk by:increasing estimates of cash outflows, oradjusting estimates of probabilities, orreducing rates at which cash outflows are discounted to present value, oradjusting the expected present valueadjusting discount rate doesnt always work

16 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.orgBG16Questions or comments?The IASB encourages its members and staff to express their individual views. The views expressed in this presentation are those of the presenters. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.17

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org17MB 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org18The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace.The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.18 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org18