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effects of inflation in the financial statements of entities

whose currency is the currency of a hyperinflationary

economy. An economy is considered hyperinflationary

when the cumulative inflation rate over three years is

approaching, or exceeds, 100%.

Fair value measurements

In our experience, fair value measurements may be

approached from two different perspectives: the

first approach is to consider the relevant accounting

standards and the second approach is to consider

the valuation methodologies applied by specialists.

Companies do best when they combine these two

approaches to fair value measurements, since this is the

most reliable way to generate fair value estimates that

are in line with the applicable accounting rules.

In order to reliably measure fair value, an entity needs

to first classify its LLTA based on the nature of the assets

and then determine the procedures and guidelines to

be followed for each type of LLTA.

Diagram 2: Types of LLTA


From an accounting standard and financial reporting

standpoint, IFRS 13 defines fair value as:

“The price that would be received to sell an asset or paid

to transfer a liability in an orderly transaction between

market participants at the measurement date.”

An entity may estimate fair value by either using

observable inputs or by applying one of the generally

accepted valuation techniques, which are outlined


Diagram 3: Valuation techniques

Source: IFRS 13 - Fair Value Measurement - generally

accepted valuation techniques

An entity’s management needs to determine the most

appropriate valuation technique based on the nature

of the asset being measured. For the selection of

the valuation technique, IFRS establishes a fair value

hierarchy that categorizes into three levels the inputs to

valuation techniques used to measure fair value.

Level 1 of the hierarchy consists of quoted prices in

active markets for identical assets. Level 2 consists of

quoted prices for similar assets or other indirect inputs,

such as interest rates and yield curves. Level 3 consists

of unobservable inputs that reflect little or no market

information. The fair value hierarchy gives the highest

priority to Level 1 inputs and IFRS requires entities to

clearly disclose the reasons for selecting their valuation


The unit of account, the “highest and best use” analysis

and access to working papers as support for audits are

additional factors that an entity should consider during

the process of estimating the fair values of its assets

for financial reporting purposes. Some specialists are

not familiar with the term “fair value” and may confuse

the concept of fair value with other types of values. A

comparison of the definitions of the different values

under various sets of standards is shown below: