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Exit vs Enter Price

I noticed that exit price concept is not loner relevant for an asset which an entity does not intend to
sell as (a) it is being used in the operations of the business or (b) it is a financial asset
that is not held for trading. 

In other words, could you tell me when I ought to use the entry price and exit price...

Thanks a lot


Aneta (Berlin)

I'm not exactly sure where you're getting your information, but (newly issued) IFRS 13 states:

IFRS 13.24 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.

In other words, far from being irrelevant, the exit price is the principal (subsequent) measurement basis under both IFRS and US GAAP (specifically ASC 820-10-35-3).

Also, other standards obligate the entity to regularly review all its assets (financial assets, PP&E, intangible assets, goodwill) and recognize an impairment whenever an asset's carrying amount (book value) significantly exceeds its exit price (hypothetical exit price).  

True, under IAS 36, an entity may also consider an asset’s value in use (which may exceed exit price), but it would still be obligated to demonstrate that that amount is recoverable.  If it cannot (with sufficient certainly), it would be obligated to write the asset down to its exit price.

Thanks a lot - I used one of 156 comment letters reflected FASBs view.

Mentioned  FRS 13.24 Fair value definitions was attacked:

  • as a bad guide for other than financial instruments - such as physical and intangible assets or liabilities
  • One auditor from Pwc also remarked that a liability should reflect a settlement rather than a transfer price if it cannot legally be transferred or if the entity does not intend to do so.
  • One letter said that  may  be  major  problems  in  applying  the  concept  in  emerging  and  transition economies where there are limited markets and few valuators  

Dear Mr Mladek, you have a very good reputation among my colleagues, could you please tell me your opinion on the cases and show us through a specific example application of this FV definition. We are confused:-)

Thanks a lot 



It seems odd that the FASB would submit a comment letter opposed to basing fair value on exit price (since it was their idea in the first place).  It also seems odd that they would submit a comment letter at all, since they and IASB hold regular joint meetings (and can share their respective views directly).  But, just to be certain, I looked through them (both the first batch to the 2009 ED and the second batch to the 2010 ED) and found no letter from the FASB.

Anyway, before getting carried away reading too much into the due process of standard setting, it is important to appreciate that comment letters are comment letters, standards are standards.

The former are merely opinions (informed or otherwise) of people and/or institutions that may or may not be pursuing their own agenda.  The latter are authoritative pronouncements that have (at lease in the EU) the force of law (thanks to EC 1606/2002).

To be honest, I never bothered reading any the FV comment letters since it was obvious from the start that the IASB would converge with (old) SFAS 157 regardless of what anyone wrote.

Not that I’m a big fan of fair value (based on exit price or anything else) if applied to anything but financial assets.  I even have a problem with it being applied to liabilities (unless we’re talking about instruments like derivatives).

Nevertheless, as of 1.1.2013, unless they want a qualified opinion, entities applying IFRS will be obligated to apply IFRS 13 whether they agree with its definition of fair value or not (and auditors will be obligated to enforce these rules even if they consider the concept of exit price unworkable).

One good thing is that the IASB is also skeptical about the applicability IFRS 13 to anything but financial assets.  This is why IFRS 13.5 explicitly states “This IFRS applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements … .”

In other words, IFRS 13 applies if, and only if some another IFRS / IAS states that it applies.  If some other IFRS / IAS sets out its own measurement basis, the entity will apply that basis, not IFRS 13.

As far as PP&E and intangible assets are concerned, both IAS 16 and 38 set out their own initial and subsequent measurement bases.

Granted, fair value is still a possibility, but only if the entity elects to apply the fair value model.  And even if it does, both IAS 16.32 (explicitly) and IAS 38.77 (implicitly) assume that this valuation will be performed by a “professionally qualified valuer” who will base his or her conclusions on generally accepted valuations techniques (that may or may not fully or partially reflect exit price) applicable to the situation at hand.

And then there is IAS 36.

Since it defines recoverable amount as the higher of value in use and fair value (less cost to sell), if an entity expects to recover the value of the assets through their use, exit price (the basis for the latter) is not relevant (and need not even be determined).

Exit price will only become relevant if the entity intends to sell the assets (where it is the only logical measurement basis anyway) or if it happens to be higher than value in use (where it is in the entity’s own best interest to determine it).

As to liabilities, the fair value of an entity’s own liabilities is significantly influenced (if not determined) by its credit rating.  Thus, if the entity has a rating, valuing its liabilities is simplicity itself.  If it does not, is very unlikely that it will be possible to do it any other way except with the aid of a qualified professional (or another appropriate third party).

In the situation where entity is unable to perform, the whole concept of determining the “fair value” of its liabilities is ridiculous.

The value of those liabilities is based on what its creditors are willing to accept and/or the value of its saleable assets and/or the quality of its legal representation.

Trying to determine this value ex ante is, for all practical purposes, a waste of time and effort.

In other words, I wouldn’t worry too much about IFRS 13 unless I were a bank with unwritten-off bad loans on my books (and I was intent on keeping this fact away from my regulator and/or shareholders).  In this situation, I’d be concerned.  Very concerned.

Finally, I would be happy to discuss the application of IFRS to specific situations, but since such a discussion would unavoidably be based on my experience with specific companies, the internet is not the appropriate forum.

If you are truly interested in my judgment, you can retain my services and I will be happy (once I have all the facts) to provide your company with a detailed response of how IFRS applies to its particular situation.

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