Guiding Principle

The Standards include a chapter dedicated to the manner in which a reporting entity should apply the fair value measurement to its liabilities and equity instruments. Generally speaking, it may be said that, in most cases that require a reporting entity to measure the fair value of its liabilities, the measured liabilities will be financial ones. For instance, under International Financial Reporting Standards (IFRS), in certain situations, IFRS 9 includes provisions that allow the reporting entity to designate financial liabilities as at fair value through profit or loss, and under certain circumstances (such as in the case of financial liabilities held for trading), it even requires the liability to be measured at fair value. In addition, the fair value of financial liabilities is also required to be measured at initial recognition, including when separating an embedded derivative that is not closely related to the host debt contract, or when separating a compound instrument into the debt component and the complementary equity component. Such measurement is also required when significant contractual changes are made to the terms of a financial liability.

It may be said that it is not often that IFRSs (or US Generally Accepted Accounting Principles (US GAAP) Standards, in this regard) require reporting entities to measure the fair value of their own equity instruments. This stems from the fact that IFRS 2—Share-Based Payment is excluded from the provisions of IFRS 13 (for more information, see Chapter 2, Section 2.2) as are Accounting Standards Codification (ASC) Topic 718—Compensation—Stock Compensation and ASC 505– 50—Equity—Equity-Based Payments to Non-Employees with regard to ASC 820's scope.

Furthermore, normally, under IFRS when the reporting entity buys or issues its own equity instrument, International Accounting Standard (IAS) 32—Financial Instruments: Presentation requires to measure such a transaction at cost. Therefore, in our view, the most common cases in which a reporting entity may be required to measure the fair value of its equity instruments under the provisions of IFRS 13 are when the reporting entity pays consideration in a business combination (or acquires significant influence in an associate or joint control in a joint venture), by way of issuing or transferring its equity instruments.