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L70. Are net portfolio basis adjustments that have been allocated to the individual financial assets and financial liabilities in the

In document Fair Value Measurement (Page 73-76)

portfolio considered when determining the categorization in the fair value hierarchy for disclosure purposes?

820-10-35-37A Yes. In categorizing fair value measurements of the individual financial assets and [IFRS 13.73] financial liabilities in the fair value hierarchy for disclosure purposes, net portfolio

basis adjustments are considered. Each asset and liability measured at fair value is categorized within the fair value hierarchy on the basis of the lowest level input that has a significant effect on its overall fair value measurement (see Section H).

820-10-35-18D The portfolio measurement exception enables an entity to measure the fair value [IFRS 13.48, 73] of a group of financial assets and financial liabilities consistently with how market

participants would price the net risk exposure. In our view, an allocated net portfolio basis adjustment is considered an assumption (i.e., input) that market participants would use when pricing the financial assets and financial liabilities that make up the offsetting risk position. Therefore, we believe that an allocated net portfolio basis adjustment is an input to the fair value measurement of the individual asset or liability.

820-10-35-37A An allocated net portfolio basis adjustment that is an unobservable input and [IFRS 13.73] that has a significant effect on the fair value measurement of an individual financial

asset or financial liability would cause the entire fair value measurement to be categorized within Level 3.

Example L70: Credit-Risk Adjustment Allocation

Company L holds a group of financial assets and financial liabilities, which it manages on the basis of its net exposure to credit risk to particular counterparties and applies the net portfolio basis exception. The inputs to the net portfolio basis adjustment for a particular counterparty are unobservable, while all other inputs to the fair value measurement of the group and to the individual financial assets and financial liabilities within the group are Level 2 inputs.

Because the portfolio measurement exception does not apply to financial statement presentation, the counterparty credit-risk adjustment is allocated to the financial assets and financial liabilities within the group. The allocation of the counterparty credit-risk adjustment to the individual financial assets and financial liabilities may affect the level of the fair value measurements of those financial assets and financial liabilities within the fair value hierarchy.

If the allocated counterparty credit-risk adjustment is significant to the fair value measurement of an individual financial asset or financial liability, then that fair value measurement would be categorized within Level 3. If the credit-risk adjustment allocation is significant only to the fair value measurement of some of the individual financial instruments in the portfolio, and not to others, some would be categorized as Level 2 measurements and some as Level 3 measurements.

L80. In applying the exception, how should an entity consider the existence of an arrangement that mitigates credit-risk exposure in the event of default?

820-10-35-18D, 35-18L Question C70 discusses the usual position of how an entity should consider an [IFRS 13.14, 56, 69] arrangement that mitigates credit-risk exposure in the event of default. However, if

an entity applies the portfolio measurement exception to a group of financial assets and financial liabilities entered into with a particular counterparty, the effect of such an agreement would be included in measuring the fair value of the group of financial assets and financial liabilities.

For individual instruments that are actively traded on an exchange, the actual counterparty to the trade transaction in many instances is the exchange entity (e.g., the clearing house for the exchange). For these exchange transactions, we

understand that even when there is no master netting agreement between the exchange and the entity, credit risk is usually deemed to be minimal because the operating procedures of the exchanges require the daily posting of collateral which is, in effect, an arrangement that mitigates credit-risk exposure in the event of default.

In addition, if the exchange is not the counterparty to the trade transaction, the transaction is a principal-to-principal transaction and an arrangement that mitigates credit-risk exposure in the event of default may be considered in determining the appropriate credit adjustment for determining the fair value of the financial instrument if the entity meets the requirement to and elects to use the portfolio measurement exception.

Fair Value Measurement: Questions and Answers | 73 L. Portfolio Measurement Exception |

M. Inactive Markets

Overview

In an active market, transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

An orderly transaction assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities.

A fair value measurement may be affected if there has been a significant decrease in the volume or level of activity for that item compared with its normal market activity. Judgment may be required in determining whether, based on the evidence available, there has been a significant decrease.

If an entity concludes that the volume or level of activity for an asset or liability has significantly decreased, then further analysis of the transactions or quoted prices is required. A decrease in the volume or level of activity on its own might not indicate that a transaction or a quoted price is not representative of fair value, or that a transaction in that market is not orderly.

It is not appropriate to presume that all transactions in a market in which there has been a decrease in the volume or level of activity are not orderly.

In document Fair Value Measurement (Page 73-76)