Private Equity and Portfolio Valuation: IFRS 9 requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or the financial liability.
Financial Assets
| Loans and receivables “Basic” loans and receivables where the objective of the entity’s business model for realizing these assets is either: |
Treatment |
|---|---|
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Amortized Cost |
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FVOCI |
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FVPL |
| Financial Assets | Treatment |
|---|---|
| Mandatorily redeemable preferred shares and “puttable” instruments (e.g., investments in mutual fund units) |
FVPL |
| Freestanding derivative financial assets (e.g., purchased options, forwards and swaps with a positive fair value at the balance sheet date) |
FVPL |
| Investments in equity instruments Entity irrevocably elects at initial recognition to recognize only dividend income on a qualifying investment in profit and loss, with no recycling of changes in fair value accumulated in equity through OCI. |
FVOCI |
| Other | FVPL |
Note: FVPL may be used if an asset qualifies for FVOCI or Amortized Cost to avoid an accounting mismatch.
Equity instruments
All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of financial position, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to present value changes in ‘other comprehensive income’. There is no ‘cost exception’ for unquoted equities.
Other comprehensive income option
If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at FVTOCI with only dividend income recognised in profit or loss.[IFRS 9, paragraph 5.7.5]
Financial Liabilities
An entity cannot reclassify financial liabilities. Under IAS 39, the entire change in the fair value of financial liabilities designated as FVPL always are recognized in profit and loss. IFRS 9 modifies this requirement to specify that the portion of the change attributable to changes in the entity’s own credit risk is recognized in OCI, with no recycling, unless:
Basis for estimating expected credit losses
Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and probability-weighted amount that is determined by evaluating the range of possible outcomes as well as incorporating the time value of money. Also, the entity should consider reasonable and supportable information about past events, current conditions and reasonable and supportable forecasts of future economic conditions when measuring expected credit losses.[IFRS 9 paragraph 5.5.17]
The Standard defines expected credit losses as the weighted average of credit losses with the respective risks of a default occurring as the weightings. [IFRS 9 Appendix A] Whilst an entity does not need to consider every possible scenario, it must consider the risk or probability that a credit loss occurs by considering the possibility that a credit loss occurs and the possibility that no credit loss occurs, even if the probability of a credit loss occurring is low.[IFRS 9 paragraph 5.5.18]
In particular, for lifetime expected losses, an entity is required to estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date, weighted by the probability of that default occurring. An entity is required to incorporate reasonable and supportable information (i.e., that which is reasonably available at the reporting date). Information is reasonably available if obtaining it does not involve undue cost or effort (with information available for financial reporting purposes qualifying as such).
For applying the model to a loan commitment an entity will consider the risk of a default occurring under the loan to be advanced, whilst application of the model for financial guarantee contracts an entity considers the risk of a default occurring of the specified debtor.[IFRS 9 paragraphs B5.5.31 and B5.5.32]
Coordinated Portfolio Valuation Services
Assist you in formulating a solid and written valuation policy and execute a set of coordinated valuation modelling services for your portfolio companies for financial reporting purposes and communication with investors;
Validate and benchmark your existing valuation inputs and models across portfolio companies and along their stage of investment to align portfolio model consistency and ensure their accountability upon enquires from auditors, regulators and investors;
Evaluate critically the risk characteristics of the portfolio companies and assess the discount rates and multiples applied from the market participants’ perspective (such as institutional and professional investors) on the subject portfolio; and
Provide an impact assessment on portfolio valuation by various critical events (such as the effect of new rounds of funding to one portfolio company on other portfolio companies from the related industry, effect of delayed project milestones on J-curve).
Our standards and accreditations
Extended Reading
Amortized Cost
The asset is measured at the amount recognized at initial recognition minus principal repayments, plus or minus the cumulative amortization of any difference between that initial amount and the maturity amount, and any loss allowance. Interest income is calculated using the effective interest method and is recognized in profit and loss. Changes in fair value are recognized in profit and loss when the asset is derecognized or reclassified.
Fair Value Through OtherComprehensive Income (“FVOCI”)
The asset is measured at fair value. Loans and receivables. Interest revenue, impairment gains and losses, and a portion of foreign exchange gains and losses, are recognized in profit and loss on the same basis as for Amortized Cost assets. Changes in fair value are recognized initially in Other Comprehensive Income (OCI). When the asset is derecognized or reclassified, changes in fair value previously recognized in OCI and accumulated in equity are reclassified to profit and loss on a basis that always results in an asset measured at FVOCI having the same effect on profit and loss as if it were measured at Amortized Cost. Investments in equity instruments. Dividends are recognized when the entity’s right to receive payment is established, it is probable the economic benefits will flow to the entity and the amount can be measured reliably. Dividends are recognized in profit and loss unless they clearly represent recovery of a part of the cost of the investment, in which case they are included in OCI. Changes in fair value are recognized in OCI and are never recycled to profit and loss, even if the asset is sold or impaired.
Fair Value Through Profit and Loss(“FVPL”)
The asset is measured at fair value. Changes in fair value are recognized in profit and loss as they arise.