IFRS 13 FAIR VALUE MEASUREMENT

1 INTRODUCTION

IFRS 13 defines fair value, sets out a framework for measuring fair value (i.e. explains how to measure fair value for financial reporting), and requires disclosures about fair value measurements (IFRS 13.1 and 13.IN4).

The new standard has to be applied in the financial statements as at Dec 31, 2013 (if the entity's reporting periods start on Jan 01 and end on Dec 31). Earlier application is permitted by the IASB (IFRS 13.C1). However, in the European Union, new IFRSs have to be endorsed by the European Union before they can be applied. There has been no endorsement with regard to IFRS 13 as yet.

Explaining fair value measurement in detail cannot be effected in only one chapter of a book. Instead, this would require writing a separate book. Consequently, in this chapter only the fundamentals of measuring fair value (and not every detail) are discussed.

Since the initial mandatory application of IFRS 13 applies to financial statements as at Dec 31, 2013 (see above), the other chapters of this book do not yet incorporate the consequential amendments of IFRS 13 to other standards.

2 SCOPE

The standard applies when another IFRS permits or requires fair value measurements or disclosures about fair value measurements (including measurements such as fair value less costs to sell, based on fair value, and disclosures about those measurements), except in specified circumstances. It does not require fair value measurements in addition to those already permitted or required by other IFRSs (IFRS 13.5, 13.IN2, and 13.IN4).

The definition of fair value focuses on assets and liabilities. In addition, IFRS 13 has to be applied to an entity's own equity instruments measured at fair value (IFRS 13.4).

There are two categories of exemptions from the scope of IFRS 13 (IFRS 13.6–13.7):

• Exemptions from the disclosure requirements of IFRS 13
• Exemptions from the measurement and disclosure requirements of IFRS 13:
  • Share-based payment transactions within the scope of IFRS 2
  • Leasing transactions within the scope of IAS 17
  • Measurements that have some similarities to fair value but are not fair value, such as value in use in IAS 36 or net realizable value in IAS 2.

The fair value measurement framework of IFRS 13 applies to both initial and subsequent measurement if fair value is permitted or required by other IFRSs (IFRS 13.8).

3 THE MEASUREMENT REQUIREMENTS OF IFRS 13

3.1 Definition of Fair Value

Fair value represents 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 under current market conditions. This means that fair value represents an exit price from the perspective of a market participant that holds the asset or owes the liability (IFRS 13.2, 13.9, 13.Appendix A, and 13.B2).

It is clear from the above that fair value is a market-based measurement and not an entity-specific measurement (IFRS 13.2).

An orderly transaction is a transaction that 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. It does not represent a forced transaction (e.g. a forced liquidation or a distress sale) (IFRS 13.Appendix A).

3.2 The Asset or Liability

Since a fair value measurement is for a particular asset or liability, the entity has to take into account the characteristics of the asset or liability when measuring fair value if market participants would also take these characteristics into account. The effect of a particular characteristic on fair value measurement depends on how it would be taken into account by market participants. The following are examples of such characteristics (IFRS 13.11–13.12):

• Restrictions, if any, on the sale or use of the asset.
• The condition and location of the asset.

The asset or liability measured at fair value might be either of the following (IFRS 13.13):

• A stand-alone asset or liability (e.g. a financial liability or an item of property, plant, and equipment).

• A group of assets, a group of liabilities or a group comprising assets and liabilities (e.g. a cash-generating unit1 or a business2).

Whether the asset or liability is a stand-alone asset or liability or a group (see above) as described above for recognition or disclosure purposes depends on its unit of account. The unit of account represents the level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes. The unit of account for the asset or liability has to be determined according to the IFRS that requires or permits the fair value measurement, except as provided in this IFRS (IFRS 13.14 and IFRS 13.Appendix A).

3.3 The Transaction

Consistent with the definition of fair value,3 a fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions (IFRS 13.15).

When measuring fair value, it is presumed that the transaction takes place in the following market (IFRS 13.16, 13.18, and 13.Appendix A):

• In the principal market for the asset or liability (if a principal market exists). This presumption applies irrespective of whether the price in that market is directly observable or estimated using another valuation technique. The principal market is the market with the greatest volume and level of activity for the asset or liability.
• In the absence of a principal market, in the most advantageous market for the asset or liability. This is the market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability after taking into account transport costs and transaction costs. The latter two types of costs are defined as follows:
  • Transport costs represent the costs that would be incurred to transport an asset from its current location to its most advantageous (or principal) market.
  • Transaction costs are the costs to sell an asset or to transfer a liability in the most advantageous (or principal) market for the asset or liability that are directly attributable to the sale or the transfer. Transaction costs have to meet both of the following criteria:
    • They result directly from and are essential to that transaction.
    • They would not have been incurred by the entity if the decision to sell the asset or transfer the liability had not been made.

In the absence of evidence to the contrary, the market in which the entity would normally sell the asset or transfer the liability is presumed to be the principal market (or the most advantageous market) (IFRS 13.17).

At the measurement date, the entity must have access to the principal (or most advantageous) market. Different entities (and businesses within those entities) may have access to different markets. Thus, the principal (or most advantageous) market for the same asset or liability might be different for different entities (and businesses within those entities) according to IFRS 13. This means that market participants also have to be considered from the perspective of the entity. As a consequence, differences may arise among entities in this aspect. Although the entity must be able to access the market, it need not be able to sell the asset or transfer the liability on the measurement date in order to be able to measure fair value on the basis of the price in that market (IFRS 13.19–13.20).

If there is no observable market to provide pricing information about the sale or the transfer at the measurement date, it has to be assumed that a transaction takes place at that date, which has to be considered from the perspective of a market participant that holds the asset or owes the liability. The assumed transaction serves as a basis for estimating the price to sell the asset or to transfer the liability (IFRS 13.21).

3.4 Market Participants

Market participants are buyers and sellers in the principal (or most advantageous) market4 for the asset or liability that have all of the following characteristics (IFRS 13.Appendix A):

• They are independent of each other. This means that they are not related parties5 as defined in IAS 24.6

• They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information.
• They are able to enter into a transaction for the item.
• They are willing to enter into a transaction for the item. This means that they are motivated but not forced or otherwise compelled to do so.

The entity has to measure fair value using the assumptions that market participants would use when pricing the asset or liability assuming that market participants act in their economic best interest. In developing those assumptions, the entity need not identify specific market participants. Rather, the entity identifies characteristics that distinguish market participants generally, considering factors specific to all the following (IFRS 13.22–13.23):

• The asset or liability.
• The principal (or most advantageous) market for the asset or liability.
• Market participants with whom the entity would transact in that market.

3.5 The Price

Fair value is the price that would be received to sell an asset or paid to transfer a liability (i.e. an exit price) in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions irrespective of whether that price is directly observable or estimated using another valuation technique (IFRS 13.24 and 13.Appendix A).

The price used to measure the fair value of the asset or liability must not be adjusted for transaction costs.7 This is because transaction costs do not represent a characteristic of an asset or a liability. Transaction costs have to be accounted for according to the appropriate IFRS. They do not include transport costs.8 If location is a characteristic of the asset (as might be the case, for example, for a commodity), the price in the principal (or most advantageous) market has to be adjusted for the costs (if any) that would be incurred in order to transport the asset from its current location to that market (IFRS 13.25–13.26).

3.6 Application to Non-financial Assets

When measuring fair value of a non-financial asset, a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use has to be taken into account. The highest and best use is the use of a non-financial asset by market participants that would maximize the value of the asset (or the group of assets and liabilities (e.g. a business) within which the asset would be used). The highest and best use takes into account the use of the asset that is physically possible, legally permissible, and financially feasible (IFRS 13.27–13.28 and 13.Appendix A).

It is clear from the above that the highest and best use is determined from the perspective of market participants even if the entity plans a different use. For example, the entity may acquire an intangible asset only with the intention to prevent others from using it and not with the intention to use the asset. Nevertheless, fair value has to be determined assuming the highest and best use of the asset by market participants (IFRS 13.29–13.30).

3.7 Application to Liabilities and the Entity's Own Equity Instruments

A fair value measurement assumes that a non-financial or financial liability or an entity's own equity instrument (e.g. equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer assumes the following (IFRS 13.34):

• A liability would remain outstanding and the transferee (a market participant) would be required to fulfill the obligation. The liability would not be settled with the counterparty on the measurement date.
• The entity's own equity instrument would remain outstanding and the transferee (a market participant) would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise extinguished on the measurement date.

There might be no observable market to provide pricing information about the transfer of a liability or the entity's own equity instrument (e.g. as a result of contractual or other legal restrictions with regard to transfers of such items). Nevertheless, there might be an observable market for such items if they are held by other parties as assets (IFRS 13.35).

In all cases, it is necessary to maximize the use of observable inputs and to minimize the use of unobservable inputs (IFRS 13.36).

When a quoted price for the transfer of an identical or a similar liability or entity's own equity instrument is not available and the identical item is (IFRS 13.37 and 13.40):

• held by another party as an asset, the fair value of the liability or equity instrument is measured from the perspective of a market participant that holds the identical item as an asset at the measurement date,
• not held by another party as an asset, the fair value of the liability or equity instrument is measured using a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity.

The fair value of a liability has to reflect the effect of non-performance risk, which is the risk that the entity will not fulfill the obligation. Non-performance risk includes the entity's own credit risk and any other factors that might influence the likelihood that the obligation will or will not be fulfilled. Non-performance risk is assumed to be the same before and after the transfer of the liability (IFRS 13.42, 13.43, and 13.Appendix A).

3.8 Fair Value at Initial Recognition

The prices paid by entities to acquire assets may differ from the prices received for selling them. Similarly, entities do not necessarily transfer liabilities at the prices received to assume them (IFRS 13.57 and 13.Appendix A):

• When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price represents the price paid to acquire the asset or received to assume the liability (an entry price).
• By contrast, the fair value of the asset or liability represents the price that would be received to sell the asset or paid to transfer the liability (an exit price).

In many cases, the transaction price will equal the fair value at initial recognition (IFRS 13.58).

If another standard requires or permits measuring an asset or a liability at fair value at initial recognition and the transaction price differs from fair value, the resulting gain or loss (day 1 gain or day 1 loss) has to be recognized in profit or loss unless that standard specifies otherwise (IFRS 13.60).

3.9 Valuation Techniques

It is necessary to use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs (IFRS 13.61).

Three widely used valuation techniques are the market approach, the income approach, and the cost approach (IFRS 13.62 and 13.Appendix A):

• The market approach is defined as a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities (such as a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables (IFRS 13.B5–13.B6).
• The income approach comprises valuation techniques that convert future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount. The fair value measurement is based on current market expectations about the future amounts. The valuation techniques include, for example, the following (IFRS 13.B10–13.B11):
  • Present value techniques.
  • Option pricing models, such as the Black–Scholes–Merton formula or a binomial model (i.e. a lattice model),9 which incorporate present value techniques and reflect both the time value and the intrinsic value of an option.
  • The multi-period excess earnings method, which is used to measure the fair value of some intangible assets.
• The cost approach represents a valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). This means that under this approach, fair value is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. Obsolescence comprises physical deterioration, functional (technological) obsolescence, and economic (external) obsolescence (IFRS 13.B8–13.B9).

The entity has to use valuation techniques that are consistent with one or more of these three approaches to measure fair value (IFRS 13.62).

3.10 Inputs to Valuation Techniques

Inputs are the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. Inputs can be categorized as follows (IFRS 13.Appendix A):

• Observable inputs are inputs that are developed using market data (such as publicly available information about actual events or transactions).
• Unobservable inputs are inputs for which market data are not available. They are developed using the best information available about the assumptions that market participants would use when pricing the item.

Valuation techniques used to measure fair value have to maximize the use of relevant observable inputs and minimize the use of unobservable inputs (IFRS 13.67). Examples of markets in which inputs might be observable for some assets and liabilities (e.g. financial instruments) are exchange markets, brokered markets, dealer markets, and principal-to-principal markets (IFRS 13.67–13.68 and 13.B34).

The entity has to select inputs that are consistent with the characteristics of the item that market participants would take into account in a transaction for the item. In some cases, these characteristics result in the application of an adjustment, such as a premium or discount (e.g. a control premium or a non-controlling interest discount). If there is a quoted price in an active market10 (i.e. a Level 1 input11) for an asset or a liability, the entity generally has to use that price without adjustment when measuring fair value (IFRS 13.69).

3.11 Fair Value Hierarchy

IFRS 13 establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value into three levels (the hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs) (IFRS 13.72).

If the inputs used to measure the fair value of an asset or a liability are categorized within different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety in the same level as the lowest level input that is significant to the entire measurement (IFRS 13.73).

3.11.1 Level 1 Inputs

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date (IFRS 13.76 and 13.Appendix A). An active market is a market in which transactions for the asset or liability take place with sufficient volume and frequency to provide pricing information on an ongoing basis (IFRS 13.Appendix A). In general, no adjustment is made to a quoted price (IFRS 13.77 and 13.79).

Some financial assets and financial liabilities, for which a Level 1 input is available, might be exchanged in multiple active markets (e.g. on different exchanges). Hence, the emphasis within Level 1 is on determining both of the following (IFRS 13.78):

• The principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.12
• Whether the entity can enter into a transaction for the asset or liability at the price in that market at the measurement date.

3.11.2 Level 2 Inputs

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include the following (IFRS 13.81–13.82 and 13.Appendix A):

• Quoted prices for identical or similar assets or liabilities in inactive markets.
• Quoted prices for similar assets or liabilities in active markets.
• Inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates observable at commonly quoted intervals and credit spreads).
• Market-corroborated inputs (i.e. inputs that are derived principally from or corroborated by observable market data by correlation or other means).

Adjustments to Level 2 inputs will vary depending on factors specific to the asset or liability, which include the following (IFRS 13.83):

• The location or condition of the asset.
• The extent to which inputs relate to items that are comparable to the item.
• The volume or level of activity in the markets in which the inputs are observed.

3.11.3 Level 3 Inputs

Level 3 inputs are unobservable inputs for the asset or liability (IFRS 13.86 and 13.Appendix A). Unobservable inputs have to be used to measure fair value to the extent that relevant observable inputs are not available. Since fair value is a market-based measurement and not an entity-specific measurement,13 unobservable inputs have to reflect the assumptions that market participants would use when pricing the item, including those about risk (IFRS 13.87). A fair value measurement has to include an adjustment for risk if market participants would include one when pricing the item. For example, it might be necessary to include a risk adjustment in the case of significant measurement uncertainty (IFRS 13.88).

4 ILLUSTRATION OF THE APPLICATION OF SELECTED VALUATION TECHNIQUES

4.1 Measuring Owner-occupied Items of Property, Plant, and Equipment

The measurement of owner-occupied items of property, plant, and equipment is generally based on the cost approach as described in Section 3.9.

4.2 Measuring American Options According to the Binomial Model

In this section, the measurement of American call options on shares according to the binomial model is illustrated. However, only the basics of the model are explained. An American option may be exercised on any trading day on or before expiry.

In practice, the binomial model is applied for measuring options within the scope of IFRS 9, as well as for measuring employee share options within the scope of IFRS 2. Although IFRS 13 does not apply to share-based payment transactions within the scope of IFRS 2 (IFRS 13.6a), the logic of the binomial model is the same irrespective of whether IFRS 13 applies or not.

Determining fair value of an option according to the binomial model involves the following steps:

• First, the binomial price tree is created. The price tree shows the changes in fair value of the shares that are possible. Fair value of the shares can move up or down by specific factors (the up factor (u) and the down factor (d)). The following applies with regard to these factors (whereby the last assumption is usually made, but does not have to be made): u ≥ 1; 0 < d ≤ 1 and d = 1: u.
• Next, the exercise price of the option is deducted from each of the possible fair values of the shares determined for the expiration date. This results in a number of different intrinsic values for the option. It is important to note that intrinsic value cannot become negative because, in this case, the holder of the option would simply not exercise it.
• In the next step, fair value of the option is determined by working back to the valuation date. This means that the intrinsic values at the time of expiration are multiplied pairwise by their so-called risk neutral probabilities. Thereby, p is the risk neutral probability of an up move and (1 – p) is the risk neutral probability of a down move. Discounting using the risk-free interest rate results in the possible values of the option as at the end of the prior period. This procedure is repeated, i.e. means that working back to the first node of the tree (the measurement date) is necessary where the calculated number is the fair value of the option.

4.3 Measuring a Brand According to the Relief from Royalty Method

In this section, the determination of the fair value of a brand according to the “relief from royalty method” is illustrated. According to this method the value of a brand is the present value of the royalty receipts that could be obtained from licensing the brand to another party (or alternatively, as the present value of the royalty payments that the owner of the brand saves because of not having to license the brand from a third party).

In any case, these hypothetical royalty receipts must not be reduced by the costs of maintaining the brand if the costs of maintaining the brand are paid by the hypothetical licensee. The reason for this is that the costs of maintaining the brand are already considered when fixing the royalty, in this case. An explicit deduction from the royalty would lead to these costs being accounted for twice.

4.4 The Tax Amortization Benefit

For many assets, depreciation or amortization is deductible for tax purposes, leading to a tax advantage (deductibility for tax purposes reduces taxable profit and consequently also taxes payable). Discounting the asset's future cash flows results in a present value that does not take this tax advantage into account. As noted above, fair value is an objective amount.14 Thus, this tax advantage (which is called tax amortization benefit) has to be included when determining fair value, irrespective of whether the acquirer is able to realize the tax advantage.

The tax amortization benefit can be determined by multiplying the present value by the following formula:15 UL : (UL – PVIFA · t) – 1

The tax amortization benefit is characteristic of the income approach.16 It is typically taken into account when fair value of intangible assets, investment properties or items of property, plant, and equipment (rented to others) is determined according to the income approach. However, when fair value is determined according to the market approach, it is presumed that the market price already includes the tax amortization benefit.

5 EXAMPLES WITH SOLUTIONS

Example 1

Measuring an American option according to the binomial model

On Jan 01, 01, entity E acquires one American call option to buy one share. The expiration date of the option is Dec 31, 02. The exercise price of the option is CU 9. On Jan 01, 01, fair value of one share is CU 10. The up factor (u) is 1.25 p.a. and the down factor (d) is 0.80 p.a. (= 1 : 1.25). The risk neutral probability of an up move (p) in fair value of the share is 0.40 (i.e. 40%). The risk-free interest rate is 10% p.a.

Required

Determine the fair value of the option as at Jan 01, 01, according to the binomial model.

Hints for solution

In particular Sections 4.2 and 3.9.

Solution

For reasons of simplification, the calculations in this example are effected on the basis of numbers that relate to an entire year. In practice, the calculations are normally made on a more detailed basis.

The assumed development of fair value of the shares is illustrated in the price tree presented below. The figures are determined on the basis of the up and down factors.

Next, the exercise price of the option (CU 9) is deducted from each of the possible fair values of the shares determined for the expiration date (Dec 31, 02). This results in a number of different intrinsic values for the option. An intrinsic value cannot become negative. Afterwards, the intrinsic values as at Dec 31, 02 are multiplied pairwise by their risk neutral probabilities. Discounting for one period results in the figures presented in the column “Dec 31, 01” in the table below.17 This procedure is repeated, i.e. means that working back to the first node of the tree is necessary where the calculated number is the fair value of the option as at Jan 01, 01.

Hence, fair value of the option (rounded to two decimal figures) as at Jan 01, 01 is CU 1.27.

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Example 3

Measurement of a brand according to the relief from royalty method (including the tax amortization benefit)

On Dec 31, 00, entity E acquires 100% of the shares of entity S. S produces body care products under a brand name that has been well known for many years. Annual inflation-adjusted revenues of CU 80 for 01, CU 88 for 02, CU 96 for 03, and of CU 104 p.a. from 04 onwards are expected for products sold under the brand name.

A database search on license agreements for body care products indicates that royalties are between 2% and 8% p.a. In this example, it is assumed that a royalty of 5% p.a. could be stipulated with a third party for S's brand (considering factors such as brand awareness, the positioning of the brand, and its life cycle), under the presumption that the hypothetical licensee would pay the costs of maintaining the brand.

For measurement purposes, a risk-adjusted and inflation-adjusted discount rate of 10% p.a. is appropriate. In the future, high costs of maintaining the brand are planned in order to be able to use the brand for an indefinite period of time.

Required

Determine the carrying amount of the brand (fair value) on the date of acquisition of S in E's consolidated statement of financial position according to the relief from royalty method. The tax rate is 25%. Assume that the brand's statutory useful life for tax purposes is 15 years.

Hints for solution

In particular Sections 4.3 and 4.4.

Solution

According to the relief from royalty method, fair value of the brand is determined on the basis of the present value of the future royalty receipts that could be obtained from licensing the brand to another party.

In this example, the royalty receipts must not be reduced by the costs of maintaining the brand because these costs are paid by the hypothetical licensee and have already been considered when fixing the royalty. A deduction from the royalty receipts would lead to the costs of maintaining the brand being accounted for twice.

The present value of the hypothetical future royalty receipts is determined as follows:18

The tax amortization benefit is calculated by multiplying the total of the present values of CU 37.4 by the formula “UL : (UL – PVIFA · t) – l:”19

Useful life for tax purposes (in years)	15
Interest rate	10%
PVIFA20	7.60608	Present value of an annuity of CU 1 during the term UL and on the basis of the interest rate i: 1 : 1.1 + 1 : 1.12+… until the end of the period UL (formula “PV” in Excel).
Tax amortization benefit	5.4	37.4 · (15 : (15 − 7.60608 · 0,25) −1)

Therefore, the fair value of the brand as at Dec 31, 00 (i.e. on the acquisition date) is CU 42.8 (= CU 37.4 + CU 5.4).

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1 See the chapter on IAS 36, Sections 1 and 4.

2 See the chapter on IFRS 3, Section 1.

3 See Section 3.1.

4 See Section 3.3 with regard to the definition of the terms “principal market” and “most advantageous market.”

5 See the chapter on IAS 24, Section 2.

6 However, the price in a related party transaction may be used as an input to a fair value measurement, if there is evidence that the transaction was entered into at market terms (IFRS 13.Appendix A).

7 See Section 3.3 with regard to the definition of the term “transaction costs.”

8 See Section 3.3 with regard to the definition of the term “transport costs.”

9 See Section 4.2.

10 See Section 3.11.1.

11 See Section 3.11.1.

12 See Section 3.3 with regard to the definition of the terms “principal market” and “most advantageous market.”

13 See Section 3.1.

14 See Section 3.1.

15 UL = useful life for tax purposes; PVIFA = present value interest factor of annuity for the period UL and the interest rate i (corresponds with the present value of an annuity of CU 1 during the term UL, on the basis of the interest rate i); t = tax rate.

16 See Section 3.9.

17 For example, the amount of CU 2.955 is determined as follows: [CU 6.625 · p + CU 1.000 · (1 − p)] : 1.1.

18 The present value for 04 onwards is determined as follows: first, the present value as at Jan 01, 04 of a perpetual annuity has to be calculated: CU 3.9 : 0.1 = CU 39. This result has to be discounted for three periods from Jan 01, 04 to Dec 31, 00 with a discount rate of 10% p.a.

19 UL = useful life for tax purposes; PVIFA = present value interest factor of annuity for the period UL and the interest rate i (corresponds with the present value of an annuity of CU 1 during the term UL, on the basis of the interest rate i); t = tax rate.

20 20 PVIFA = present value interest factor of annuity.