Chapter Two Fair value measurement and Impairment

Example: The price for a financial asset or financial liability for the identical asset is traded on an active market (e.g. Tokyo Stock Exchange).
Level 2 inputs: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Example: Interest rates and yield curves observable at commonly quoted intervals, implied volatilities, and credit spreads.
Level 3 inputs: Unobservable inputs for the asset or liability. It is required that an entity to minimize the use of Level 3 inputs when measuring fair value.
Example: Projected cash flows used in a discounted cash flow calculation.
2.1.6. Disclosure
A number of disclosures are designed to provide users of financial statements with additional transparency regarding:

• 
  the extent to which fair value is used to measure assets and liabilities;
  
• 
  the valuation techniques, inputs and assumptions used in measuring fair value; and
  
• 
  the effect of Level 3 fair value measurements on profit or loss (or other comprehensive income).
  

The objectives of disclosure are to:
(a) enable users of financial statements to understand the valuation techniques and inputs used to develop fair value measurements; and
(b) help users to understand the effect of fair value measurements on profit or loss and other comprehensive income for the period when fair value is based on unobservable inputs (Level 3 inputs).
For example, for residential mortgage-backed securities, an entity might disclose the following:

1. 
   the types of underlying loans (e.g. prime loans or sub-prime loans);
   
2. 
   collateral;
   
3. 
   guarantees or other credit enhancements;
   
4. 
   seniority level of the tranches of securities;
   
5. 
   the year of issue;
   
6. 
   the weighted-average coupon rate of the underlying loans and the securities;
   
7. 
   the weighted-average maturity of the underlying loans and the securities;
   
8. 
   the geographical concentration of the underlying loans; and
   
9. 
   information about the credit ratings of the securities.
   

2.2. Impairment
In principle an asset is impaired when an entity will not be able to recover that asset’s carrying value, either through using it or selling it. If circumstances arise which indicate assets might be impaired, a review should be undertaken of their cash generating abilities either through use or sale. This review will produce an amount which should be compared with the assets’ carrying value, and if the carrying value is higher, the difference must be written off as an impairment in the statement of comprehensive income.