Fair value measurement is an accounting standard that uses current market prices to measure the fair value of financial assets and liabilities. There are three levels of measurement in fair value, each reflecting the importance of inputs. Level one measures market-priced financial assets, such as equity investments, and Level two measures the fair value of debt. Financial assets held by a company are measured at fair value based on their current bid prices.
The measurement of equity instruments at fair value is performed through other comprehensive income and is carried under other financial assets. Deutsche Telekom has a large number of unlisted, strategic individual positions and believes that measurement through other comprehensive income is appropriate. The company does not plan to use these investments for short-term profit-taking. The measurement of equity investments uses the best information available at the reporting date. The decision about which information to use depends on the proximity of the relevant transaction to the reporting date. Also, the degree of similarity between the object being measured and comparable companies must be taken into consideration.
Financial instruments measured at fair value are classified into two types, according to their risk profile. Derivatives are classified into two types: interest-bearing and non-interest-bearing. The fair value of interest-bearing financial instruments is higher than the carrying amount. For example, a company could record a loss on a EUR50 billion debt with a EUR60 billion fair value.
Financial assets are classified into two main categories: assets and liabilities. Assets include loans and receivables. Liabilities are measured using the amortized cost method or the effective interest method. Fair value of financial assets is the carrying amount plus any transaction costs that were incurred. These transaction costs must be directly related to the acquisition.
Fair value is measured through the income statement. Assets measured at fair value are reclassified if the company changes its business model. The fair value of financial assets is reflected in profit and loss in the income statement, and the reclassification results in a new carrying amount for the asset.
Financial liabilities are measured at fair value using mathematical measurement models. These methods are widely accepted by the international financial community. Nevertheless, they have their limitations and may lead to inaccurate estimates. Inaccurate valuations can result in an accounting mismatch. This is why fair value is crucial in financial reporting. And it is crucial to note that different types of financial assets have different fair values.
Financial assets can be classified into two categories: current and non-current assets. Current assets are those that have a longer life, while non-current assets are those that have a shorter lifespan.