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Discount rate adjustment technique [IFRS 13.B20-21]

Assume that Asset A is a contractual right to receive CU800 in one year (i.e. there is no timing uncertainty). There is an established market for comparable assets, and information about those assets, including price information, is available. Of those comparable assets:

Asset B is a contractual right to receive CU1,200 in one year and has a market price of CU1,083. Therefore, the implied annual rate of return (i.e. a one-year market rate of return) is 10.8% [(CU1,200/CU1,083) 1].

Asset C is a contractual right to receive CU700 in two years and has a market price of CU566. Therefore, the implied annual rate of return (i.e. a two-year market rate of return) is 11.2% [(CU700/CU566)^0.5 1].

All three assets are comparable with respect to risk (i.e. dispersion of possible pay-offs and credit).

(i) Comparability based nature of the cash flows and other factors
On the basis of the timing of the contractual payments to be received for Asset A relative to the timing for Asset B and Asset C (i.e. one year for Asset B versus two years for Asset C), Asset B is deemed more comparable to Asset A. Using the contractual payment to be received for Asset A (CU800) and the one-year market rate derived from Asset B (10.8%), the fair value of Asset A is CU722 (CU800/1.108).

(ii) Using the build up approach In the absence of available market information for Asset B, the one-year market rate could be derived from Asset C using the build-up approach. In that case the two-year market rate indicated by Asset C (11.2%) would be adjusted to a one-year market rate using the term structure of the risk-free yield curve. Additional information and analysis might be required to determine whether the risk premiums for one-year and two-year assets are the same. If it is determined that the risk premiums for one-year and two-year assets are not the same, the two-year market rate of return would be further adjusted for that effect.