IFRS 13 Fair Value Measurement

Conceptual Framework Linkage

Why fair value needed a SINGLE definition and framework

The Conceptual Framework recognises fair value as a valid measurement basis but, before IFRS 13, its definition and application VARIED across different IFRS Standards. IFRS 13 unified this into ONE consistent definition – an EXIT PRICE, from a MARKET PARTICIPANT'S perspective – applied consistently wherever ANY OTHER Standard requires or permits fair value measurement.

HOW IFRS 13 MAPS TO THE FRAMEWORK

Faithful representation – an EXIT price (what would be received to SELL, not what was paid to acquire) reflects the asset's genuine current economic value from a market perspective Comparability – a SINGLE fair value framework applied consistently across IFRS 9, IAS 40, IAS 41, IFRS 3, and others eliminates inconsistent fair value definitions previously scattered across individual Standards Market participant perspective – fair value reflects ASSUMPTIONS market participants would use, NOT the reporting entity's own specific intentions, ensuring an objective, faithfully representative measure

IFRS 13 does NOT determine WHEN fair value is required – that remains the role of each individual Standard (IFRS 9, IAS 40, etc.); IFRS 13 only determines HOW to measure fair value once another Standard requires or permits it.

The core exit price definition

Fair value = 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

"Orderly transaction" EXCLUDES forced liquidations or distress sales – fair value assumes NORMAL market exposure, not fire-sale conditions.

Scope & Applicability

What IFRS 13 covers

IFRS 13 applies when ANOTHER IFRS Standard REQUIRES OR PERMITS fair value measurements or disclosures – it applies to BOTH initial and subsequent measurement, wherever fair value is used.

Scope exclusions include share-based payment transactions (IFRS 2), leases (IFRS 16), and net realisable value under IAS 2 – measurements that RESEMBLE fair value but are governed by their own specific Standards.

Key definitions you must know

Principal market

The market with the GREATEST volume and level of activity for the asset/liability.

Most advantageous market

The market that MAXIMISES the amount received (asset) or MINIMISES the amount paid (liability), after transaction and transport costs – used ONLY if there is NO principal market.

Highest and best use

The use of a NON-FINANCIAL asset by market participants that would MAXIMISE its value – physically possible, legally permissible, and financially feasible.

The Principal (or Most Advantageous) Market

Determining WHICH market's price to use

Fair value is measured using the price in the PRINCIPAL market (assumed to be the market the entity would normally transact in, absent evidence to the contrary) – or, if there is NO principal market, the MOST ADVANTAGEOUS market.

Example 1: Principal vs most advantageous market

An entity's commodity can be sold in Market A (highest transaction VOLUME, price $98, transaction costs $2) or Market B (lower volume, price $100, transaction costs $5).

Since Market A has the GREATEST volume of activity, it is the PRINCIPAL market – fair value is based on Market A's price of $98 (BEFORE deducting transaction costs, which are NOT part of fair value itself, though they DO factor into which market is "most advantageous" when no principal market exists).

Highest and Best Use – Non-Financial Assets

Valuing based on the market's use, not necessarily the entity's own use

For NON-FINANCIAL assets, fair value considers a market participant's ability to generate economic benefit by using the asset in its HIGHEST AND BEST USE, or by SELLING it to another market participant who would use it in its highest and best use – this may DIFFER from how the entity itself currently uses the asset.

Example 2: Land valued for a DIFFERENT use than current

An entity owns land currently used for light industrial purposes, valued at $2,000,000 in that use. However, the land is legally zoned for residential development, and market evidence shows comparable residential-zoned land trades at $5,500,000, with redevelopment being both physically possible and financially feasible.

Fair value is based on the HIGHEST AND BEST USE – residential development – at $5,500,000, NOT the entity's current $2,000,000 industrial use value, since market participants would recognise and pay for the land's greater potential.

The Three Valuation Techniques

Market, cost, and income approaches

ApproachDescription

Market approachUses prices/information from market transactions involving IDENTICAL or COMPARABLE assets/liabilities

Cost approachReflects the amount CURRENTLY required to replace the SERVICE CAPACITY of an asset (current replacement cost)

Income approachConverts FUTURE amounts (cash flows/income/expenses) to a SINGLE current (discounted) amount

An entity uses the valuation technique(s) APPROPRIATE in the circumstances, maximising the use of RELEVANT OBSERVABLE inputs and minimising unobservable inputs – techniques are applied CONSISTENTLY, though a change may be warranted if it results in a measurement equally or more representative of fair value.

The Fair Value Hierarchy

The three levels, originating from IFRS 13

LevelInput basis

Level 1Quoted prices (unadjusted) in ACTIVE markets for IDENTICAL assets/liabilities the entity can access at the measurement date

Level 2Inputs OTHER than Level 1 quoted prices that are OBSERVABLE, directly or indirectly

Level 3UNOBSERVABLE inputs, used when relevant observable inputs are not available

This hierarchy is DEFINED in IFRS 13 but its detailed DISCLOSURE requirements are largely specified in IFRS 7 (for financial instruments) and IFRS 13 itself (for all fair value measurements generally).

Fair Value of Liabilities & Own Equity

A transfer notion, including non-performance risk

Fair value of a liability assumes it is TRANSFERRED to a market participant at the measurement date (it is NOT settled or extinguished), and reflects the effect of NON-PERFORMANCE RISK – including the entity's OWN CREDIT RISK – assumed to be the SAME before and after the transfer. Where a quoted price for transferring an identical liability is not available, an entity may use the quoted price of the SAME liability when held as an ASSET by another party, as a proxy.

Day-One Gains and Losses

Transaction price vs fair value at initial recognition

The transaction price is often (but NOT always) equal to fair value at initial recognition. If fair value DIFFERS from the transaction price, the resulting "day-one" gain/loss is recognised per the requirements of the OTHER applicable IFRS Standard (e.g. IFRS 9 for financial instruments), which may or may not permit IMMEDIATE recognition depending on whether the fair value is evidenced by a quoted price in an active market or a valuation technique using only observable data.

Disclosure Requirements

Required disclosures

FOR RECURRING/NON-RECURRING FAIR VALUE MEASUREMENTS

Fair value hierarchy level for each class of asset/liability measured at fair value Valuation techniques and inputs used, including any changes in technique For Level 3: a reconciliation from opening to closing balances, and sensitivity to changes in unobservable inputs

GENERAL

The valuation process used by the entity for Level 3 fair value measurements (e.g. valuation committee, external valuers)

Critical Judgments & Estimates

Where management judgement matters most

SIGNIFICANT JUDGEMENTS

Identifying the principal (or most advantageous) market Determining highest and best use for non-financial assets, and whether it differs from current use Selecting the appropriate valuation technique(s), and classifying inputs by hierarchy level

SIGNIFICANT ESTIMATES

Unobservable inputs used in Level 3 valuation techniques Non-performance risk (including own credit risk) incorporated into liability fair values

Level 3 valuations, by definition, rely on management's OWN unobservable assumptions – making them the MOST judgemental, and often the most scrutinised by auditors and regulators, of all fair value measurements.

IFRS vs US GAAP

Comparison – IFRS 13 vs US GAAP (ASC 820)

FeatureIFRS (IFRS 13)US GAAP

Core exit price definitionExit price, market participant perspectiveSAME exit price definition – near-identical, converged through joint standard-setting

Fair value hierarchyThree levelsSAME three levels, essentially identical mechanics

Highest and best useApplies to non-financial assetsSame concept, converged

IFRS 13 and ASC 820 are AMONG THE MOST CONVERGED standards in the entire IFRS/US GAAP landscape, having been developed through a genuinely JOINT IASB/FASB project specifically to eliminate prior definitional inconsistencies.

Statement Mapping

Comprehensive event-to-statement mapping table

Event / transactionStatement(s) affectedNotes

Fair value measurement (per host Standard)SOFPBasis and measurement determined per IFRS 13; recognition rules per the host Standard

Change in fair value (host Standard dependent)SOPL OCILocation determined by the HOST Standard (e.g. IFRS 9, IAS 40), not IFRS 13 itself

Day-one gain/loss recognitionSOPLPer the host Standard's specific criteria for immediate recognition

Hierarchy classification, valuation technique, Level 3 reconciliationNotesMandatory disclosure

IFRS 13 itself has NO recognition consequences – it supplies the MEASUREMENT and DISCLOSURE mechanics that the host Standard's own recognition rules then apply.

Related Standards

Cross-reference map

StandardConnection

IFRS 9Uses IFRS 13's framework for FVTPL/FVOCI measurement

IAS 40 / IAS 41Use IFRS 13's fair value framework for investment property and biological assets respectively

IFRS 3Uses IFRS 13's fair value framework almost universally in the acquisition method

IFRS 7Supplies additional disclosure requirements specifically for financial instrument fair values

Quick-reference glossary

Orderly transaction

A transaction assuming exposure to the market for a period allowing usual marketing activities – excludes forced liquidations.

Non-performance risk

The risk an obligation will not be fulfilled, including the entity's own credit risk, factored into liability fair values.

Quick-Reference Glossary

Fair value

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.

Principal market

The market with the GREATEST volume and level of activity for the asset/liability.

Most advantageous market

The market that MAXIMISES the amount received (asset) or MINIMISES the amount paid (liability), after transaction and transport costs – used ONLY if there is NO principal market.

Highest and best use

The use of a NON-FINANCIAL asset by market participants that would MAXIMISE its value – physically possible, legally permissible, and financially feasible.

Orderly transaction

A transaction assuming exposure to the market for a period allowing usual marketing activities – excludes forced liquidations.

Non-performance risk

The risk an obligation will not be fulfilled, including the entity's own credit risk, factored into liability fair values.

Financial statement key

BS Balance sheet

IS Income statement

SE Statement of changes in equity

OCI Other comprehensive income

SCF Statement of cash flows

History & Development

May-2011

In May 2011 the International Accounting Standards Board issued IFRS 13 Fair Value Measurement. IFRS 13 defines fair value and replaces the requirement contained in individual Standards.

Jun-2011

IAS 19 Employee Benefits