Factsheet Series: IFRS 13

Fair Value Measurement

Understand the key principles behind the fair value measurement in IFRS 13. The article also provides
the summary of disclosures on fair value information.
by TheAccSense TeamJuly 12, 2021Updated August 7, 2021

Fair value reflects the price that would be received to sell an asset or
paid to transfer a liability.
IFRS 13 Fair Value Measurement governs the financial reporting
requirements for fair value. Entities apply this standard for all
assets and liabilities that require or allow fair value as their
measurement. For instance, the standard is applied for:

 Investment property measured using the fair value model.

 Fair value measurement for intangible assets or property,
plant and equipment measured using the revaluation model.
 Measurement at fair value for non-monetary grants.
 Measurement of contingent consideration at fair value in
business combination.

The standard sets out a single framework for measuring fair value.
Additionally, it also stipulates the required disclosures about the
fair value measurement. However, the standard does not intend to
establish valuation standards or affect valuation practice outside
financial reporting.

Let’s now get into the details of IFRS 13.

What is fair value?

Firstly, let‘s understand the definition of fair value. IFRS 13 defines

fair value as 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. Accordingly, fair value is a
market-based and not an entity-specific measurement.
The components of fair value measurement

In addition, fair value of asset or liability is not necessarily the same

as transaction price. Transaction price is the price paid
to acquire the asset or received to assume the liability – i.e., an
entry price.

Entities, however, do not necessarily sell assets at its acquisition

price. Similarly, entities may not transfer liabilities at the prices
received to assume them.

As such, transaction price is an entry price, while fair value is an

exit price for entities that hold the assets or owe the liabilities.

Secondly, let’s us now understand the key components in the fair

value definition.
The asset and liability

In fair value determination, entities need to consider the

characteristics of the asset or liability. Entities include the
characteristics of the asset or liability only if market participants
take them into account when pricing the asset or liability at the
measurement date.

The characteristics depend on the specific asset or liability, but may

include:

1. Firstly, the condition and location of the asset.

2. Secondly, the restrictions on the sale or use of the asset.

The transaction

The definition of fair value also emphasises the fact for the
transaction to take place in an orderly transaction. Accordingly, fair
value measurement assumes that the transaction takes place:

 Firstly, in the principal market for the asset or liability.

 Secondly, in the absence of a principal market, in the most
advantageous market for the asset or liability.

But what is the principal market? Also, what is

‘most advantageous market’? The table explains the concepts:
Principal market Most advantageous market

The market with the greatest The market that maximises the amount that would be received to sell the
volume and level of activity asset or minimises the amount that would be paid to transfer the liability.
for the asset or liability. This amount is after considering transaction costs and transport costs.

The difference between principal market and most advantageous

market

Nevertheless, entities do not need to take an exhaustive search of all

possible markets to identify the principal market or the most
advantageous market. In fact, IFRS 13 states that entities assume
the market in which the entity would normally enter into a
transaction for the asset or liability as the principal market or the
most advantageous market.

Entities must have access to the principal market at the

measurement date. Accordingly, the principal market may be
different for different entities for the same asset or liability.
Although IFRS 13 requires entities to have access to the market,
entities do not need to be able to sell the asset or transfer the
liability in such market.

Market participants

The third component is market participants. In determining the fair

value, entities assume market participants act in their economic
best interest. In addition, entities do not need to identify the specific
market participants. Entities generally consider the factors specific
to the following:

1. Firstly, the asset and liability.

 2. Secondly, the principal or most advantageous market for the
asset or liability.
3. Lastly, market participants with whom the entity would enter
into a transaction in that market.

The price

The last component of fair value measurement is the price. The

price can either be directly observable or estimated using another
valuation technique. Additionally, the price in the market should
not be adjusted for transaction costs as it is not a characteristic of
an asset or liability. In addition, transaction costs are specific to a
transaction and differ depending on how an entity enters into the
transaction.

Valuation techniques in IFRS 13

Fair Value Measurement

We now come to the important part of fair value measurement – the

valuation techniques. Specifically, on how do we measure the fair
value for assets or liabilities? In general, IFRS 13 requires entities to
use appropriate valuation techniques to measure the fair value of
assets or liabilities.
To clarify this, IFRS 13 states that the valuation techniques must be
appropriate in the circumstances as well as sufficient data are
available. Entities should also maximise the use of observable input
and minimise the use of unobservable inputs.

There are three widely used valuation techniques – first, the market
approach, second, the cost approach, and finally, the income
approach.

Market approach Cost approach Income approach

Uses prices and other relevant information Reflects the amount that Converts future amounts (i.e. cash flows or
generated by market transactions involving would be required income and expenses) to a single current
identical or comparable assets, liabilities or a currently to replace the (i.e. discounted) amount. It reflects current
group of assets and liabilities. Example is service capacity of an market expectations about those future
matrix pricing. asset. amounts.

The valuation techniques

Some assets or liabilities require a single valuation technique to be

used while some others require multiple valuation technique to be
used. Nevertheless, IFRS 13 does not restrict the use of either single
or multiple valuation techniques.

Change in a valuation technique

Above all, the valuation techniques used must be applied

consistently. Nevertheless, a change in a valuation technique or its
application is possible and appropriate, only if such change results
in a measurement that is more representative of fair value in the
circumstances.
But then, how do we account for a change in the valuation technique
used or its application? IFRS 13 explains that such change is a
change in accounting estimate, as fair value measurement is an
estimate. Accordingly, entities follow the guidance in IAS
8 Accounting Policies, Changes in Accounting Estimates and
Errors. IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors will help you to understand how to account
for such a change.

Application of fair value

measurement

IFRS 13 also provides requirements on the application of fair value

measurement as follows:

Application to non-financial assets

Fair value measurement takes into consideration 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 it in its highest and best use.

For this, entities consider whether the highest and best use is
physically possible, legally permissible, and financially feasible. In
addition, the application of the highest and best use ignores how
entity intends to use the asset. Instead, it is considered from the
perspective of market participants. An entity’s current use
nevertheless is presumed to be its highest and best use,
unless market and other factors suggest otherwise.

Application to liabilities and an entity’s own

equity instruments

An entity assumes the fair value measurement is transferred to the

market participant at the measurement date. In addition, it is
assumed that:

 The liability remains outstanding and transferee would be

required to fulfil the obligation.
 An entity’s own equity instrument remain outstanding and
transferee would take on the rights and responsibilities
associated with the instrument.

In addition, IFRS 13 provides the following requirements:

 Firstly, where the liabilities and equity instruments held by

other parties as assets. In this situation, when a quoted price
for the transfer of an identical liability or entity’s own equity
instrument is not available, an entity measures the fair value
from the perspective of a market participant that holds the
identical item as an asset.
 Secondly, when the liabilities and equity instruments not held
by other parties as assets. Accordingly, an entity measures the
fair value using a valuation technique from the perspective of a
market participant that owes the liability or has issued
the claim on equity.
Fair value hierarchy

What is fair value hierarchy? Fair value hierarchy aims at

categorising the inputs to valuation techniques used into three
levels. In addition, fair value hierarchy gives highest priority to
unadjusted quoted prices in active market and the lowest priority to
unobservable inputs. The table below explains each level of the fair
value hierarchy.

Level 1 inputs Level 2 inputs Level 3 inputs

Quoted prices (unadjusted) in active market for Inputs other than quoted prices included Unobservable inputs
identical assets or liabilities that an entity can within Level 1 that are observable for the for the asset or
access at the measurement date. asset or liability, either directly or indirectly. liability.

The fair value hierarchy

Importantly, no adjustment should be made to a Level 1 input

except in certain circumstances. In contrast, entities make various
adjustments to Level 2 inputs. These adjustments depends on
factors specific to the asset or liability. The final level, Level 3 uses
unobservable inputs to measure fair value to the extent that relevant
observable inputs are not available. In this situation, entities
develop unobservable inputs using the best information available,
which may include the entities’ own data.

Disclosures on fair value

information
IFRS 13 also requires extensive disclosure of fair value information
in the financial statements. This is to help users to assess:

 Firstly, the assets and liabilities measured at fair value on a

recurring or non-recurring basis. This includes the valuation
techniques and inputs used to develop those measurements.
 Secondly, the effect of measurements on profit or loss or other
comprehensive income. This is for recurring fair value
measurements using significant unobservable inputs
(Level 3).

Disclosure for assets and liabilities measured at

fair value

To achieve the two objectives above, an entity should disclose the

information in the table below. The information is disclosed for
each class of assets and liabilities measured at fair value:

Non- Non- Non-

Recurring Recurring Recurring
Recurring Recurring Recurring

L1 L2 L3 L1 L2 L3

Fair value measurement at the end of the

Yes Yes Yes Yes Yes Yes
reporting period

Reason for the measurement No No No Yes Yes Yes

Level of fair value hierarchy Yes Yes Yes Yes Yes Yes

Amount of transfer, the reasons and the

entity’s policy for determining the transfers Yes Yes No No No No
between levels

Description of valuation techniques No Yes Yes No Yes Yes

 Non- Non- Non-
Recurring Recurring Recurring
Recurring Recurring Recurring

Description of inputs used No Yes Yes No Yes Yes

Change in valuation techniques or use of an

No Yes Yes No Yes Yes
additional valuation technique

Quantitative information on significant

No No Yes No No Yes
unobservable inputs used

Reconciliation from opening balance to the

No No Yes No No No
closing balance

The amount of total gains or losses for the

No No Yes No No No
period

Description of the valuation processes used No No Yes No No Yes

Narrative description of the sensitivity of fair

value measurement to changes in
unobservable inputs, including No No Yes No No No
interrelationship between those inputs to
other unobservable inputs

Changes in one or more of the unobservable

inputs for financial assets and financial No No Yes No No No
liabilities

The fact if the highest and best use differs

Yes Yes Yes Yes Yes Yes
from its current use and the reason

The summary of disclosures for assets and liabilities measured at

fair value
Disclosure for assets and liabilities where fair
value are disclosed

Entities may also disclose the fair value of certain assets and
liabilities that are not measured at fair value. For these assets and
liabilities, IFRS 13 simplifies the disclosure requirements.

For these assets and liabilities, entities will only need to disclose:

 First, the level of the fair value hierarchy.

 Second, a description of the valuation techniques and the
inputs used for those categorised within Level 2 and 3.
 Third, the fact and reasons if the highest and best use of non-
financial assets differ from the current use.

For a liability measured at fair value and issued with an inseparable

third-party credit enhancement, IFRS 13 requires the issuer to
disclose the existence of that credit enhancement. In addition,
entities should also disclose whether the existence of credit
enhancement is reflected in the fair value measurement of the
liability.

The above sums up the principles in fair value measurement of

assets and liabilities. Having said this, there are lots of judgements
and estimates involved in determining fair value in practice. IFRS
13 provides a detailed guidance and examples on these principles.