IFRS 13 Fair Value Measurement - Summary

IFRS 13 Fair Value Measurement

IFRS Summaries by Imad Uddin, FRM

Objective of IFRS 13

To define fair value.

To set out in a single IFRS a framework for measuring fair value.

To require disclosures about fair value measurements for consistency and comparability across IFRSs.

IFRS 13 does not introduce new requirements to measure items at fair value, but provides guidance on *how* to measure fair value when other IFRSs require or permit it.

Scope

Applies To:

IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (including fair value less costs to sell).

Excludes (Measurement and Disclosure Requirements):

Share-based payment transactions within the scope of IFRS 2.

Leasing transactions accounted for in accordance with IFRS 16.

Measurements that have some similarities to fair value but are not fair value, such as:

Net realizable value (NRV) in IAS 2 Inventories.

Value in use in IAS 36 Impairment of Assets.

Definition of Fair Value

Fair Value is 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.

Key Concepts Embedded in the Definition:

Exit Price: Fair value is an exit price (selling an asset or transferring a liability), not an entry price (acquiring an asset or incurring a liability).

Market-Based: Measured using assumptions market participants would use, not entity-specific intentions or values.

Orderly Transaction: Assumes exposure to the market for a period before measurement date to allow for usual and customary marketing activities; not a forced sale or liquidation.

Market Participants: Buyers and sellers in the principal (or most advantageous) market who are independent, knowledgeable, able, and willing to transact.

Measurement Date: The date at which the fair value is being determined (typically the reporting date).

Fair Value Hierarchy

IFRS 13 categorizes inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).

Level	Input Type	Description & Examples
Level 1	Quoted Prices (Unadjusted)	Inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. Ex: Closing price of a publicly traded share on a major stock exchange.
Level 2	Observable Inputs	Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Ex: Quoted prices for similar assets/liabilities in active markets; quoted prices for identical/similar assets in non-active markets; interest rates and yield curves observable at common intervals; implied volatilities; credit spreads.
Level 3	Unobservable Inputs	Inputs for the asset or liability that are not based on observable market data. These reflect the entity's own assumptions about what market participants would use (but should be developed using the best information available). Ex: Internal cash flow forecasts for a private company valuation; historical volatility adjusted for entity-specific factors; financial forecasts for a start-up.

Hierarchy Rules:

Maximize the use of relevant observable inputs and minimize unobservable inputs.

Disclosure is required of the level in the fair value hierarchy within which the fair value measurement is categorized in its entirety.

Measurement Approach

Valuation Techniques:

An entity shall use valuation techniques appropriate in the circumstances and for which sufficient data are available, maximizing observable inputs and minimizing unobservable inputs. Three widely used valuation approaches are:

Market Approach: Uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g., market multiples).

Cost Approach: Reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Income Approach: Converts future amounts (e.g., cash flows or income and expenses) to a single current (discounted) amount. Reflects current market expectations about those future amounts (e.g., present value techniques, option pricing models).

Selection Principles for Valuation Techniques:

Select techniques consistent with one or more of the three approaches.

Apply valuation techniques consistently (change only if it results in more representative fair value).

Ensure technique reflects assumptions market participants would use.

Application by Asset or Liability Type

Non-Financial Assets:

Fair value measurement takes into account 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.

Highest and best use considers uses that are physically possible, legally permissible, and financially feasible.

E.g., Land might be valued based on its potential for residential development, if that's its highest and best use, rather than its current agricultural use.

Liabilities and Own Equity Instruments:

Fair value assumes the liability or equity instrument is transferred to a market participant at the measurement date (not settled or cancelled).

If no observable market price for transfer, measure using valuation technique from perspective of a market participant that owes the liability or has issued the equity claim.

Own Credit Risk (for Liabilities):

The fair value of a liability must reflect the effect of non-performance risk, which includes, but may not be limited to, an entity’s own credit risk.

For financial liabilities designated at FVTPL under IFRS 9, changes in FV due to own credit risk are usually presented in OCI.

Unit of Account:

The fair value measurement is for a particular asset or liability. The unit of account (individual asset/liability, or group) is determined by the IFRS standard that requires or permits the fair value measurement.

Exception: If an entity manages a group of financial assets and liabilities on a net exposure basis, fair value can be measured on a net basis (portfolio exception for certain financial instruments).

Fair Value Disclosures

Required for:

Assets and liabilities measured at fair value on a recurring basis (e.g., FVTPL financial instruments, investment property under FV model).

Assets and liabilities measured at fair value on a non-recurring basis (e.g., assets held for sale measured at FV less costs to sell, assets revalued under IAS 16 if it's a one-off).

Disclosure of fair value for items not measured at fair value in the statement of financial position but for which fair value is disclosed (e.g., loans measured at amortized cost).

Key Disclosure Elements (for each class of asset/liability measured at FV):

Disclosure Requirement	Detail / Examples
Fair Value at Reporting Date	For each class of assets and liabilities.
Level of Hierarchy	Categorization into Level 1, 2, or 3 of the fair value hierarchy.
Valuation Techniques & Inputs (Level 2 & 3)	Description of technique(s) and significant inputs used. For Level 3, quantitative information about significant unobservable inputs.
Transfers Between Levels	Amounts of any transfers between Level 1 and Level 2, reasons for transfers, and policy for determining when transfers occur.
Sensitivity Analysis (Level 3)	Narrative discussion of sensitivity of FV to changes in significant unobservable inputs. For financial instruments, a quantitative sensitivity analysis may be required.
Level 3 Reconciliation	See table below. Shows changes during the period.
Valuation Processes	Description of valuation processes used by the entity (e.g., how it decides policies, techniques, inputs).
Highest and Best Use (Non-financial)	For non-financial assets, if highest and best use differs from current use, disclose that fact and why.

Level 3 Reconciliation (Illustrative Movements):

Period Movement	Examples of What's Included
Opening Balance	As of beginning of the reporting period.
Total Gains or Losses for the Period	Recognized in P&L and/or OCI (disclose where). Includes unrealized gains/losses on assets held at period end.
Purchases, Sales, Issues, Settlements	Separately for additions and disposals/settlements.
Transfers into or out of Level 3	Reasons for transfers and policy.
Closing Balance	As of end of the reporting period.

Inputs and Adjustments to Valuation

Types of Inputs:

Input Type	Examples
Observable Inputs	Inputs developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions market participants would use. (E.g., market prices from exchanges, quoted interest rates, yield curves, credit spreads, volatilities).
Unobservable Inputs	Inputs for which market data are not available and that are developed using the best information available about the assumptions market participants would use. (E.g., internal financial forecasts, entity's own data adjusted for market views, estimated future cash flows in a DCF).

Adjustments to Consider in Valuation:

Blockage Factors: Adjustments to quoted prices due to size of holding relative to trading volume (blockage factor) are NOT permitted if fair value is measured using a quoted price in an active market (Level 1). Price x Quantity.

Fair value measurement is for the unit of account specified by the relevant IFRS.

Measurement must reflect market conditions at the measurement date, not a past or future date.

Fair value is measured for a particular asset/liability considering its characteristics (e.g., condition, location, restrictions on sale/use).

Specific Examples - Techniques & Hierarchy

Asset/Liability Example	Likely Valuation Technique	Likely Hierarchy Level
Listed Equity Share (actively traded)	Quoted market price × quantity	Level 1
Plain Vanilla Corporate Bond (not actively traded but similar bonds are)	Discounted cash flows using observable yield curves and credit spreads for similar bonds.	Level 2
Complex Over-the-Counter Derivative	Option pricing model (e.g., Black-Scholes) or other model with some unobservable inputs (e.g., long-dated volatility).	Level 2 or 3 (depends on significance of unobservable inputs)
Office Building (Investment Property)	Discounted cash flow (based on rental income, adjusted for unobservable inputs like vacancy rates) or comparable sales approach (adjusting for differences).	Level 2 or 3
Unquoted Equity Investment (Private Company)	Market multiples from comparable public companies (adjusted) or discounted cash flow using entity's forecasts.	Level 3

Best Practices for Entities

When Measuring Fair Value:

Identify the principal market (most volume/activity) or, in its absence, the most advantageous market.

For non-financial assets, determine the highest and best use from a market participant perspective.

Maximize use of observable inputs and select appropriate valuation techniques.

Validate inputs and valuation techniques with market data and practices where possible.

Document assumptions, data sources, valuation rationale, and review processes.

For Disclosures:

Disclose clear and consistent valuation methodology and inputs used.

Group assets and liabilities into classes based on nature, characteristics, and risks for disclosure.

Provide robust reconciliation for Level 3 fair value movements.

Clearly explain reasons for transfers between hierarchy levels.

Include meaningful narrative on the sensitivity of Level 3 measurements to changes in significant unobservable inputs.

Summary of IFRS 13 Goals

Promote consistency and comparability in fair value measurements used in financial reporting.

Provide a single framework for measuring fair value when required or permitted by other IFRSs.

Require fair value to reflect market participant assumptions, not entity-specific views, enhancing objectivity.

Increase transparency through detailed disclosures, especially for fair value measurements using subjective (Level 3) inputs.

_{Disclaimer: These IFRS summaries are provided for educational purposes only.}

_{Imad Uddin is deeply passionate about IFRS and has founded Analyqt, a consulting firm dedicated to helping clients navigate complex accounting and financial reporting challenges. In addition to his advisory work, Imad is committed to education and knowledge-sharing, which led to the creation of IFRSMasterclass.com, a platform offering high-quality IFRS training and resources.}

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