IFRS 13 – Fair Value Measurement

IFRS 13 was originally issued in May 2011 and applies to annual periods on or after 1 January 2013.

The principles in IFRS 13 are intended to increase the consistency and comparability of fair value estimates in financial reporting.

The standard applies to all fair value measurements, when fair value is required or permitted by IFRS, with some limited exceptions:

  • share-based payment transactions (IFRS 2)
  • leasing transactions (IAS 17)
  • measurements which are similar to, but not the same as, fair value, e.g.:
    • net realizable value of inventories (IAS 2)
    • value in use (IAS 36).

IFRS 13 does not address the issue of what to measure at fair value. IFRS 13 addresses how to measure 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.

Fair value is a market-based measure, not an entity-specific one. Therefore, valuation techniques used to measure fair value maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

To increase consistency and compatibility in fair value measurements and related disclosures, IFRS 13 establishes a fair value hierarchy that categorizes the inputs to valuation techniques into 3 levels:

  • Level 1 inputs
    • Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
      • E.g. the price for a financial asset or financial liability for the identical asset is traded on an active market (e.g., London Stock Exchange)
  • Level 2 inputs
    • Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
      • E.g. for the valuation of a building you could use the price per square meter of buildings in similar locations.
  • Level 3 inputs
    • Unobservable inputs for the asset or liability.
      • E.g. a financial forecast (e.g., of cash flows or profit or loss) developed using the entity’s own data if there is no reasonably available information that indicates that market participants would use different assumptions.

Note: Level 3 inputs are only used where relevant observable inputs are not available.

A fair value measurement assumes that the transaction takes place either:

  1. in the principal market for the asset or liability, or
  2. in the most advantageous market (in the absence of a principal market).

The principle market is the market with the greatest volume and level of activity for the asset or liability.

The most advantageous market is the market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs.

Fair value also takes into account transport costs, but excludes transaction costs.

Example 1

An asset is sold in two different active markets at the following prices per item:

 Market AMarket B
Selling Price2729
Transport Costs-2-5
Transaction Costs-4-2

The company can access both markets.

Let’s assume that the principal market (the one with the greatest volume and level of activity) is Market A.

The fair value of the asset is therefore $25 per item.

If, however neither market were the principal market, the fair value would be measured using the price in the most advantageous market.

The most advantageous market is Market B after considering both transaction and transport costs ($22 vs. $21); and so the fair value measure would be $24 per item (as fair value is measured before transaction costs).

Example 2

The following three markets exist for ABC Ltd.’s fleet of vehicles. ABC Ltd has the ability to transact in all three markets. As at the measurement date, the entity has 200 vehicles (same make, model and mileage) that it needs to measure at fair value. Volumes and prices in the respective markets are as follows:

MarketSelling PriceVolume                          

Based on this information, Market B would be the principal market as this is the market in which the majority of transactions for the asset occur.

As such, the fair value of the 200 cars as at the measurement date would be $3.000.000 (200 * $15.000).

A fair value measurement of a non-financial asset 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 the asset in its highest and best use.

The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible.

Example 3

An entity owns a piece of land, which is currently used as a factory site. The fair value of the land in-use is determined to be $30m.

The land could also be vacated and used for residential purposes with a fair value of $35m. Of course, in order to convert the land from a factory site to a vacant one, the entity would incur demolition costs of $2m.

Therefore the fair value of the land is $33m ($35m less $2m).