IFRS 13 – Fair Value Measurement is a standard developed by the IAS that provides guidance on how to measure fair value in financial reporting.
The standard aims to enhance the consistency and comparability of financial statements by setting out a single definition of fair value and providing a framework for measuring it.
Fair value is an important concept in accounting as it determines the value of assets, liabilities, and equity instruments that are reported in financial statements.
This article will explore IFRS 13 in detail, discussing its objectives, scope, measurement techniques, and implementation challenges faced by companies. It will also highlight the key differences between IFRS 13 and other fair value measurement standards used globally.
The objective of IFRS 13
IFRS 13 defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements.
IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except for
- share-based payment transactions within the scope of IFRS 2 Share-based Payment
- leasing transactions within the scope of IAS 17 Leases
- measurements that are similar to fair value but not fair value, such as net realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.
IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a ‘fair value hierarchy. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the fair value measurement is categorised in its entirety in the level of the lowest level input that is significant to the entire measurement (based on the application of judgement).
Measurement of fair value
Overview of fair value measurement approach
The objective of fair value measurement is to estimate the price at which an orderly transaction sells the asset or to transfer the liability between market participants at the measurement date under current market conditions. A fair value measurement requires an entity to determine all of the following:
- the particular asset or liability that is the subject of the measurement (consistently with its unit of account)
- for a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use)
- the principal (or most advantageous) market for the asset or liability
- the valuation technique(s) appropriate for the measurement, considering the availability of data to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.
Guidance on measurement
IFRS 13 guides the measurement of fair value, including the following:
- An entity takes into account the characteristics of the asset or liability being measured that a market participant would consider when pricing the asset or liability at the measurement date (e.g. the condition and location of the asset and any restrictions on the sale and use of the asset).
- Fair value measurement assumes an orderly transaction between market participants at the measurement date under current market conditions
- Fair value measurement assumes a transaction taking place in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability
- A fair value measurement of a non-financial asset takes into account its highest and best use
- A fair value measurement of financial or non-financial liability or an entity’s equity instruments assumes it is transferred to a market participant at the measurement date, without settlement, extinguishment, or cancellation at the measurement date
- The fair value of a liability reflects non-performance risk (the risk the entity will not fulfil an obligation), including an entity’s own credit risk and assuming the same non-performance risk before and after the transfer of the liability
- An optional exception applies for certain financial assets and liabilities with offsetting positions in market risks or counterparty credit risk, provided conditions are met (additional disclosure is required).
An entity uses valuation techniques appropriate to the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. [IFRS 13:61, IFRS 13:67]
The objective of using a valuation technique is to estimate the price at which an orderly transaction sells the asset or to transfer the liability between market participants and the measurement date under current market conditions. Three widely used valuation techniques are: [IFRS 13:62]
- 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. a business)
- cost approach – reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost)
- income approach – converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts.
In some cases, a single valuation technique will be appropriate, whereas, in others, multiple valuation techniques will be appropriate. [IFRS 13:63]
IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both of the following: [IFRS 13:91]
- for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements
- for fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period.
The disclosure requirements are not required for:
- plan assets measured at fair value following IAS 19 Employee Benefits
- retirement benefit plan investments are measured at fair value following IAS 26 Accounting and Reporting by Retirement Benefit Plans
- assets for which the recoverable amount is fair value, fewer disposal costs under IAS 36 Impairment of Assets.
The standard aims to improve fair-value measurements’ consistency and comparability across different entities and jurisdictions. Providing a common framework for measuring fair value helps users of financial statements make informed decisions about an entity’s financial performance and position.