IFRS 13 Fair value measurement Content provides the explanations on all aspects of IFRS 13 in this website. IFRS 13 provides a common framework for measuring fair value when required or permitted by another IFRS.
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.’ [IFRS 13 9]. The key principle is that fair value is the exit price from the perspective of market participants who hold the asset or owe the liability at the measurement date. It is based on the perspective of market participants rather than the entity itself, so fair value is not affected by an entity’s intentions towards the asset, liability or equity item that is being fair valued.
IFRS 13 Fair value measurement Content
- the particular asset or liability being measured and its unit of account
- the valuation premise appropriate for the measurement (applicable to non-financial assets only)
- the principal (or most advantageous) market for the asset or liability
- the valuation technique(s) appropriate for the measurement
Particular asset or liability and its characteristics
IFRS 13 clarifies that fair value measurement is for a particular asset or liability and its characteristics should be taken into account when measuring fair value. Such characteristics can include the condition and location of the asset and any restrictions on the sale or use of the asset. The effect on the measurement arising from a particular characteristic will differ depending on how that characteristic would be taken into account by market participants (IFRS 13 11-12).
Effective date and transition
An entity shall apply this Standard for annual periods beginning on or after 1 January 2013. Earlier application is permitted. If an entity applies this IFRS for an earlier period, it shall disclose that fact. This Standard shall be applied prospectively as of the beginning of the annual period in which it is initially applied.
Amendment from Annual Improvements Cycle 2011–2013 issued in December 2013: An entity shall apply that amendment for annual periods beginning on or after 1 July 2014. An entity shall apply that amendment prospectively from the beginning of the annual period in which IFRS 13 Fair Value Measurement was initially applied. Earlier application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact.
Understanding the fair value concept
When determining fair value of an asset or liability, cognisance must be given to what the market participants would consider when determining an appropriate price to pay or receive for that asset or liability.
Matters that market participants would consider include the condition and location of the asset as well as the restrictions on the sale or use of the asset.
This Standard is very clear that transaction costs should not be included in the fair value of the asset or liability as these costs are not a characteristic of the asset or liability, however the fair value must be adjusted to consider any transport costs.
Generally, the fair value of non-financial assets proves to the be most difficult to determine, given the fact that it may be difficult to determine the correct market as well as the characteristics that market participants would consider when determining an acceptable price. The Standard states that the fair value of non-financial assets must be determined regarding the highest and best use of the asset, even when the counterparty to the transaction will not use the asset in the same manner as the seller. However, the seller’s current use of the asset is the highest and best use of the asset.
When performing the fair value calculation, entities must use valuation techniques that are appropriate in 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.
See also: The IFRS Foundation