IAS 32, IAS 36, IFRS 1, IFRS 9, IFRS 13 Definition:
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.
IFRS 16 Definition: For the purpose of applying the lessor accounting requirements in IFRS 16 Leases, the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
IFRS 2 Definition:
The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.
IFRS 13 consolidates the fair value guidance from across the various standards into a single standard. It clarifies the definition of fair value and provides additional disclosure requirements. It does not change when fair value can or should be used as it only addresses how to measure fair value.
IFRS 13 formalises the definition of market participants which is lacking in other standards. Market participants are buyers and sellers in the principal (or most advantageous) market who are independent of each other, knowledgeable about the asset or liability and able and willing to enter into a transaction for the asset or liability. Fair value is determined using market participants assumptions, not entity-specific assumptions. When measuring fair value it should be assumed that market participants act in their economic best interest.
A fair value measurement requires an entity to determine all of the following:
- Asset or liability to be measured
- The principal (or most advantageous) market
- Valuation technique
- Level of fair value hierarchy
Between IASB and FASB and its (more prominent) members extensive discussion have been (and are) ongoing. Fair value has been perceived to better capture ‘economic substance’, historical cost might be deemed to be an inappropriate measure, despite the latter possibly being a more accurate representation of what it purports to represent (historical cost). IASB is perceived being more pro-fair value than FASB. In summary there are two opinions:
The fair value perspective emphasises the role of financial reporting in serving investors in capital markets. It seeks accounting information that has a forward-looking content, impounding future cash flows from a non entity specific market perspective. It is most likely to achieve this when the reference markets are complete and competitive; ideally perfect markets would be accessible.
The alternative perspective also seeks to serve investors, broadly defined, but it gives priority to existing shareholders and regards stewardship as an important and distinct function of financial reporting. It too seeks accounting information that is relevant to forecasting future cash flows, but it assumes that this will often be achieved by providing information that is useful input to investors’ valuation models, rather than direct valuation of future cash flows. Such information may be entity specific. This approach assumes that information asymmetry and imperfect and incomplete markets are common.
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