Objective: IFRS 13 establishes a single framework for measuring fair value and requires disclosures about fair value measurements.
- Applies to all fair value measurements required or permitted by other IFRSs
- Does not apply to share-based payments (IFRS 2) or leasing transactions (IFRS 16)
- Provides uniform definition and measurement framework across all IFRSs
Fair Value: 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 excludes transaction costs but considers transportation costs.
Always use the Principal Market if available; otherwise, use the Most Advantageous Market that gives you the highest net proceeds (Price − Transportation Costs)
- Exit Price: Perspective of market participants, not entity-specific
- Orderly Transaction: Not a forced liquidation or distress sale
- Market Participants: Independent, knowledgeable, willing and able to transact
Key Principle: Fair value is a market-based measurement, not an entity-specific measurement.
IFRS 13 establishes a three-level hierarchy for fair value measurements:
| Level | Description | Examples |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets/liabilities | Listed equity securities, exchange-traded derivatives |
| Level 2 | Observable inputs other than Level 1 prices | Valuation models using market-corroborated inputs |
| Level 3 | Unobservable inputs for the asset/liability | Cash flow models using entity-specific assumptions |
Priority: Maximize use of observable inputs and minimize use of unobservable inputs.
Market Approach: Uses prices and other relevant information from market transactions.
Income Approach: Converts future amounts to a single discounted present value.
Cost Approach: Reflects the amount required to replace the service capacity of an asset.
- Entity should use valuation techniques consistent with one or more approaches
- Techniques should be applied consistently
- Multiple techniques may be used with results evaluated and weighted
Asset: Specialized manufacturing equipment
Approach: Cost approach (replacement cost)
Inputs: Current prices for similar equipment, adjustment for obsolescence
Fair Value: Replacement cost new less accumulated depreciation
- Principal Market: Market with greatest volume/activity level
- Most Advantageous Market: Market maximizing price received/minimizing price paid
- Highest and Best Use: For non-financial assets, considers use that is physically possible, legally permissible, and financially feasible
- Transportation Costs: Included if location is characteristic of the asset
- Blockage Factors: Not permitted to adjust quoted prices for large blocks
| Category | Disclosure Requirements |
|---|---|
| All Fair Values | Valuation techniques and inputs used, level in fair value hierarchy |
| Level 2 & 3 | Description of valuation process, sensitivity analysis |
| Level 3 Only | Reconciliation of opening/closing balances, quantitative unobservable inputs |
| Recurring vs Non-recurring | Separate disclosure for recurring and non-recurring fair value measurements |
- Identifying appropriate market participants
- Determining the principal or most advantageous market
- Developing unobservable inputs for Level 3 measurements
- Assessing highest and best use for non-financial assets
- Measuring fair value for liabilities and own equity instruments
- Considering restrictions on asset sale or liability transfer
Definition: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Application
Applied to investments in equity and debt instruments and investment property.
Fair Value Hierarchy
| Level | Description | Examples |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets | Listed securities |
| Level 2 | Observable inputs for similar assets (market approach) | Similar assets in active markets |
| Level 3 | Unobservable inputs (income approach) | Present value of future cash flows (PVFCF) |
Key Principles
- Use the principal market (highest volume) or, if not available, the most advantageous market
- Excludes transaction costs
- Includes transportation costs if location is an asset characteristic
- For non-financial assets, consider highest and best use