IFRS 13 | Fair Value Measurement

1

Objective

This IFRS defines fair value, sets out in a single IFRS a framework for measuring fair value, and requires disclosures about fair value measurements.

2

Market-Based Measurement

Fair value is a market-based measurement, not an entity-specific measurement. The objective is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions.

3

Unobservable Inputs

When a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. Because fair value is market-based, it uses market participant assumptions, including those about risk.

4

Scope Focus

The definition of fair value focuses on assets and liabilities but also applies to an entity's own equity instruments measured at fair value.

5

Application

This IFRS applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements based on fair value, such as fair value less costs to sell).

6

Exclusions

The measurement and disclosure requirements do not apply to share-based payment transactions (IFRS 2), leasing transactions (IFRS 16), and measurements that have some similarities to fair value but are not fair value (e.g., net realisable value in IAS 2, value in use in IAS 36).

7

Disclosure Exclusions

Disclosures required by this IFRS are not required for plan assets (IAS 19), retirement benefit plan investments (IAS 26), and assets for which recoverable amount is fair value less costs of disposal (IAS 36).

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Definition

Fair value is defined 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.

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Asset or Liability

A fair value measurement is for a particular asset or liability. An entity shall take into account the characteristics of the asset or liability (e.g., condition, location, restrictions) if market participants would take them into account when pricing it.

13

Unit of Account

The asset or liability measured might be a stand-alone item or a group. The unit of account is determined in accordance with the IFRS that requires or permits the fair value measurement.

15

The Transaction

A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions.

16

Market Location

The measurement assumes the transaction takes place either in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market.

17

Market Identification

An entity need not undertake an exhaustive search of all possible markets but shall take into account all reasonably available information. The market the entity normally enters is presumed to be the principal (or most advantageous) market.

18

Principal Market Price

If there is a principal market, the fair value measurement shall represent the price in that market (whether directly observable or estimated), even if the price in a different market is potentially more advantageous.

19

Market Access

The entity must have access to the principal (or most advantageous) market at the measurement date.

22

Market Participants

An entity measures fair value using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interest.

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The Price

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date (an exit price).

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Transaction Costs

The price used to measure fair value is not adjusted for transaction costs (which are accounted for under other IFRSs). Transaction costs are specific to a transaction, not the asset or liability.

26

Transport Costs

If location is a characteristic of the asset (e.g., a commodity), the price is adjusted for the costs to transport the asset from its current location to the market.

27

Non-Financial Assets

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 it in its highest and best use.

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Highest and Best Use

Highest and best use takes into account use that is physically possible, legally permissible, and financially feasible.

29

Market Perspective

Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. The entity's current use is presumed to be the highest and best use unless market factors suggest otherwise.

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Valuation Premise

The highest and best use establishes the valuation premise: either using the asset in combination with other assets/liabilities (as a group) or on a stand-alone basis.

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Liabilities and Equity

A fair value measurement assumes that a financial or non-financial liability or an entity's own equity instrument is transferred to a market participant at the measurement date. The liability remains outstanding and is not settled or extinguished.

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Observable Market

Even when there is no observable market for the transfer of a liability or equity instrument, there might be an observable market for such items if they are held by other parties as assets (e.g., a bond held by an investor).

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Adjustments

When measuring the fair value of a liability/equity instrument held by another party as an asset using the asset's price, an entity adjusts the quoted price only if there are factors specific to the asset that are not applicable to the liability/equity instrument (e.g., credit enhancements).

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No Corresponding Asset

When there is no corresponding asset (e.g., a decommissioning liability), the entity measures fair value using a valuation technique from the perspective of a market participant that owes the liability (e.g., expected future cash outflows).

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Non-Performance Risk

The fair value of a liability reflects the effect of non-performance risk (including the entity's own credit risk). Non-performance risk is assumed to be the same before and after the transfer.

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Restrictions on Transfer

When measuring the fair value of a liability or own equity instrument, an entity shall not include a separate input or adjustment relating to the existence of a restriction that prevents the transfer of the item.

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Demand Features

The fair value of a financial liability with a demand feature (e.g., demand deposit) is not less than the amount payable on demand, discounted from the first date the amount could be required to be paid.

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Portfolio Exception

An entity that holds a group of financial assets and liabilities is permitted to use an exception to measure the fair value of the group on the basis of the price that would be received to sell a net long position or paid to transfer a net short position for a particular risk exposure (market risk or credit risk).

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Initial Recognition

When an asset is acquired or a liability assumed, the transaction price is the entry price. Fair value is the exit price. In many cases, the transaction price equals the fair value.

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Valuation Techniques

An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

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Approaches

Three widely used valuation techniques are the market approach, the cost approach, and the income approach.

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Inputs

Valuation techniques used to measure fair value shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs.

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Input Selection

An entity selects inputs consistent with the characteristics of the asset or liability market participants would take into account. Premiums or discounts reflecting size (blockage factors) are not permitted.

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Bid and Ask Prices

If an asset or liability has a bid and an ask price, the price within the bid-ask spread that is most representative of fair value shall be used. The use of bid prices for assets and ask prices for liabilities is permitted but not required.

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Fair Value Hierarchy

The standard establishes a fair value hierarchy that categorises inputs into three levels: Level 1, Level 2, and Level 3.

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Categorisation

The fair value measurement is categorised in its entirety in the same level of the hierarchy as the lowest level input that is significant to the entire measurement.

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Level 1 Inputs

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

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Level 2 Inputs

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices for similar assets, inputs derived from observable market data).

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Level 3 Inputs

Level 3 inputs are unobservable inputs for the asset or liability.

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Using Level 3

Unobservable inputs are used to the extent that relevant observable inputs are not available. They reflect the assumptions market participants would use, including assumptions about risk.

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Disclosure Objective

An entity shall disclose information that helps users assess: (a) for assets and liabilities measured at fair value on a recurring or non-recurring basis, the valuation techniques and inputs used; and (b) for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income.

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Specific Disclosures

Minimum disclosures include: fair value measurement at reporting date; level of the fair value hierarchy; transfers between Level 1 and 2; description of valuation techniques and inputs (for Level 2 and 3); quantitative information about significant unobservable inputs (for Level 3); and a reconciliation of opening to closing balances for Level 3 recurring measurements.

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Defined Terms

• active market: A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
• cost approach: A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).
• entry price: The price paid to acquire an asset or received to assume a liability in an exchange transaction.
• exit price: The price that would be received to sell an asset or paid to transfer a liability.
• expected cash flow: The probability-weighted average (ie mean of the distribution) of possible future cash flows.
• 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.
• highest and best use: The use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (eg a business) within which the asset would be used.
• income approach: Valuation techniques that convert future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.
• inputs: The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as the following: (a) the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model); and (b) the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable.
• Level 1 inputs: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
• Level 2 inputs: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
• Level 3 inputs: Unobservable inputs for the asset or liability.
• market approach: A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (ie similar) assets, liabilities or a group of assets and liabilities, such as a business.
• market-corroborated inputs: Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• market participant: Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: (a) They are independent of each other, ie they are not related parties as defined in IAS 24, although the price in a related party transaction may be used as an input to a fair value measurement if the entity has evidence that the transaction was entered into at market terms. (b) They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary. (c) They are able to enter into a transaction for the asset or liability. (d) They are willing to enter into a transaction for the asset or liability, ie they are motivated but not forced or otherwise compelled to do so.
• most advantageous market: The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs.
• non-performance risk: The risk that an entity will not fulfil an obligation. Non-performance risk includes, but may not be limited to, the entity's own credit risk.
• observable inputs: Inputs that are developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions that market participants would use when pricing the asset or liability.
• orderly transaction: A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (eg a forced liquidation or distress sale).
• principal market: The market with the greatest volume and level of activity for the asset or liability.
• risk premium: Compensation sought by risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability. Also referred to as a 'risk adjustment'.
• transaction costs: The costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria: (a) They result directly from and are essential to that transaction. (b) They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made (similar to costs to sell, as defined in IFRS 5).
• transport costs: The costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market.
• unit of account: The level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes.
• unobservable inputs: Inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.