IFRS 13

FAIR VALUE MEASUREMENT

 Fair value measurement

IFRS 13 gives extensive guidance on how the fair value of assets and liabilities
should be established.

Definitions

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

The price which would be received to sell the asset or paid to transfer (not settle)
the liability is described as the 'exit price. The market-based current exit price
implies an exchange between unrelated, knowledgeable and willing parties.
 Scope

IFRS 13 applies when another IFRS requires or permits fair value measurements or
disclosures. The measurement and disclosure requirements do not apply in the case of -

(a) Share-based payment transactions within the scope of IFRS 2 Share-based Payment

(b) Leasing transactions within the scope of IFRS 16 Leases, and

(c) Net realisable value as in IAS 2 inventories or value in use as in IAS 36 Impairment of
Assets.
 Measurement

'Fair value is a market-based measurement, not an entity-specific measurement. It focuses on

assets and liabilities and on exit (selling) prices. It also takes into account market conditions at
the measurement date. In other words, it looks at the amount for which the holder of an asset
could sell it and the amount which the holder of a liability would have to pay to transfer it. It can
also be used to value an entity's own equity instruments.

Because it is a market-based measurement, fair value is measured using the assumptions that
market participants would use when pricing the asset, taking into account any relevant
characteristics of the asset.
 It is assumed that the transaction to sell the asset or transfer the liability takes place either:

(a) In the principal market for the asset or liability; or

(b) In the absence of a principal market, in the most advantageous market for the asset or
liability.

The principal market is the market which is the most liquid (has the greatest volume and level of
activity) for that asset or liability .
In most cases the principal market and the most advantageous market will be the same.

IFRS 13 acknowledges that when market activity declines an entity must use a valuation
technique to measure fair value . In this case the emphasis must be on whether a transaction
price is based on an orderly transaction, rather than a forced sale.

Fair value is not adjusted for transaction costs. Under IFRS 13, these are not a feature of the asset
or liability, but may be taken into account when determining the most advantageous market.
 Example: Principal or most advantageous market
An asset is sold in two active markets, Market X and Market Y, at $58 and $57, respectively. Valor
Co does business in both markets and can access the price in those markets for the asset at the
measurement date as follows.

Market X Market Y

Price 58 57

Transaction costs -4 -3

Transport costs (to transport the asset to that market) -4 -2

50 52

Remember that fair value is not adjusted for transaction costs. Under IFRS 13, these are not a
feature of the asset or liability, but may be taken into account when determining the most
advantageous market.
If Market X is the principal market for the asset (ie the market with the greatest volume and level
of activity for the asset), the fair value of the asset would be $54, measured as the price that
would be received in that market ($58) less transport costs ($4) and ignoring transaction costs.
 If neither Market X nor Market Y is the principal market for the asset, Valor must measure the fair
value of the asset using the price in the most advantageous market. The most advantageous market is
the market that maximises the amount that would be received to sell the asset, after taking into
account both transaction costs and transport costs (ie the net amount that would be received in the
respective markets).

The maximum net amount (after deducting both transaction and transport costs) is obtainable in
Market Y ($52, as opposed to $50). But this is not the fair value of the asset. The fair value of the asset
is obtained by deducting transport costs but not transaction costs from the price received for the
asset in Market Y: $57 less $2 $55.
Fair value measurements are based on an asset or a liability's unit
of account, which is specified by each IFRS where a fair value
measurement is required. For most assets and liabilities, the unit
of account is the individual asset or liability, but in some instances
may be a group of assets or liabilities.

Non-financial assets

For non-financial assets the fair value measurement looks at how

the asset can be used. It takes into account the ability of a market
participant to generate economic benefits by using the asset in its
highest and best use.
 Valuation approaches

The IFRS identifies three valuation approaches:

(a) 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.

(b) Markel 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 .

(c) 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) .
 Valuation techniques

Valuation techniques must be those which are appropriate and for which sufficient data are available.
Entities should maximise the use of relevant observable inputs and minimise the use of anobservable
Inputs.

The standard establishes a three-level hierarchy for the inputs that valuation techniques use to
measure fair value:

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity can access at the measurement date' .

Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly' , eg quoted prices for similar assets in active markets or for
identical or similar assets in non-active markets or use of quoted interest rates for valuation
purposes

Level 3 'Unobservable inputs for the asset or liability , ie using the entity's own assumptions about
market exit value .
 Measuring liabilities
Fair value measurement of a liability assumes that that liability is
transferred at the measurement date to a market participant,
who is then obliged to fulfill the obligation.
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