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IFRS 13
Fair Value Measurement

Introduction of IFRS 13

The objective of IFRS 13 is to provide a single source of guidance for fair value measurement where it is
required by a reporting standard, rather than it being spread throughout several reporting standards.

E.g. IFRS 3 Business combinations requires that the net assets of Sub. are measured at fair value at
acquisition date.
E.g. IAS 40 investment property and IFRS 9 Financial instruments requires financial assets and liabilities to
be measured at fair value at each reporting date.
E.g. IFRS 5 requires that assets classified as held for sale should be measured at the lower of their carrying
amount and fair value less cost to sell.

IFRS 13 does not apply to:

Share-based payment transactions (IFRS 2 Share-based Payments)
Lease (IFRS Leases)
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IFRS 13 Fair value

This IFRS 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.

 An orderly transaction
It is not a forced transaction and the price is representative.
 Market participants
Independent buyers and sellers who are informed, willing and knowledgeable, and able to enter into a transaction in
the principal or the most advantageous market as appropriate.
They are not forced into transactions (i.e. they are not suffering from cash flow shortages.)

When pricing an asset or a liability, they would take into account:

a. the condition and location of the asset; and
b. Restrictions, if any, on the sale or use of the asset.
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IFRS 13 Fair value

 Fair value is a market-based measurement, not one that is entity specific, and it reflects current
market conditions and assumptions about risk.

The principal market is the one with the greatest volume and level of activity for the asset or liability.
The most advantageous market is the one that maximizes the net amount received from selling an asset
(or minimises the amount paid to transfer a liability) after transport and transaction costs.
Price-transport cost-transaction cost确认最优市场

 When fair value is determined, transaction costs(such as legal and broker fees) are ignored as these
costs are not a character of the asset or liability.
Price-transport cost确认公允价值
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TYU – Markets
An asset is sold in two different active markets at different prices. An entity enters into transactions in both
markets and can access the price in those markets for the asset at the measurement date as follows:

Market 1 Market 2
Price 26 25
Transaction costs (3) (1)
Transport costs (2) (2)
Net price received 21 22
What is the fair value of the asset if:
(a) market 1 is the principal market for the asset?
(b) no principal market can be determined?
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(a)
I. If Market 1 is the principal market, the fair value of the asset would be measured using the
price that would be received in that market, after taking into account transport costs.
II. The fair value would therefore be $24 ($26 – $2). Transaction costs are ignored.

(b)
I. If neither market is the principal market for the asset, the fair value of the asset would be
measured using the price in the most advantageous market.
II. Because the maximum net amount that the entity would receive is $22 in Market 2 ($25 –
$3), the fair value of the asset would be measured using prices in Market 2.
III. This would result in a fair value measurement of $23 ($25 – $2). Transaction costs are still
ignored in fair value measurement.

Answer 6
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IFRS 13 Fair value

Approaches to determine fair value

I. Market approach (valuations based on recent sales prices)

Prices and other market-related data is used for identical or similar (comparable) assets and liabilities.

II. Cost approach (valuations based on replacement cost)

Current replacement cost that would be incurred to replace the service or operational capacity of an asset

III. Income approach (valuations based on financial forecasts)

Estimated future cash flows may be converted into a single, current amount stated at PV

IFRS 13 Fair value

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

Input hierarchy

Level 1 Inputs (most reliable evidence)

a) Quoted prices in active markets for identical assets
----Active markets are markets where transactions take place with sufficient frequency and
volume for pricing information to be provided.

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IFRS 13 Fair value

 Level 2 Inputs
a) Observable inputs, other than those included within level 1 above, which are observable
directly or indirectly. This may include:
 quoted prices for similar asset in active markets
 quoted prices for identical or similar assets in less active markets
 Inputs other than quoted prices that are observable:
E.g. interest rates, yield curves, price per square meter for the building
b) Adjustments may be needed to level 2 inputs and if this adjustment is significant, then it may
require the fair value to be classified as level 3.

IFRS 13 Fair value

 Level 3 Inputs
a) Unobservable inputs for an asset or liability, based upon the best information available. The
use of these inputs should be kept to a minimum.
b) The inputs are usually based on management’s assumptions, profit or cash flow forecasts using
an entity’s own data.
 In developing unobservable inputs, an entity may begin with its own data, but it shall adjust
those data if reasonably available information indicates that other market participants would
use different data or there is something particular to the entity that is not available to other
market participants.

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TYU - Inputs
Baklava has an investment property that is measured at fair value. This property is rented out on short-term
leases.
The directors wish to fair value the property by estimating the present value of the net cash flows that the
property will generate for Baklava. They argue that this best reflects the way in which the building will
generate economic benefits for Baklava.
The building is unique, although there have been many sales of similar buildings in the local area.

Required:
Discuss whether the valuation technique suggested by the directors complies with IFRS.

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The director’s estimate of the future net cash flows that the building will generate is a level 3 input. IFRS 13
gives lowest priority to level 3 inputs. These should not be used if a level 1 or level 2 input exists.

Observable data about the recent sales price of similar properties is a level 2 input. The fair value of the
building should therefore be based on these prices, with adjustments made as necessary to reflect the
specific location and condition of Baklava’s building.

Answer 12
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IFRS 13 Fair value

Non-financial assets

• Property, plant and equipment

• Intangible assets

The fair value of a non-financial asset should be based on its highest and best use.
 the use that a market participant would adopt in order to maximize its value.（definition）

Current use of a non-financial asset is presumed to be its highest and best use unless market or other factors
suggest that a different use by market participants would maximise the value of the asset.

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IFRS 13 Fair value

 The highest and best use of a non-financial asset takes into account the use of the asset that is physically
possible, legally permissible and financially feasible.

1) Physically possible: physical characteristics of the asset that market participants would take into
account when pricing the asset (e.g. the location or size of a property);
2) Legally permissible: any legal restrictions on the use of the asset that market participants would take
into account when pricing the asset (eg the zoning regulations applicable to a property);
 A use can be legally permissible even if it is not legally approved.
3) Financially feasible: whether a use of the asset that is physically possible and legally permissible
generates adequate income or cash flows (taking into account the costs of converting the asset to that
use) to produce an investment return
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Application to liabilities and an entity’s own equity instruments

An entity shall measure the fair value of the liability or equity instrument as follows:
a. using the quoted price in an active market for the identical item held by another party as an asset, if
that price is available.
b. if that price is not available, using other observable inputs, such as the quoted price in a market that is
not active for the identical item held by another party as an asset.
c. if the observable prices in (a) and (b) are not available, using another valuation technique, such as:
I. an income approach (e.g. a present value technique that takes into account the future cash flows
that a market participant would expect to receive from holding the liability or equity instrument as
an asset).
II. a market approach (e.g. using quoted prices for similar liabilities or equity instruments held by
other parties as assets).

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IFRS 13 Fair value

Disclosure

• Enable users of financial statements to evaluate the inputs and methods used to determine how fair

value measurements have been arrived at.

• The level in the three-tier valuation hierarchy should be disclosed, together with supporting details of

valuation methods and inputs used where appropriate.

• Disclosure should also be made when there is a change of valuation technique to measure an asset or

liability.

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Specimen paper Q3-(a)

Q1(A)(II) MAR/JUN 2021

Q1(A)(i) SEP/DEC 2019

Articles

IFRS 13 Fair value measurement

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