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FAIR VALUE MEASUREMENT ~ IFRS 13


Prior to IFRS 13: Fair Value Measurement standard, fair value was defined as “an amount exchanged between knowledgeable willing parties at an arm’s length transaction”. As per this definition fair value is the price at which parties are ready to "enter" into the transaction. The notion was therefore "entry price"




The change in IFRS 13 of the definition of fair value concentrates on exit price. The new 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." It means that an entity shall look at how the market participants will price the asset or liability at a measurement date. The notion here is now the "exit price".

The objective of IFRS 13 was to define fair value in a single IFRS and to set out disclosures about fair value measurements.

What must an entity do to calculate Fair Value?
  1. determine the particular asset or liability that is the subject of measurement ;
  2. for a non-financial asset, determine the valuation base that is appropriate for the measurement;
  3. know which is the principal (or most advantageous) market for the asset or liability 
  4. know the valuation techniques (e.g. DCF approach, NPV, IRR models, Black Scholes Option Pricing, etc.) appropriate for the measurement, considering: 
    • the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability; and 
    • the level of the fair value hierarchy (level 1, level 2 or level 3) within which the inputs are categorized. 
IFRS 13 requires comprehensive disclosures like:
  • Valuation techniques and inputs used to develop fair value measurement for both recurring (financial instruments appearing on balance sheet at the end of each reporting date) and non-recurring measurements (assets/liabilities presented on balance sheet in certain circumstances);
  • The changes in fair value on profit or loss or other comprehensive income for recurring fair value measurements using significant Level 3 inputs.
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