IFRS 13 is a single source of guidance for measuring fair value when required or permitted by another IFRS. IFRS 13 addresses how to measure fair value, but it does not stipulate when fair value can or should be used.

Fair value is the exit price, from the perspective of market participants who hold the asset or owe the liability, at the measurement date. It is based on the perspective of market participants rather than just the entity itself, so fair value is not affected by an entity’s intentions towards the asset, liability, or equity item that is being fair valued. Fair value is a market-based measurement and not an entity-specific measurement. 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.

A fair value measurement requires management to determine four elements: the particular asset or liability that is the subject of the measurement (consistent with its unit of account); the highest and best use for a non-financial asset; the principal (or, in its absence, the most advantageous) market; and the valuation technique.

Application of the IFRS 13 framework The table and flow chart below set out a step-by-step approach to applying the basic measurement principles of IFRS 13. The table also provides a high level summary of some of the key concepts underlying IFRS 13 and illustrates the framework for measuring fair value. The summary does not address all of the requirements of the Standard – users should refer to the more detailed discussions later in this chapter and to the text of the Standard for a fuller understanding. Note that Steps 2 to 4 do not necessarily occur in the order set out in the table and flow chart (i.e. they are inter-related). # Step Explanation 1. Identify the ‘asset’ or ‘liability’ being measured (i.e. the unit of account). IFRS 13 notes that the asset or liability measured at fair value may be (1) a stand-alone asset or liability (e.g.,. an investment property), (2) a group of assets or a group of liabilities, or (3) a group of assets and liabilities (e.g.,. a cash-generating unit). The level at which fair value is measured will depend on the ‘unit of account’ specified in other IFRS Standards (typically, the level at which the asset or liability is aggregated or disaggregated for recognition or disclosure purposes). For example: in accordance with IAS 36, an entity may be required to measure fair value less costs of disposal for a cash-generating unit when assessing its recoverable amount; and under IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39, the unit of account is generally an individual financial instrument. 2a. For non-financial assets, determine the asset’s highest and best use. A fair value measurement of a non-financial asset is based on its ‘highest and best use’. This concept is not relevant for financial assets, liabilities or an entity’s own equity instruments because those items do not have alternative uses as contemplated in IFRS 13. The highest and best use must be determined from the perspective of market participants, even if an entity intends a different use. However, there is a presumption that an entity’s current use of a non-financial asset is its highest and best use, unless there is evidence to suggest otherwise. Consequently, IFRS 13 does not require an entity to perform an exhaustive search for other potential uses of a non-financial asset. The highest and best use of an asset might provide maximum value through either (1) its use in combination with other assets or other assets and liabilities, or (2) on a stand-alone basis. 2b. For financial assets and financial liabilities with offsetting market risks or counterparty credit risk, evaluate the criteria for the fair value exception and establish a policy. IFRS 13 permits an exception to the general fair value measurement requirements for financial assets and financial liabilities if an entity: manages the group of assets and liabilities on the basis of its net exposures to market risks or counterparty credit risks; provides information on that basis to key management personnel; and measures those assets and liabilities at fair value in the statement of financial position. In summary, the exception permits an entity to measure the fair value of the group of assets and liabilities (i.e. the portfolio) rather than the individual assets and liabilities within the portfolio. Details of the exception, including the detailed criteria for qualification, are set out in IFRS 13. The application of this exception is an accounting policy choice in accordance with IAS 8 and must be applied consistently from period to period for a particular portfolio. This exception does not change the unit of account (which continues to be the individual instrument determined under IFRS 9 or IAS 39), but changes the unit of measurement from the individual financial instrument to the group (portfolio) of financial instruments. 2c. For liabilities and an entity’s own equity instruments, assume the liabilities or equity instruments are transferred to market participants at the measurement date. IFRS 13 requires that the fair value of a liability or an entity’s own equity instrument be based on an assumed transfer to a market participant even if the entity does not intend to transfer the liability or equity instrument to a third party or it is unable to do so. Under this assumption, the fair value of a liability should be measured on the basis that the liability would remain outstanding and the transferee would be required to fulfil the obligation; it should not be assumed that the liability would be settled or otherwise extinguished. Similarly, the fair value of an entity’s own equity instrument should be measured on the basis that the equity instrument would remain outstanding and the transferee would take on the rights and responsibilities associated with the instrument; it should not be assumed that the instrument would be cancelled or otherwise extinguished on the measurement date. In addition, the measurement of liabilities and own equity instruments depends on whether identical liabilities or equity instruments are held by other parties as assets. 3. Identify the market in which to price the asset or liability – i.e. either (1) the principal market, or (2) if no principal market exists, the most advantageous market. The principal market is “[t]he market with the greatest volume and level of activity for the asset or liability”. The most advantageous market is “[t]he 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… “. If there is a principal market for the asset or liability, the fair value measurement should reflect the price in that market, even if the price in a different market is potentially more advantageous at the measurement date. In the absence of evidence to the contrary, the market in which an entity would normally enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal (or most advantageous) market. Therefore, an entity is permitted to use the price in the market in which it normally enters into transactions unless there is evidence that the principal (or most advantageous) market and that market are not the same. A market cannot be identified as the principal (or most advantageous) market unless the entity has access to that market at the measurement date. 4. Develop assumptions that market participants in the principal (or most advantageous) market would use when pricing the asset or liability. ‘Market participants’ are buyers and sellers in the principal (or most advantageous) market for the asset or liability that are (1) independent of each other, (2) knowledgeable, (3) able to enter into a transaction for the asset or liability, and (4) willing to enter into such a transaction. An entity need not identify specific market participants, but should identify characteristics that distinguish market participants generally. 5. Estimate fair value using appropriate valuation techniques and related inputs. When the price for an asset or a liability cannot be observed directly, it must be estimated using a valuation technique. Entities should use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Highest priority should be given to unadjusted quoted prices in active markets for identical assets or liabilities. IFRS 13 refers to three widely used valuation techniques: the market approach; the cost approach; and the income approach. Any valuation technique used to measure fair value should be consistent with one or more of these approaches. IFRS 13 does not set out a hierarchy of valuation techniques because particular valuation techniques may be more appropriate in some circumstances than in others. The use of multiple valuation techniques may be appropriate in certain circumstances. In those cases, the results should be evaluated considering the reasonableness of the range of values indicated by those results. A fair value measurement is the point within that range that is most representative of the fair value in the circumstances. Once a valuation technique has been selected, it should be applied consistently. A change in a valuation technique or its application (e.g.,. a change in its weighting when multiple valuation techniques are used or a change in an adjustment applied to a valuation technique) is only appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. An entity should evaluate the factors listed in IFRS 13 to determine whether there has been a significant decrease in the volume or level of activity for the asset or liability relative to normal market activity. When such a decrease has occurred, this will affect the entity’s selection of techniques and/or inputs and the weight placed on quoted prices. 6. If the exception in Step 2b applies, allocate the fair value calculated in Step 5 (which might include several units of account) to the individual units of account that are the subject of the fair value measurement (as determined in Step 1). If the fair value calculated in Step 5 is for multiple units of account, the fair value should be allocated to the individual units of account that are the subject of the fair value measurement on a reasonable and consistent basis. 7. Classify the fair value measurement within the fair value hierarchy and prepare the disclosures required by IFRS 13. IFRS 13 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. When several inputs are used to measure the fair value of an asset or a liability, those inputs may be categorised within different levels of the fair value hierarchy (e.g.,. the valuation may be based on some Level 2 and some Level 3 inputs). In such circumstances, the categorisation of the fair value measurement in its entirety is based on the lowest level input that is significant to the entire measurement. IFRS 13 set out disclosure requirements in respect of fair value measurements. The disclosures vary depending on whether the assets or liabilities are measured at fair value on a recurring or non-recurring basis. The disclosure requirements set out in IFRS 13 do not apply to fair value measurements on initial recognition.

Scope

IFRS 13 applies to all fair value measurements or disclosures that are either required or permitted by other standards, except: share-based payments under IFRS 2; leases under IFRS 16 (IAS 17); and measurements that are similar to (but are not) fair value, including the net realizable value measure in IAS 2, and the value-in-use measure in IAS 36.

The measurement requirements of IFRS 13 apply to the following items, but the disclosure requirements do not: defined benefit plan assets measured at fair value under IAS 19; retirement benefit plan investments measured at fair value under IAS 26; and assets tested for impairment using fair value less costs of disposal under IAS 36.

IFRS 13 applies to initial and subsequent measurements at fair value.

There is no exemption from IFRS 13 for first-time adopters of IFRS. A first-time adopter who is required to, or chooses to, measure assets and liabilities at fair value must apply IFRS 13.

Examples of fair value measurements within the scope of IFRS 13 include, but are not limited to:

• identifiable assets and liabilities of an acquiree measured at fair value at the acquisition date under IFRS 3;
• non-current assets and disposal groups classified as held for sale measured at fair value less costs to sell under IFRS 5;
• property, plant and equipment, and intangible assets measured using the revaluation models in IAS 16 and IAS 38 respectively;
• measurement by the issuer of the fair value of a compound financial instrument, and the fair value of the liability component of that compound financial instrument, to measure the debt and equity components of the instrument at initial recognition under IAS 32;
• the recoverable amount of an asset or a cash-generating unit determined under IAS 36 when it is based on fair value less costs of disposal;
• financial assets and financial liabilities within the scope of IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39 required to be measured at fair value at initial recognition or subsequent reporting dates;
• investment property measured after initial recognition using the fair value model under IAS 40 or investment property measured using the cost model under IAS 40 (for which the fair value is disclosed even though the investment property is not measured at fair value in the statement of financial position); and
• biological assets and agricultural produce measured at fair value fewer costs to selling at initial recognition or subsequent reporting dates under IAS 41.

Scope exclusions – measurement and disclosure requirements

The measurement and disclosure requirements of IFRS 13 do not apply to the following:

• share-based payment transactions within the scope of IFRS 2;
• leasing transactions accounted for by IFRS 16 (effective for annual periods beginning on or after 1 January 2019, with earlier application permitted) or, for entities that have not yet adopted IFRS 16, within the scope of IAS 17 and
• measurements that have some similarities to fair value but are not fair value (e.g.,. ‘net realizable value’ in IAS 2 or ‘value in use’ in IAS 36.

Scope exclusions – disclosure requirements only

The disclosures specified by IFRS 13 are not required for:

• plan assets measured at fair value by IAS 19;
• retirement benefit plan investments measured at fair value by IAS 26; and
• assets for which the recoverable amount is fair value less costs of disposal by IAS 36.

Examples of application of scope requirements and exclusions

Impact of IFRS 13 on impairment testing under IAS 36 In specified circumstances, IAS 36 requires an entity to estimate the recoverable amount of an asset or a cash-generating unit (CGU). The recoverable amount of an asset or a CGU is the higher of its fair value less costs of disposal and its value in use (see chapter A10 for detailed requirements). IFRS 13’s measurement requirements will affect the impairment testing of assets or CGUs under IAS 36 when an entity is required to estimate the asset’s (or the CGU’s) fair value less costs of disposal. This will be the case when an entity is required by IAS 36 to estimate the recoverable amount of the asset or CGU, unless it has already been determined that the value in use of the asset or CGU is higher than its carrying amount. One aspect of the IFRS 13 model that has particular significance in the context of impairment testing is that, when measuring fair value, an entity is required to use the assumptions that market participants would use, even if the entity has no intention of selling the asset. If unobservable inputs (i.e. inputs for which market data are not available) are used, IFRS 13 states that “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”. Therefore, an entity may need to adjust its internally developed assumptions to reflect the assumptions that market participants would use. In addition, when measuring the fair value of a non-financial asset, the entity must consider the highest and best use of the asset from the perspective of market participants, even if the entity intends a different use. However, an entity’s current use of a non-financial asset can be 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. Note that, in accordance with IFRS 13, IFRS 13’s disclosure requirements do not apply to assets or CGUs for which an entity is required to estimate the fair value less costs of disposal. Instead, an entity should comply with the disclosure requirements in IAS 36.

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Application of IFRS 13 to provisions within the scope of IAS 37 Provisions falling within the scope of IAS 37 are not measured at fair value. Such provisions are measured at the entity’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Consequently, the measurement and disclosure requirements of IFRS 13 do not apply to provisions within the scope of IAS 37. IAS 37 states that the best estimate of the expenditure required to settle a present obligation is “the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time”. Although this measure may have some similarities to fair value, it is not fair value or based on fair value and, consequently, in accordance with IFRS 13, IFRS 13 does not apply.

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Application of IFRS 13 to the net defined benefit liability (asset) for a defined benefit retirement benefit plan IFRS 13 does not apply to the net defined benefit liability (asset) reported in the employer’s statement of financial position for a defined benefit retirement benefit plan under IAS 19. However, the measurement requirements of IFRS 13 do apply to plan assets, which is the only component of the net defined benefit liability (asset) that is measured at fair value. For the other components of the net defined benefit liability (asset) (i.e. those that are not measured at fair value), employers should follow the measurement requirements set out in IAS 19. Although plan assets are subject to the measurement requirements in IFRS 13, in accordance with IFRS 13, IFRS 13’s disclosure requirements do not apply.

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Application of IFRS 13 to fair value information disclosed in the financial statements that is not required by IFRS Standards An entity may disclose in its financial statements fair value information that is not required to be disclosed by IFRS Standards. Such ‘supplementary’ fair value information is generally presented in the notes to the financial statements and it is most commonly presented in one of the following circumstances: the disclosure is encouraged (but not required) by an IFRS Standards. For example, IAS 16 suggests that, when the cost model is being used, a disclosure that might be relevant for users of the financial statements is “the fair value of property, plant and equipment when this is materially different from the carrying amount”; or the disclosure is required by local legislation or by a regulator; or the entity wishes to draw attention to particular circumstances (e.g.,. a significant shift in the fair value of assets measured on a cost basis in the financial statements). The requirements of IFRS 13 generally apply to such supplementary fair value information. IFRS 13 applies “when another IFRS requires or permits fair value measurements or disclosures about fair value measurements” other than in the limited circumstances listed in IFRS 13 and 7. Therefore, when an entity presents supplementary fair value information that is encouraged by another IFRS (e.g.,. under IAS 16 as described above), the fair value measure that is disclosed should comply with the measurement requirements of IFRS 13, and certain of the disclosures required under IFRS 13 as specified in IFRS 13 should be presented. Equally, when an entity voluntarily presents information about fair value, a user of the financial statements will generally be entitled to assume, unless otherwise stated, that the term has the same meaning as elsewhere in the financial statements, and the entity should comply with the requirements of IFRS 13 as described in the previous paragraph. In some circumstances, local legislation or other regulations may require disclosure in the financial statements of an amount described by the relevant authority as ‘fair value’ but for which the relevant authority specifies a measurement basis that differs from the basis of measurement for fair value under IFRS 13. In such circumstances, while the entity is obliged to comply with the requirements imposed by the relevant authority, the measurement basis used for the specified disclosure, and the fact that the basis differs from that which would be used under IFRS Standards, should be clearly disclosed.

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Application of disclosure requirements of IFRS 13 to assets and liabilities acquired in a business combination IFRS 3 generally requires the identifiable assets and liabilities of an acquiree to be measured at fair value at the date of acquisition. As a result, the acquirer is required to apply the measurement requirements of IFRS 13 to these acquisition date fair values. However, IFRS 13 establishes that the disclosure requirements of IFRS 13 apply to assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition. This is supported by IFRS 13, which clarifies that the disclosure requirements in IFRS 13 apply only to fair value measurements made after initial recognition because other IFRS Standards address the disclosures required at the time of initial recognition. Consequently, because an acquiree’s identifiable assets and liabilities are measured at fair value at the date of acquisition for the purpose of their initial recognition in the consolidated financial statements of the acquirer, the disclosure requirements of IFRS 13 need not be applied to those acquisition-date measurements.

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Application of disclosure requirements of IFRS 13 to assets and liabilities measured at fair value and included within a disposal group classified as held for sale Under IFRS 5, assets and liabilities excluded from the scope of the measurement requirements of that Standard may nevertheless be included within a disposal group classified as held for sale, and the disposal group as a whole is subject to the measurement requirements and the classification and presentation requirements of IFRS 5. Items included within a disposal group that are not subject to the measurement requirements of IFRS 5 are measured in accordance with applicable IFRS Standards; some items (e.g.,. financial instruments) may be measured at fair value. If assets and liabilities that are measured at fair value on a recurring or non-recurring basis are part of a disposal group classified as held for sale, the question arises as to whether the disclosure requirements of IFRS 13 apply to those assets and liabilities. The extent to which the disclosure requirements of other IFRS Standards apply to assets or liabilities included within disposal groups classified as held for sale is addressed in IFRS 5:5B which states that “disclosures in other IFRSs do not apply to [non-current assets held for sale] (or disposal groups) unless those IFRSs require … disclosures about measurement of assets and liabilities within a disposal group that are not within the scope of the measurement requirement of IFRS 5”. Therefore, for assets and liabilities excluded from the scope of the measurement requirements of IFRS 5 that are included within a disposal group classified as held for sale and that are measured at fair value, the effect of IFRS 5 is that the disclosure requirements of IFRS 13 apply to the extent that those disclosure requirements relate to measurement. Given that IFRS 13 as a whole is concerned with the measurement of fair value, and with disclosures regarding the measurement of fair value, all of the disclosure requirements of IFRS 13 relate to ‘measurement’ and, consequently, should be applied. When determining the classes of assets and liabilities as required by IFRS 13, and preparing the fair value measurement disclosures, an entity should distinguish assets and liabilities that are part of a disposal group classified as held for sale from its other assets and liabilities. The classes determined in accordance with IFRS 13 should be consistent with the major classes of assets and liabilities disclosed separately in accordance with IFRS 5).