IFRS 13-Fair Value Measurement (summary)
Summary of IFRS 13-Fair Value Measurement
IFRS 13 defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements.
It applies when another Standard 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), except in specified circumstances in which other Standards govern. For example, IFRS 13 does not specify the measurement and disclosure requirements for share-based payment transactions, leases or impairment of assets. Nor does it establish disclosure requirements for fair values related to employee benefits and retirement plans.
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 (an exit price). When measuring fair value, an entity uses the assumptions that market participants would use when pricing the asset or the liability under current market conditions, including assumptions about risk. As a result, an entityβs intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value.
Objective
IFRS 13:
- defines fair value
- sets out in a single IFRS a framework for measuring fair value
- requires disclosures about fair value measurements.
IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except for:
- share-based payment transactions within the scope ofΒ IFRS 2Β Share-based Payment
- leasing transactions within the scope ofΒ IFRS 16Β Leases
- measurements that have some similarities to fair value but that are not fair value, such as net realisable value inΒ IAS 2Β InventoriesΒ or value in use inΒ IAS 36Β Impairment of Assets.
Key definitions
- 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
- 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
- Exit price
- The price that would be received to sell an asset or paid to transfer a liability
- 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 (e.g. a business) within which the asset would be used
- 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
- Principal market
- The market with the greatest volume and level of activity for the asset or liability
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Fair value hierarchy
IFRS 13 seeks to increase consistency and comparability inΒ fair value measurementsΒ and relatedΒ disclosuresΒ through a ‘fair value hierarchy’. The hierarchy categorises the inputs used in valuationΒ techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
Level 1 inputs
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.
If an entity holds a position in a single asset or liability and the asset or liability is traded in an active market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity, even if the market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price.
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. quoted prices of similar assets).
Level 2 inputs include:
- quoted prices for similar assets or liabilities in active markets
- quoted prices for identical or similar assets or liabilities in markets that are not active
- inputs other than quoted prices that are observable for the asset or liability, for example
- interest rates and yield curves observable at commonly quoted intervals
- implied volatilities
- credit spreads
- inputs that are derived principally from or corroborated by observable market data by correlation or other means (‘market-corroborated inputs’).
Level 3 inputs
Level 3 inputs inputs are unobservable inputs for the asset or liability.
Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity’s own data, taking into account all information about market participant assumptions that is reasonably available.
Fair value measurement approach
The objective of a fair value measurement 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.
In order to measure fair value, the entity must determine:
1. The asset or liability to be measured
2. For a non-financial asset, the valuation premise that is appropriate for the measurement (highest and best use)
3. The principal market or most advantageous market for the asset or liability
4. An appropriate valuation technique to use (to reflect the assumptions market participants would use when valuing the asset or liability).
Valuation technique
IFRS 13 discuss three valuation approaches:
1. Market approach β uses prices and other relevant information generated by market transactions involving identical or similar assets or liabilities
Market approach is usually used for the measurement of:
- cash generating unitsΒ and businesses (by reference to quoted prices or transactions in the same industry and based on revenue/EBITDA/other multiples),
- properties (by reference to transactions for similar properties).
2. Cost approach β uses current replacement cost
Cost approach is usually used for measurement of:
- tangible assets that are developed internally or
- assets that are used in combination with other assets and liabilities
3. Income approach β uses discounted future cash flows or income and expenses.
Present value techniques are usually used for measurement of:
- cash generating unitsΒ and businesses (basedΒ on estimated revenue and expenses),
- financial assets/liabilities when quoted prices are not available for identical or similar items (based on contractual and/or estimated cash flows),
- investment properties (based estimated rental revenue and operating expenses).
Any one, or where appropriate a combination, of these valuation techniques should be selected and consistently applied.
In order to use a valuation technique, βinputsβ are required. For example, an income approach requires cash flow estimations and appropriate discount rates. Inputs used to measure fair value are divided into three categories:
Level 1
Quoted prices in active markets for identical assets and liabilities
Level 2
Observable inputs other than those classified as level 1
Level 3
Unobservable inputs
The standard required entities to use Level 1 inputs when the relevant information is available (e.g. to value quoted shares). Where such information is not available then Level 2 inputs should be used. Level 3 should only be used as a last resort.
Disclosure
Disclosure objective
IFRS 13 requires an entity to disclose information that helps users of its financial statements assess both of the following:
- for 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, the valuation techniques and inputs used to develop those measurements
- for fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period.
Disclosure exemptions
The disclosure requirements are not required for:
- plan assets measured at fair value in accordance withΒ IAS 19Β Employee Benefits
- retirement benefit plan investments measured at fair value in accordance withΒ IAS 26Β Accounting and Reporting by Retirement Benefit Plans
- assets for which recoverable amount is fair value less costs of disposal in accordance withΒ IAS 36Β Impairment of Assets.
Source:
1.Β Phnom Penh HR
2.iasplus . com/en/standards/ifrs/ifrs13
3. ifrs . org /issued-standards/list-of-standards/ifrs-13-fair-value-measurement/
4. TALBI, Hicham. IAS – IFRS Standards : Understand and practice IAS/IFRS standards through example cases and corrected exercises
5. ifrscommunity . com /knowledge-base/valuation-techniques-fair-value/