IFRS 13

The principles in IFRS 13 – Fair Value Measurement are intended to increase the consistency and comparability of fair value estimates in financial reporting.

Objectives of IFRS 13 are to

• defines fair value,
• sets out in a single IFRS a framework for measuring fair value,
• requires disclosures about fair value measurements.

Definition of fair value

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).

Fair value has three components as defined in Para 9 are:

• 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 is for a particular asset or liability and its a market‑based measurement, not an entity‑specific measurement.

Scope

IFRS 13 applies when another IFRS requires or permits fair value measurements except for:

• share-based payment transactions within the scope of IFRS 2 Share-based Payment,
• leasing transactions within the scope of IFRS 16 Leases,
• measurements that have some similarities to fair value but that are not fair value, such as net realisable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.

Fair value at initial recognition

When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (an entry price).

In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price).

Fair value hierarchy

IFRS 13 introduces a fair value hierarchy that categorises inputs to valuation techniques into three levels. The highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. An entity must maximize the use of Level 1 inputs and minimize the use of Level 3 inputs.

Level 1 Inputs – Quoted Prices

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.

Level 2 Inputs – Other than Quoted Prices

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 and 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 – Unobservable Inputs

Level 3 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.

Valuation techniques

This Standard requires entities to apply valuation techniques consistent with any of the following three methods:

1. Market approach: uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities (e.g. a business)
2. Cost approach: reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost)
3. Income approach: converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts.

Valuation techniques used to measure fair value shall be applied consistently.

Any change in a valuation technique or its application is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. That might be the case if, for example, any of the following events take place:

• new markets develop,
• information previously used is no longer available,
• new information becomes available,
• valuation techniques improve; or
• market conditions change.

Disclosures

• 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.

Specific disclosures required are specified in IFRS 13 from para 93 to 99.

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of Canada and Dubai’s largest brands. He is a tax and IFRS coach and the founder of accountingblogger.com