IFRS 13: Fair value measurement
What fair value means, the principal and most advantageous markets, and the three-level fair value hierarchy.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: IFRS 13 defines fair value and explains how to measure it whenever another standard asks for it.
The key idea: fair value is the price you would get for selling an asset (or pay to transfer a liability) in an ordinary sale between market participants on the measurement date. It is an exit price.
Example. Shares that trade on the London Stock Exchange at £3.40 have a fair value of £3.40 each: a Level 1 input.
Key words
- Fair value
- The price received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.Example: An investment property that would sell for £1.2m.
- Principal market
- The market with the greatest volume and level of activity for the asset.Example: The main exchange where a commodity is traded.
- Most advantageous market
- The market giving the best net amount after transaction and transport costs. Used only if there is no principal market.Example: The market where selling nets £22, not £21.
- Fair value hierarchy
- Three levels ranking the inputs used to measure fair value, from quoted prices (Level 1) to unobservable estimates (Level 3).Example: Quoted shares are Level 1; a model using the company’s own forecasts is Level 3.
Learn
Which market?
- If there is a principal market, use its price, even if another market is better.
- If not, use the most advantageous market: the one with the highest price after transaction costs and transport costs.
Then measure fair value as that market’s price less transport costs only. Transaction costs help you choose the market, but aren’t deducted from fair value.
The fair value hierarchy
| Level | Inputs | Example |
|---|---|---|
| Level 1 | Quoted prices for identical assets in active markets | Listed shares on a stock exchange |
| Level 2 | Other observable inputs, directly or indirectly | Prices for similar buildings, interest rate yield curves |
| Level 3 | Unobservable inputs, such as the company’s own data | Unlisted shares valued with management’s forecasts |
Non-financial assets: highest and best use
Value a non-financial asset (such as land) at its highest and best use by market participants, even if the company uses it differently. It must be physically possible, legally allowed and financially feasible.
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Worked example
An asset is sold in two markets. Neither is the principal market.
| Market A £ | Market B £ | |
|---|---|---|
| Price | 26 | 25 |
| Transaction costs | (3) | (1) |
| Transport costs | (2) | (2) |
| Net amount received | 21 | 22 |
Market B is the most advantageous market because it nets £22. Fair value = Market B’s price less transport costs only: £25 − £2 = £23.
Practice questions
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