International Financial Reporting Standard 13 – Fair Value Measurement
How did fair value develop in IFRS Accounting Standards?
Modern IFRS Accounting Standards make extensive use of the fair value basis, both for measurement and disclosure. Historically, the term fair value is relatively new in accounting. The original 1989 Conceptual Framework did not mention this term at all, referring instead to potential measurement bases such as present value, current cost (i.e., replacement cost) or realisable value, without clearly explaining the conceptual differences between these measurement bases.
What challenges existed before IFRS 13?
Over the years, significant changes have taken place in IFRS Accounting Standards. The most notable of these is the growing use of fair value as both a measurement and disclosure basis. However, IFRS Accounting Standards initially lacked a consistent conceptual foundation for defining and measuring fair value, and it did not provide uniform disclosure requirements. As a result, certain IFRS Accounting Standards that relied on fair value measurement were applied inconsistently, even in defining the term itself.
For example, IAS 39 Financial Instruments: Recognition and Measurement (later replaced by IFRS 9 Financial Instruments) included detailed fair value guidance, whereas IAS 41 Agriculture contained only limited guidance.
What is the purpose of IFRS 13?
IFRS 13, effective from 2013, was introduced to provide a principles-based definition of fair value, establish a single framework for its measurement, and set disclosure requirements. IFRS 13 explains how to measure fair value wherever IFRS Accounting Standards require or permit its use, but not when to apply it or where to recognise changes in fair value – that guidance is provided in the specific IFRS Accounting Standards. The principles apply equally to financial and non-financial items, with additional guidance for non-financial assets.
What is the key characteristic of fair value?
A key feature of fair value is that, unlike historical cost or value-in-use, it represents a market-based, objective measurement, not entity-specific.
How is fair value defined?
Fair value is defined 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.”
How is fair value measured in practice?
Thus, regardless of whether observable transactions exist, the goal is to estimate the hypothetical price in an ordinary market transaction between market participants at the measurement date and under current market conditions. The entity’s intent to hold an asset rather than sell it is irrelevant.
Nonetheless, determining fair value may require significant judgment and be subject to uncertainty, for example, in valuing early-stage investments.
How does IFRS 13 align with US GAAP?
IFRS 13 was developed jointly by the IASB and FASB to align IFRS and US GAAP fair value concepts. In practice, the standards are highly convergent.
Where is fair value used in IFRS?
Applications of Fair Value Measurement
Fair value is used widely throughout IFRS as a requirement, an accounting policy choice or, occasionally, for disclosure only. Following are common examples for the use of fair value measurement:
How is fair value applied to financial instruments?
Example A – Financial instruments
The guidance for financial instruments relies heavily on fair value:
Measurement at initial recognition: Under IFRS 9, financial assets and financial liabilities are initially measured at fair value (with certain adjustments for transaction costs).
Subsequent measurement: Depending on classification, certain financial assets and financial liabilities are measured under IFRS 9 at fair value through profit or loss or through other comprehensive income.
Disclosure: IFRS 7 requires entities to disclose the fair value of financial instruments, even when not measured at fair value.
How is fair value applied in business combinations?
Example B – Business combinations
Under IFRS 3, the acquirer recognises the identifiable assets and liabilities of the acquiree at their fair values at the acquisition date (subject to limited exceptions).
How is fair value applied to PP&E, intangible assets and investment property?
Example C – PP&E, intangible assets and investment property
IFRS Accounting Standards such as IAS 16, IAS 38 and IAS 40 permit applying the revaluation model or the fair value model as alternatives to cost, provided fair value can be reliably measured. Under the fair value model (IAS 40), periodic remeasurements are required with changes recognised in profit or loss.
How is fair value used in impairment and assets held for sale?
Example D – Impairment and assets held for sale
Fair value plays an important role in determining recoverable amounts. Under IAS 36, recoverable amount is the higher of value in use and fair value less costs to sell. Under IFRS 5, assets held for sale are measured at the lower of carrying amount and fair value less costs to sell.
How is fair value applied to plan assets?
Example E – Plan assets related to post-employment benefits
Under IAS 19, plan assets for defined benefit plans are measured at fair value (subject to certain limits).
When is fair value used as deemed cost?
Example F – Fair value as deemed cost
Under IFRS 1, a first-time adopter may elect to measure PP&E, intangible assets and/or investment property at fair value at the transition date and subsequently account for that amount as “deemed cost”.
What are the core principles of IFRS 13?
Core Principles
IFRS 13 establishes overarching fair-value principles applicable to all relevant items:
What is market-based measurement?
Market-based measurement: Fair value reflects the characteristics of the item being measured, rather than those of the reporting entity. Entity-specific synergies or legal/tax restrictions are excluded.
What are market participant assumptions?
Market participant assumptions: Measurements are based on assumptions that market participants would use, giving priority to observable over unobservable inputs.
What valuation techniques are used?
Valuation techniques: Multiple approaches may be appropriate, e.g., discounted cash flows and market multiples. The objective is always to estimate the exit price in an orderly transaction, maximising the use of market data.
What is the overall concept of IFRS 13?
In essence, IFRS 13 anchors fair value as a unified, objective, and market-driven measurement basis across IFRS Accounting Standards.