‘a. feed the PIR findings regarding the usefulness of disclosures into the work on
Better Communications in Financial Reporting, in particular, the projects on
Principles of Disclosure and Primary Financial Statements ... ;
b. continue liaising with the valuation profession, monitor new developments in
practice and promote knowledge development and sharing ... ; and
c. conduct no other follow-up activities as a result of findings from the PIR, for
example not to perform any work in the area of prioritising the unit of account or
Level 1 inputs because the costs of such work would exceed its benefits...’2
The IASB is expected to release its Report and Feedback Statement on the PIR in the
last quarter of the 2018 calendar year-end.3
This chapter outlines the requirements of IFRS 13, its definitions, measurement
framework and disclosure requirements. It addresses some of the key questions that are
being asked about how to apply IFRS 13, recognising that some aspects of the standard
are still unclear and different views may exist. Further issues and questions may be
raised in the future as entities continue to apply the standard and practices evolve.
1.2
Overview of IFRS 13
The framework of IFRS 13 is based on a number of key concepts including unit of
account, exit price, valuation premise, highest and best use, principal market, market
participant assumptions and the fair value hierarchy. The requirements incorporate
financial theory and valuation techniques, but are solely focused on how these concepts
are to be applied when determining fair value for financial reporting purposes.
IFRS 13 does not address the issue of what to measure at fair value or when to measure
fair value. The IASB separately considers these issues on a project-by-project basis.
Other IFRSs determine which items must be measured at fair value and when. IFRS 13
addresses how to measure fair value. The principles in IFRS 13 provide the IASB with a
consistent definition that will assist in determining whether fair value is the appropriate
measurement basis to be used in any given future project.
The definition of fair value in IFRS 13 is based on an exit price notion, which
incorporates the following key concepts:
• Fair value is the price to sell an asset or transfer a liability and, therefore, represents
an exit price, not an entry price.
• The exit price for an asset or liability is conceptually different from its transaction
price (an entry price). While exit and entry price may be identical in many
situations, the transaction price is not presumed to represent the fair value of an
asset or liability on its initial recognition.
• Fair value is an exit price in the principal market, i.e. the market with the highest
volume and level of activity. In the absence of a principal market, it is assumed that
the transaction to sell the asset or transfer the liability would occur in the most
advantageous market. This is the market that would maximise the amount that
Fair value measurement 941
would be received to sell an asset or minimise the amount that would be paid to
transfer a liability, taking into account transport and transaction costs. In either
case, the entity must have access to the market on the measurement date.
While transaction costs are considered in determining the most advantageous
market, they do not form part of a fair value measurement (i.e. they are not added
to or deducted from the price used to measure fair value). However, an exit price
would be adjusted for transportation costs if location is a characteristic of the asset
or liability being measured. This is discussed further at 9 below.
• Fair value is a market-based measurement, not an entity-specific measurement.
When determining fair value, management uses the assumptions that market
participants would use when pricing the asset or liability. However, an entity need
not identify specific market participants.
These key concepts and the following aspects of the guidance in IFRS 13 require
particular focus when applying the standard.
• If another standard provides a fair value measurement exemption that applies
when fair value cannot be measured reliably, an entity may need to consider the
measurement framework in IFRS 13 in order to determine whether fair value can
be reliably measured (see 2 below).
• If there is a principal market for the asset or liability, a fair value measurement
represents the price in that market at the measurement date (regardless of
whether that price is directly observable or estimated using another valuation
technique), even if the price in a different market is potentially more
advantageous (see 6 below).
• Fair value measurements should take into consideration the characteristics of the
asset or liability being measured, but not characteristics of the transaction to sell
the asset or transfer a liability. Transportation costs, for example, must be deducted
from the price used to measure fair value when location is a characteristic of the
item being measured at fair value (see 5 and 9 below). This principle also clarifies
when a restriction on the sale or use of an asset or transfer of a liability affects the
measurement of fair value (see 5 below) and when premiums and discounts can be
included. In particular, an entity is prohibited from making adjustments for the size
of an entity’s holding in comparison to current trading volumes (i.e. blockage
factors, see 15 below).
• The fair value measurement of non-financial assets must reflect the highest and
best use of the asset from a market participant’s perspective, which might be its
current use or some alternative use. This establishes whether to assume a market
participant would derive value from using the non-financial asset on its own or in
combination with other assets or with other assets and liabilities (see 10 below);
• The standard clarifies that a fair value measurement of a liability must consider
non-performance risk (which includes, but is not limited to, an entity’s own credit
risk, see 11 below).
• IFRS 13 provides guidance on how to measure the fair value of an entity’s own
equity instruments(see 11 below) and aligns it with the fair value measurement of
liabilities. If there are no quoted prices available for the transfer of an identical or
942 Chapter
14
a similar liability or entity’s own equity instrument, but the identical item is held
by another party as an asset, an entity uses the fair value of the corresponding asset
(from the perspective of the market participant that holds that asset) to measure
the fair value of the liability or equity instrument. When no corresponding asset
exists, the fair value of the liability is measured from the perspective of a market
participant that owes the liability (see 11 below).
• A measurement exception in IFRS 13 allows entities to measure financial
instruments with offsetting risks on a portfolio basis, provided certain criteria are
met both initially and on an ongoing basis (see 12 below).
• The requirements of IFRS 13 in relation to valuation techniques apply to all
methods of measuri
ng fair value. Traditionally, references to valuation
techniques in IFRS have indicated a lack of market-based information with
which to value an asset or liability. Valuation techniques as discussed in IFRS 13
are broader and, importantly, include market-based approaches (see 14 below).
When selecting inputs to use, an entity must prioritise observable inputs over
unobservable inputs (see 16 below).
• IFRS 13 provides application guidance to assist entities measuring fair value in situations
where there has been a decrease in the volume or level of activity (see 8 below).
• Categorisation within the fair value hierarchy is required for all fair value
measurements. Disclosures required by IFRS 13 are substantially greater for those
fair value measurements that are categorised within Level 3 (see 16 and 20 below).
1.3
Objective of IFRS 13
A primary goal of IFRS 13 is to increase the consistency and comparability of fair value
measurements used in financial reporting under IFRS. It provides a common objective
whenever IFRS permits or requires a fair value measurement, irrespective of the type
of asset or liability being measured or the entity that holds it.
The objective of a fair value measurement is to estimate the price at which an orderly
transaction would take place between market participants under the market conditions
that exist at the measurement date. [IFRS 13.2].
By highlighting that fair value considers market conditions that exist at the measurement
date, the IASB is emphasising that the intent of the measurement is to convey the
current value of the asset or liability at the measurement date and not its potential value
at some future date. In addition, a fair value measurement does not consider
management’s intent to sell the asset or transfer the liability at the measurement date.
Instead, it represents a market-based measurement that contemplates a hypothetical
transaction between market participants at the measurement date (these concepts are
discussed further at 6 to 9 below). [IFRS 13.3].
IFRS 13 makes it clear that the objective of a fair value measurement remains the
same, regardless of the reason for the fair value measurement (e.g. impairment
testing or a recurring measurement) or the extent of observable information
available to support the measurement. While the standard requires that the inputs
used to measure fair value be prioritised based on their relative observability (see 16
below), the nature of the inputs does not affect the objective of the measurement.
Fair value measurement 943
That is, the requirement to determine an exit price under current market conditions
is not relaxed because the reporting entity cannot observe similar assets or liabilities
being transacted at the measurement date. [IFRS 13.2].
Even when fair value is estimated using significant unobservable inputs (because
observable inputs do not exist), the goal is to determine an exit price based on the
assumptions that market participants would consider when transacting for the asset or
liability on the measurement date, including assumptions about risk. This might require
the inclusion of a risk premium in the measurement to compensate market participants
for the uncertainty inherent in the expected cash flows of the asset or liability being
measured. [IFRS 13.3].
IFRS 13 generally does not provide specific rules or detailed ‘how-to’ guidance. Given
the broad use of fair value measurements in accounting for various kinds of assets and
liabilities (both financial and non-financial), providing detailed valuation guidance was
not deemed practical. As such, the application of IFRS 13 requires significant judgement;
but this judgement is applied using the core concepts of the standard’s principles-based
framework for fair value measurements.
2 SCOPE
IFRS 13 applies whenever another IFRS requires or permits the measurement or
disclosure of fair value, or a measure that is based on fair value (such as fair value less
costs to sell), [IFRS 13.5], with the following exceptions:
(a) The measurement and disclosure requirements do not apply to:
• share-based payment transactions within the scope of IFRS 2 – Share-
based Payment;
• leasing transactions accounted for in accordance with IFRS 16 – Leases (or
within the scope of IAS 17 – Leases, see 2.2.2 below); and
• measurements that are similar to fair value, but are not fair value, such as net
realisable value in IAS 2 – Inventories – or value in use in IAS 36 –
Impairment of Assets (see 2.2.3 below). [IFRS 13.6].
(b) The measurement requirements in IFRS 13 apply, but the disclosure requirements
do not apply to:
• plan assets measured at fair value in accordance with IAS 19 – Employee
Benefits;
• retirement benefit plan investments measured at fair value in accordance with
IAS 26 – Accounting and Reporting by Retirement Benefit Plans; and
• assets for which recoverable amount is fair value less costs of disposal in
accordance with IAS 36 (see 2.2.4 below). [IFRS 13.7].
2.1
Items in the scope of IFRS 13
The measurement framework in IFRS 13 applies to both fair value measurements on
initial recognition and subsequent fair value measurements, if permitted or required by
944 Chapter
14
another IFRS. [IFRS 13.8]. Fair value measurement at initial recognition is discussed
further at 13 below.
IFRS 13 establishes how to measure fair value. It does not prescribe:
• what should be measured at fair value;
• when to measure fair value (i.e. the measurement date); or
• how (or whether) to account for any subsequent changes in fair value (e.g. in profit
or loss or in other comprehensive income). However, the standard does partly
address day one gains or losses on initial recognition at fair value, requiring that
they be recognised in profit or loss immediately unless the IFRS that permits or
requires initial measurement at fair value specifies otherwise.
An entity must consider the relevant IFRSs (e.g. IFRS 3 – Business Combinations, IFRS 9 –
Financial Instruments – or IAS 40 – Investment Property) for each of these requirements.
Note that IFRS 9 became effective for annual periods beginning on or after 1 January
2018, superseding IAS 39 – Financial Instruments: Recognition and Measurement.
However, entities that are applying IFRS 4 – Insurance Contracts, have an optional
temporary exemption that permits an insurance company whose activities are
predominantly connected with insurance to defer adoption of IFRS 9. If an entity uses
this optional exemption, it continues to apply IAS 39 until an insurer’s first accounting
period beginning on or after 1 January 2021 which is the effective date of IFRS 17 –
Insurance Contracts (see Chapter 51 at 10 for further discussion). All entities are also
allowed to continue applying IAS 39 hedge accounting requirements. References to
IFRS 9 in this Chapter are also relevant for IAS 39.
2.1.1
Fair value disclosures
The scope of IFRS 13 includes disclosures of fair value. This refers to situations where
an entity
is permitted, or may be required, by a standard or interpretation to disclose
the fair value of an item whose carrying amount in the financial statements is not fair
value. Examples include:
• IAS 40, which requires the fair value to be disclosed for investment properties
measured using the cost model; [IAS 40.79(e)] and
• IFRS 7 – Financial Instruments: Disclosures, which requires the fair value of
financial instruments that are subsequently measured at amortised cost in
accordance with IFRS 9 to be disclosed. [IFRS 7.25].
In such situations, the disclosed fair value must be measured in accordance with IFRS 13
and an entity would also need to make certain disclosures about that fair value
measurement in accordance with IFRS 13 (see 20 below).
In certain circumstances, IFRS 7 provides relief from the requirement to disclose the
fair value of a financial instrument that is not measured subsequently at fair value. An
example is when the carrying amount is considered a reasonable approximation of fair
value. [IFRS 7.29]. In these situations, an entity would not need to measure the fair value
of the financial asset or financial liability for disclosure purposes. However, it would
need to consider the requirements of IFRS 13 in order to determine whether the
carrying amount is a reasonable approximation of fair value.
Fair value measurement 945
2.1.2
Measurements based on fair value
The measurement of amounts (whether recognised or only disclosed) that are based on
fair value, such as fair value less costs to sell, are within the scope of IFRS 13. This
includes the following:
• a non-current asset (or disposal group) held for sale measured at fair value less
costs to sell in accordance with IFRS 5 – Non-current Assets Held for Sale and
Discontinued Operations – where the fair value less costs to sell is lower than its
carrying amount (see Chapter 4);
• commodity inventories that are held by commodity broker-traders and measured
at fair value less costs to sell, as discussed in IAS 2 (see Chapter 22);
• where the recoverable amount for an asset or cash-generating unit(s),
determined in accordance with IAS 36, is its fair value less costs of disposal.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 185
