enables an entity to consider its credit exposure to a particular counterparty on a net
basis, provided there is an arrangement in place that mitigates credit risk upon default
(e.g. a master netting agreement).
See 12 below for additional discussion on measuring the fair value of financial assets and
financial liabilities with offsetting risks.
3 DEFINITIONS
The following table summarises the terms that are defined in IFRS 13. [IFRS 13 Appendix A].
Figure 14.1:
IFRS 13 Definitions
Term Definition
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.
Cost approach
A valuation technique that reflects the amount that would be required currently to
replace the service capacity of an asset (often referred to as current replacement cost).
Entry price
The price paid to acquire an asset or received to assume a liability in an exchange
transaction.
Exit price
The price that would be received to sell an asset or paid to transfer a liability.
Expected
The probability-weighted average (i.e. mean of the distribution) of possible future
cash flow
cash flows.
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.
Highest and
The use of a non-financial asset by market participants that would maximise the value
best use
of the asset or the group of assets and liabilities (e.g. a business) within which the asset
would be used.
Income
Valuation techniques that convert future amounts (e.g. cash flows or income and
approach
expenses) to a single current (i.e. discounted) amount. The fair value measurement is
determined on the basis of the value indicated by current market expectations about
those future amounts.
Fair value measurement 951
Inputs
The assumptions that market participants would use when pricing the asset or liability,
including assumptions about risk, such as the following:
(a) the risk inherent in a particular valuation technique used to measure fair value
(such as a pricing model); and
(b) the risk inherent in the inputs to the valuation technique.
Inputs may be observable or unobservable.
Level 1 inputs
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
entity can access at the measurement date.
Level 2 inputs
Inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly.
Level 3 inputs
Unobservable inputs for the asset or liability.
Market
A valuation technique that uses prices and other relevant information generated by
approach
market transactions involving identical or comparable (i.e. similar) assets, liabilities or
a group of assets and liabilities, such as a business.
Market-
Inputs that are derived principally from or corroborated by observable market data by
corroborated
correlation or other means.
inputs
Market
Buyers and sellers in the principal (or most advantageous) market for the asset or
participant
liability that have all of the following characteristics:
(a) They are independent of each other, i.e. they are not related parties as defined in
IAS 24 – Related Party Disclosures (see Chapter 35), although the price in a
related party transaction may be used as an input to a fair value measurement if
the entity has evidence that the transaction was entered into at market terms.
(b) They are knowledgeable, having a reasonable understanding about the asset or
liability and the transaction using all available information, including information
that might be obtained through due diligence efforts that are usual and customary.
(c) They are able to enter into a transaction for the asset or liability.
(d) They are willing to enter into a transaction for the asset or liability, i.e. they are
motivated but not forced or otherwise compelled to do so.
Most
The market that maximises the amount that would be received to sell the asset or
advantageous
minimises the amount that would be paid to transfer the liability, after taking into
market
account transaction costs and transport costs.
Non-
The risk that an entity will not fulfil an obligation. Non-performance risk includes, but
performance
may not be limited to, the entity’s own credit risk.
risk
Observable
Inputs that are developed using market data, such as publicly available information
inputs
about actual events or transactions, and that reflect the assumptions that market
participants would use when pricing the asset or liability.
Orderly
A transaction that assumes exposure to the market for a period before the measurement
transaction
date to allow for marketing activities that are usual and customary for transactions
involving such assets or liabilities; it is not a forced transaction (e.g. a forced
liquidation or distress sale).
Principal
The market with the greatest volume and level of activity for the asset or liability.
market
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14
Term Definition
Risk premium
Compensation sought by risk-averse market participants for bearing the uncertainty
inherent in the cash flows of an asset or a liability. Also referred to as a ‘risk
adjustment’.
Transaction
The costs to sell an asset or transfer a liability in the principal (or most advantageous)
costs
market for the asset or liability that are directly attributable to the disposal of the asset
or the transfer of the liability and meet both of the following criteria:
(a) They result directly from and are essential to that transaction.
(b) They would not have been incurred by the entity had the decision to sell the asset
or transfer the liability not been made (similar to costs to sell, as defined in
IFRS 5).
Transport costs
The costs that would be incurred to transport an asset from its current location to its
principal (or most advantageous) market.
Unit of account
The level at which an asset or a liability is aggregated or disaggregated in an IFRS for
recognition purposes.
Unobservable
Inputs for which market data are not available and that are developed using the best
inputs
information available about the assumptions that market participants would use when
pricing the asset or liability.
Credit risk and market risk are defined in IFRS 7 (see Chapter 50).
Key management personnel is defined in IAS 24 (see Chapter 35).
4
THE FAIR VALUE FRAMEWORK
> 4.1
Definition of fair value
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’. [IFRS 13.9].
The definition of fair value in IFRS 13 is not significantly different from previous
definitions in IFRS, which was ‘the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s length transaction’.
[IFRS 13.BC29]. However, the definition in IFRS 13 and its guidance in the fair value
framework clarify the following:
• The definition of fair value in IFRS 13 is a current exit price, not an entry price.
[IFRS 13.BC36].
The exit price for an asset or liability is conceptually different from its transaction
price (an entry price). While exit and entry prices 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 as measured in accordance with IFRS 13.
• The exit price objective of a fair value measurement applies regardless of the reporting
entity’s intent and/or ability to sell the asset or transfer the liability at the measurement
date. [IFRS 13.BC39, BC40]. Fair value is the exit price in the principal market (or in the
absence of a principal market, the most advantageous market – see 6 below – in which
Fair value measurement 953
the reporting entity would transact). However, the price in the exit market should not
be adjusted for transaction costs – i.e. transaction costs incurred to acquire an item are
not added to the price used to measure fair value and transaction costs incurred to sell
an item are not deducted from the price used to measure fair value. [IFRS 13.25].
In addition, fair value is a market-based measurement, not an entity-specific
measurement, and, as such, is determined based on the assumptions that market
participants would use when pricing the asset or liability. [IFRS 13.BC31].
• A fair value measurement contemplates the sale of an asset or transfer of a liability,
not a transaction to offset the risks associated with an asset or liability (see 8 below
for further discussion).
• The transaction to sell the asset or transfer the liability is a hypothetical transaction
as at the measurement date that is assumed to be orderly and considers an
appropriate period of exposure to the market (see 8 below for further discussion).
[IFRS 13.15].
• The objective of a fair value measurement does not change based on the level of
activity in the exit market or the valuation technique(s) used. That is, fair value
remains a market-based exit price that considers the current market conditions as
at the measurement date, even if there has been a significant decrease in the
volume and level of activity for the asset or liability. [IFRS 13.2, B41].
4.2
The fair value measurement framework
In addition to providing a single definition of fair value, IFRS 13 includes a framework
for applying this definition to financial reporting. Many of the key concepts used in the
fair value framework are interrelated and their interaction should be considered in the
context of the entire approach.
As discussed at 1.3 above, 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’. [IFRS 13.B2].
In light of this objective, when measuring fair value, an entity must determine all of
the following:
(a) the particular asset or liability that is the subject of the measurement (consistent
with its unit of account – see 5 below);
(b) for a non-financial asset, the valuation premise that is appropriate for the
measurement (consistent with its highest and best use – see 10 below);
(c) the principal (or most advantageous) market for the asset or liability (see 6 below);
and
(d) the valuation technique(s) appropriate for the measurement (see 14 below),
considering the availability of data with which to develop inputs (see 15 below) that
represent the assumptions that market participants would use when pricing the
asset or liability (see 7 below) and the level of the fair value hierarchy within which
the inputs are categorised (see 16 below). [IFRS 13.B2].
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14
The following diagram illustrates our view of the interdependence of the various
components of the fair value measurement framework in IFRS 13.
Figure 14.2:
The fair value measurement framework
The asset or liability
Principal (or most
Highest & best
advantageous) market
use and
Valuation
premise
Market participant
(Non-financial
characteristics
assets only)
Maximise Level 1 inputs
and
Inputs
Valuation techniques
minimise Level 3 inputs
Fair value
If needed,
(The price in an orderly
allocate to unit
transaction between
of account
market participants)
Disclosures
including fair value
hierarchy
categorisation (based
on the lowest level
input that is significant
to fair value)
In practice, navigating the fair value framework may be more straight-forward for
certain types of assets (e.g. assets that trade in a formalised market) than for others (e.g.
intangible assets). For non-financial assets that derive value when used in combination
with other assets or for which a developed market does not exist, resolving the circular
nature of the relationship between valuation premise, highest and best use and exit
market is important in applying the fair value framework (refer to 10 below for
additional discussion on the fair value measurement of non-financial assets).
IFRS 13 clarifies that the concepts of ‘highest and best use’ and ‘valuation premise’ are
only applicable when determining the fair value of non-financial assets. Therefore, the
fair value framework is applied differently to non-financial assets versus other items,
Fair value measurement 955
such as financial instruments, non-financial liabilities and instruments classified in a
reporting entity’s shareholders’ equity (refer to 12 below for additional discussion on the
fair value of financial instruments with offsetting positions and to 11 below for the fair
value measurement of liabilities and instruments classified in an entity’s shareholders’
equity). Although there are differences in the application of the fair value framework
for non-financial assets, the objective of the fair value measurement remains the same,
that is, an exit price in the principal (or most advantageous) market.
As discussed in more detail at 12 below, IFRS 13 provides an exception to the principles
of fair value, allowing entitie
s to measure a group of financial instruments based on the
price to sell (or transfer) its net position for a particular risk exposure, if certain criteria
are met. The use of this exception may require a reporting entity to allocate portfolio-
level valuation adjustments to the appropriate unit of account.
5
THE ASSET OR LIABILITY
IFRS 13 states that a fair value measurement is for a particular asset or liability, which is
different from the price to offset certain of the risks associated with that particular asset
or liability.
This is an important distinction, particularly in the valuation of certain financial
instruments that are typically not ‘exited’ through a sale or transfer, but whose risks are
hedged through other transactions (e.g. derivatives). However, IFRS 13 does allow for
financial instruments with offsetting risks to be measured based on their net risk
exposure to a particular risk, in contrast to the assets or liabilities that give rise to this
exposure (see 12 below for additional discussion on the criteria to qualify for this
measurement exception and application considerations).
5.1
The unit of account
The identification of exactly what asset or liability is being measured is fundamental to
determining its fair value. Fair value may need to be measured for either:
• a stand-alone asset or liability (e.g. a financial instrument or an operating asset); or
• a group of assets, a group of liabilities, or a group of assets and liabilities (e.g. a cash-
generating unit or a business).
The unit of account defines what is being measured for financial reporting purposes. It is
an accounting concept that determines the level at which an asset or liability is aggregated
or disaggregated for the purpose of applying IFRS 13, as well as other standards.
Unless specifically addressed in IFRS 13 (see 5.1.1 and 5.1.2 below), the appropriate unit
of account is determined by the applicable IFRS (i.e. the standard that permits or
requires the fair value measurement or disclosure). [IFRS 13.13, 14]. Assume, for example,
that an investment property is valued at CU100. Further assume that the investment
property is owned by a single asset entity (or corporate wrapper) and the shares in the
entity are only valued at CU90. If another entity were to acquire the shares of the single
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 187
