International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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enter into a transaction to sell the asset or transfer the liability, unless there is evidence
to the contrary. In practice, an entity would first consider the markets it can access.
Then it would determine which of those markets has the greatest volume and liquidity
in relation to the particular asset or liability. [IFRS 13.17]. Management is not required to
perform an exhaustive search to identify the principal market; however, it cannot ignore
evidence that is reasonably available when considering which market has the greatest
volume and level of activity. [IFRS 13.17]. For example, it may be appropriate to take into
account information available in trade journals, if reliable market information about
volumes transacted is available in such journals. Absent evidence to the contrary, the
principal market is presumed to be the market in which an entity normally enters into
transactions for the asset and liability.
The principal market is considered from the perspective of the reporting entity, which
means that the principal market could be different for different entities (this is discussed
further at 6.1.1 below). For example, a securities dealer may exit a financial instrument
by selling it in the inter-dealer market, while a manufacturing company would sell a
financial instrument in the retail market. The entity must be able to access the principal
market as at the measurement date. Therefore, continuing with our example, it would
not be appropriate for a manufacturing company to assume that it would transact in the
inter-dealer market (even when considering a hypothetical transaction) because the
company does not have access to this market.
Because IFRS 13 indicates that the principal market is determined from the perspective
of the reporting entity, some have questioned whether the principal market should be
determined on the basis of: (a) entity-specific volume (i.e. the market where the
reporting entity has historically sold, or intends to sell, the asset with the greatest
frequency and volume); or (b) market-based volume and activity. However, IFRS 13 is
clear that the principal market for an asset or liability should be determined based on
the market with the greatest volume and level of activity that the reporting entity can
access. It is not determined based on the volume or level of activity of the reporting
entity’s transactions in a particular market. That is, the determination as to which
market(s) a particular entity can access is entity-specific, but once the accessible
markets are identified, market-based volume and activity determine the principal
market. [IFRS 13.BC52].
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The recognition in IFRS 13 that different entities may sell identical instruments in
different markets (and therefore at different exit prices) has important implications,
particularly with respect to the initial recognition of certain financial instruments, such
as derivatives. For example, a derivative contract between a dealer and a retail customer
would likely be initially recorded at different fair values by the two entities, as they
would exit the derivative in different markets and, therefore, at different exit prices.
Day one gains and losses are discussed further at 13.2 below.
Although an entity must be able to access the market at the measurement date, IFRS 13
does not require an entity to be able to sell the particular asset or transfer the particular
liability on that date. [IFRS 13.20]. For example, if there is a restriction on the sale of the
asset, IFRS 13 simply requires that the entity be able to access the market for that asset
when that restriction ceases to exist (it is important to note that the existence of the
restriction may still affect the price a market participant would pay – see 5.2.2 above
for discussion on restrictions on assets and liabilities).
In general, the market with the greatest volume and deepest liquidity will probably be the
market in which the entity most frequently transacts. In these instances, the principal
market would likely be the same as the most advantageous market (see 6.2 below).
Prior to the adoption of IFRS 13, some entities determined fair value based solely on the
market where they transact with the greatest frequency (without considering other
markets with greater volume and deeper liquidity). As noted above, IFRS 13 requires an
entity to consider the market with the greatest volume and deepest liquidity for the asset.
Therefore, an entity cannot presume a commonly used market is the principal market.
For example, if an entity previously measured the fair value of agricultural produce based
on its local market, but there is a deeper and more liquid market for the same agricultural
produce (for which transportation costs are not prohibitive), the latter market would be
deemed the principal market and would be used when measuring fair value.
6.1.1
Can an entity have more than one principal market for the same
asset or liability?
IFRS 13 states that ‘because different entities (and businesses within those entities) with
different activities may have access to different markets, the principal (or most
advantageous) market for the same asset or liability might be different for different
entities (and businesses within those entities). Therefore, the principal (or most
advantageous) market (and thus, market participants) shall be considered from the
perspective of the entity, thereby allowing for differences between and among entities
with different activities.’ [IFRS 13.19].
Therefore, in certain instances it may be appropriate for a reporting entity to determine
that it has different principal markets for the same asset or liability. However, such a
determination would need to be based on the reporting entity’s business units engaging
in different activities to ensure they were accessing different markets.
Determining the principal market is not based on management’s intent. Therefore, we
would not expect a reporting entity to have different principal markets for identical
assets held within a business unit solely because management has different exit
strategies for those assets.
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Consider Example 14.5 below, in which multiple exit markets exist for an asset and the
reporting entity has access to all of the various exit markets. The fact that a reporting
entity (or business unit within a reporting entity) has historically exited virtually
identical assets in different markets does not justify the entity utilising different exit
markets in determining the fair value of these assets, unless the entity has different
business units engaging in different activities. Instead, the concept of a principal market
(and most advantageous market) implies that one consistent market should generally be
considered in determining the fair value of these identical assets.
Example 14.5: Determining the principal market
The following three markets exist for a particular asset. The company has the ability to transact in all three
markets (and has historically done so).
Market Price
A
CU30,000
B
CU25,000
C
CU22,000
Under the princi
pal market concept, it would not be appropriate to value identical assets at different prices
solely because management intends to the sell the assets in different markets. Likewise, a consistent fair value
measurement for each asset utilising a blended price that is determined based on the proportion of assets that
management intends to sell in each market would not be appropriate. Instead, each of the assets would be
measured at the price in the market determined to be the company’s principal market.
If Market B were determined to represent the principal market for the asset being measured, each asset would
be valued at CU25,000. Selling the assets in either Market A or Market C would result in a gain or loss for
the company. We believe this result is consistent with one of the fundamental concepts in the fair value
framework. That is, the consequences of management’s decisions (or a company’s comparative advantages
or disadvantages) should be recognised when those decisions are executed (or those advantages or
disadvantages are achieved).
6.1.2
In situations where an entity has access to multiple markets, should
the determination of the principal market be based on entity-specific
volume and activity or market-based volume and activity?
In most instances, the market in which a reporting entity would sell an asset (or
transfer a liability) with the greatest frequency will also represent the market with
the greatest volume and deepest liquidity for all market participants. In these
instances, the principal market would be the same regardless of whether it is
determined based on entity-specific volume and activity or market-based volume
and activity. However, when this is not the case, a reporting entity’s principal market
is determined using market-based volume.
Different entities engage in different activities. Therefore, some entities have access to
certain markets that other entities do not. For example, an entity that does not function
as a wholesaler would not have access to the wholesale market and, therefore, would
need to look to the retail market as its principal market. Once the markets to which a
particular entity has access have been identified, the determination of the principal
market should not be based on management’s intent or entity-specific volume, but
rather should be based on the market with the greatest volume and level of activity for
the asset or liability.
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Example 14.6: Determining the principal market
The following three markets exist for Entity A’s fleet of vehicles. Entity A has the ability to transact in all
three markets (and has historically done so). As at the measurement date, the entity has 100 vehicles (same
make, model and mileage) that it needs to measure at fair value. Volumes and prices in the respective markets
are as follows:
The entity’s volume for the
asset in the market (based
on history
Total market-based
Market Price
and/or intent)
volume for the asset
A
CU30,000
60%
15%
B
CU25,000
25%
75%
C
CU20,000
15%
10%
Based on this information, Market B would be the principal market as this is the market in which the majority
of transactions for the asset occur. As such, the fair value of the 100 cars as at the measurement date would
be CU2.5 million (i.e. CU25,000 per car). Actual sales of the assets in either Market A or C would result in
a gain or loss to the entity, i.e. when compared to the fair value of CU25,000.
6.2
The most advantageous market
As noted above, if there is a principal market for the asset or liability being measured,
fair value should be determined using the price in that market, even if the price in a
different market is more advantageous at the measurement date.
Only in situations where there is no principal market for the asset or liability being
measured, can an entity consider the most advantageous market. [IFRS 13.16].
The most advantageous market is the one that maximises the amount that would be
received to sell the asset or minimises the amount that would be paid to transfer the
liability, after considering transaction costs and transport costs. [IFRS 13 Appendix A].
This definition reasonably assumes that most entities transact with an intention to
maximise profits or net assets. Assuming economically rational behaviour, the IASB
observed that the principal market would generally represent the most advantageous
market. However, when this is not the case, the IASB decided to prioritise the price in
the most liquid market (i.e. the principal market) as this market provides the most
representative input to determine fair value and also serves to increase consistency
among reporting entities. [IFRS 13.BC52].
When determining the most advantageous market, an entity must take into
consideration the transaction costs and transportation costs it would incur to sell the
asset or transfer the liability. The market that would yield the highest price after
deducting these costs is the most advantageous market. This is illustrated in
Example 14.7. [IFRS 13.IE19.21-22].
Example 14.7: Determining the most advantageous market
Consider the same facts as in Example 14.4. If neither market is the principal market for the asset, the fair
value of the asset would be measured using the price in the most advantageous market.
The most advantageous market is the market that maximises the amount that would be received to sell the
asset, after taking into account transaction costs and transport costs (i.e. the net amount that would be received
in the respective markets).
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Market A
Market B
CU
CU
Price that would be received
26
25
Transaction costs in that market
(3)
(1)
Costs to transport the asset to the market
(2)
(2)
Net amount that would be received
21
22
Because the entity would maximise the net amount that would be received for the asset in Market B (CU 22), that
is the most advantageous market. Market B is the most advantageous market even though the fair value that would
be recognised in that market (CU 23 = CU 25 – CU 2) is lower than in Market A (CU 24 = CU 26 – CU 2).
It is important to note that, while transaction costs and transportation costs are
considered in determining the most advantageous market, the treatment of these costs
in relation to measuring fair value differs (transaction costs and transportation costs are
discussed further at 9 below).
7 MARKET
PARTICIPANTS
When measuring fair value, an entity is required to use the assumptions that market
participants would use when pricing the asset or liability. However, IFRS 13 does not
require an entity to identify specific market participants. Instead, an entity must identify
the characteristics of market participants that would generally transact for the asset or
; liability being measured. Determining these characteristics takes into consideration factors
that are specific to the asset or liability; the principal (or most advantageous) market; and
the market participants in that market. [IFRS 13.22, 23]. This determination, and how these
characteristics affect a fair value measurement, may require significant judgement.
The principal (or most advantageous) market is determined from the perspective of the
reporting entity (or business units within a reporting entity). As a result, other entities within
the same industry as the reporting entity will most likely be considered market participants.
However, market participants may come from outside of the reporting entity’s industry,
especially when considering the fair value of assets on a stand-alone basis. For example, a
residential real estate development entity may be considered a market participant when
measuring the fair value of land held by a manufacturing company if the highest and best
use of the land is deemed to be residential real estate development.
7.1
Characteristics of market participants
IFRS 13 defines market participants as ‘buyers and sellers in the principal (or most
advantageous) market for the asset or liability’. [IFRS 13 Appendix A].
IFRS 13 assumes that market participants have all of the following characteristics:
• they are independent of each other, that is, they are not related parties, as defined
in IAS 24 (see Chapter 35);
• they are knowledgeable, having a reasonable understanding about the asset or
liability using all available information, including information obtained through
usual and customary due diligence efforts;
• they are able to enter into a transaction for the asset or liability; and
• they are willing to enter into a transaction for the asset or liability, that is, they are
motivated but not forced or otherwise compelled to do so. [IFRS 13.BC55-BC59].
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Since market participants are independent of each other, the hypothetical transaction
is assumed to take place between market participants at the measurement date, not
between the reporting entity and another market participant. While market participants