IFRS 13 Fair Value Measurement

The objective of IFRS 13 is to provide a single source of guidance for fair value measurement where it is
required by a reporting standard, rather than it being spread throughout several reporting standards.

Many accounting standards require or allow items to be measured at fair value.

Some examples from your prior studies include:
• lAS 16 Property, Plant and Equipment, which allows entities to measure property, plant and
equipment at fair value
• IFRS 3 Business Combinations, which requires the identifiable net assets of a subsidiary to
be measured at fair value at the acquisition date.

IFRS 13 does not apply to:

• share-based payment transactions (IFRS 2 Share-based Payments)
• leases (IFRS 16 Leases).
asurement where it is
rting standards.
The 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 a
between market participants at the measurement date' (IFRS 13, para 9).

Market participants are knowledgeable, third parties. When pricing an asset or a liability, they would tak
• Condition
• Location

• Restrictions on use.
It should be assumed that market participants are not forced into transactions (i.e. they are not suffering
IFRS 13 notes that there are various approaches to determining the fair value of an asset or liability:
• Market approaches (valuations based on recent sales prices)
• Cost approaches (valuations based on replacement cost)
• Income approaches (valuations based on financial forecasts).

Whatever approach is taken, the aim is always the same - to estimate the price that would be transferred
or paid to transfer a liability in an orderly transaction

sset or a liability, they would take into account:

tions (i.e. they are not suffering from cash flow shortages).
value of an asset or liability:

e price that would be transferred in a transaction with a market participant.

The price
Fair value is a market-based measurement, not one that is entity specific. As such, when determining the price at
would be sold (or the price paid to transfer a liability), observable data from active markets should be used wher

An active market is a market where transactions for the asset or liability occur frequently.
IFRS 13 classifies inputs into valuation techniques into three levels.

• Level 1 inputs are quoted prices for identical assets in active markets.

• Level 2 inputs are observable prices that are not level 1 inputs. This may include:
- - - Quoted prices for similar assets in active markets
- - - Quoted prices for identical assets in less active markets
- - - Observable inputs that are not prices (such as interest rates).

• Level 3 inputs are unobservable. This could include cash or profit forecasts using an entity's own data.
A significant adjustment to a level 2 input would lead to it being categorised as a level 3 input.
Priority is given to level 1 inputs. The lowest priority is given to level 3 inputs.

Level Asset
Level 1 Equity shares in a listed entity
Level 2 Building held and used

Level 3 Cash generating unit

 ment, not one that is entity specific. As such, when determining the price at which an asset
ansfer a liability), observable data from active markets should be used where possible.

ransactions for the asset or liability occur frequently.

on techniques into three levels.

identical assets in active markets.

Active market is a market where transactions occur
s that are not level 1 inputs. This may include: regular frequency such that price determination bec
ts in active markets possible
sets in less active markets
prices (such as interest rates).

his could include cash or profit forecasts using an entity's own data.
input would lead to it being categorised as a level 3 input.
e lowest priority is given to level 3 inputs.

Example
Unadjusted quoted prices in an active market
Price per square metre for the building from observable
market data, such as observed transactions for similar
buildings in similar locations
Profit or cash flow forecast using own data
 market where transactions occur with
such that price determination becomes
Question

Baklava has an investment property that is measured at fair value. This property is rented out on short-term lease
The directors wish to fair value the property by estimating the present value of the net cash flows that the proper
They argue that this best reflects the way in which the building will generate economic benefits for Baklava.
The building is unique, although there have been many sales of similar buildings in the local area.
Required:
Discuss whether the valuation technique suggested by the directors complies with International Financial Report
Standards.

Solution

IFRS 13, Fair Value helps to decide the fair value of assets and liabilities to be included in the Financial Stateme

Fair value is defined as 'the price that would be received to sell an asset or paid to transfer a liability in an orderl
between market participants at the measurement date' (IFRS 13, para 9).

Directors want to value the property on the basis of present value of estimated future cash flows that the property
generate. The cash flow approach is essentially using Level III inputs for fair value determination

The question states that there have been many sales of similar assets in the local area, so we do have observable
in an active market for similar assets, this is essentially a Level II Input

In case where multiple inputs are available, Level III inputs get the lowest priortiy
So, the approach taken by the Directors of using Level III inputs [ i.e. cashflows ] is not in line with IFRS 13
They should ideally use Level II inputs, i.e. information derived from sale of similar buildings in local area
 ty is rented out on short-term leases.
f the net cash flows that the property will generate for Baklava.
economic benefits for Baklava.
ngs in the local area.

with International Financial Reporting

e included in the Financial Statements

What the standard says
d to transfer a liability in an orderly transaction

future cash flows that the property will

value determination
Facts of the case and analysis
cal area, so we do have observable inputs

ws ] is not in line with IFRS 13 Conclusion

similar buildings in local area
Markets
The price received when an asset is sold (or paid when a liability is transferred) may differ depending on the
specific market where the transaction occurs.

Principal market
IFRS 13 says that fair value should be measured by reference to the principal market.
The principal market is the market with the greatest activity for the asset or liability being measured.
The entity must be able to access the principal market at the measurement date. This means that the
principal market for the same asset can differ between entities.

Most advantageous market

If there is no principal market, then fair value is measured by reference to prices in the most advantageous marke
The most advantageous market is the one that maximises the net amount received from selling an asset (or minim
Transaction costs (such as legal and broker fees) will play a role in deciding which market is most advantageous
However, fair value is not adjusted for transaction costs because they are a characteristic of the market, rather th

Amazon Flipkart
Expected selling price 50 49
Less: Transaction cost -3 -1 ** Since there was no transport cost in
Net Value 47 48 deciding the most advantageous marke
As a general rule, you have to look at t
To decide most advantageous market, look at the net value to decide 'most advantageous market'
Makes more sense to sell it at 48 than at 47
So, Flipkart is the most advantageous market
But, Fair Value is 49. Not 48

Why ???
Because the asset can be transferred at 49
The transaction cost has more to do with the market and its T&C, not with the asset

To decide Most Advantageous : Look at Net Value

But, Fair Value will be the expected selling price

** Transaction cost : Those costs which are necessary to make the transaction effective
For example - In case of sale of physical shares, stamp duty is required to be paid
Unless stamp duty is paid and deed of transfer is signed, the transfer of shares is not
effective. So, this comes under transaction cost

*** Important
We are trying to calculate FV of the asset
We should consider all those items which are a characteristic
of the asset, and ny item which is a characteristic of the market
should be ignored in FV calculation

In the example of transfer of shares, say Shivesh wants to sell shares

in physical form. If he sells in Maharashtra, Stamp Duty is 2%
If he sells in Delhi, it is 1.5%
The stamp duty is transaction cost, necessary to make the transfer
effective.
But, it is changing based on location of where the transfer is registered
So, it is a characteristic of the market, not the asset

When we talk of transportation cost of food items, if we send them to

a far off location, transport cost / cold storage expense is more due
to the perishable nature of the product, so transport cost is a characteristic
of the product, not the market

Determination of
Fair Value

Principal market Principal market

exists does not exist

Fair Value =
Identify 'Most
Selling price ( - )
Advantageous
Transport cost
Market'

Calculate Net Value

= Selling price ( - )
All transaction cost
( - ) Transport cost

Market with highest

Net Value is your
Most Advantageous
market
ed) may differ depending on the

iability being measured.

te. This means that the

ces in the most advantageous market.

eived from selling an asset (or minimises the amount paid to transfer a liability).
which market is most advantageous.
haracteristic of the market, rather than the asset.

Since there was no transport cost in my example, I did not deduct it while
ciding the most advantageous market
a general rule, you have to look at the net earning from sale of that product
decide 'most advantageous market'
 Principal market
does not exist

Identify 'Most
Advantageous
Market'

Calculate Net Value

= Selling price ( - )
All transaction cost
( - ) Transport cost

Market with highest

Net Value is your
Most Advantageous
market
Question

An asset is sold in two different active markets at different prices. An entity

enters into transactions in both markets and can access the price in those
markets for the asset at the measurement date as follows

Market 1 Market 2
Price 26 25
Transaction cost -3 -1
Transport cost -2 -2
Net Price Received 21 22

What is the fair value of the asset if

a ) market 1 is the principal market for the asset
b ) no principal market can be determined

Solution

Part ( a )

If market 1 is the principal market, then fair value would be the price received in that
market less the transportation cost

Fair Value of asset = Selling price ( - ) Transport cost = 26 ( - ) 2 = 24

Part ( b )

In case there is no principal market, reference has to be made to the most advantageous
market [ as per IFRS 13 ]

The most advantageous market is the market that maximises the net amount received on
sale of asset

The net amount received in Market 2 [ 22 ] is more than the net amount received in
market 1 [ 21 ], so market 2 is the most advantageous market

So, fair value will be 25 ( - ) 2 = 23

Sale price ( - ) Transport cost
dvantageous

nt received on
Non-financial assets

What is a non-financial asset?

The difference between financial and non-financial assets is covered in detail in

Financial Instruments. Financial assets include:
• Contractual rights to receive cash (such as receivables)
• Investments in equity shares.

Non-financial assets include:

• Property, plant and equipment
• Intangible assets.

The fair value of a non-financial asset

IFRS 13 says that the fair value of a non-financial asset should be based on its highest and best use.
The highest and best use of an asset is the use that a market participant would adopt in order to maximise its valu
The current use of a non-financial asset can be assumed to be the highest and best use, unless evidence exists to
The highest and best use should take into account uses that are:
• physically possible
• legally permissible
• financially feasible

IFRS 13 says a use can be legally permissible even if it is not legally approved.

*** Had there been a legal restriction on conversion of land from industrial to residential purpose, then 5 mn
would be the FV
 highest and best use.
adopt in order to maximise its value.
best use, unless evidence exists to the contrary.

residential purpose, then 5 mn

Question

Five Quarters has purchased 100% of the ordinary shares of Three Halves and is trying to
determine the fair value of the net assets at the acquisition date.
Three Halves owns land that is currently developed for industrial use.
The fair value of the land if used in a manufacturing operation is $5
million.
Many nearby plots of land have been developed for residential use (as high-rise apartment buildings).
The land owned by Three Halves does not have planning permission for residential use, although
permission has been granted for similar plots of land. The fair value of Three Halves' land as a vacant
site for residential development is $6 million.
However, transformation costs of $0.3 million would need to be incurred to get the land into this condition.

Required:
How should the fair value of the land be determined?

Solution

Land is a non financial asset and as per IFRS 13, Fair value of a non financial asset should be determined
with reference to its highest and best use

The current use of the asset is considered to be the highest and best use, unless evidence exists to the contrary

The current use is for industrial / manufacturing purpose and the fair value is 5 mn

Residential use of land is also permitted but to convert the land from industrial to residential purposes, the
company will have to pay transformation cost of 0.3 mn. FV for residential purposes is 6 mn

If land is used for residential purposes, FV will be 6 mn ( - ) 0.3 mn = 5.7 mn

Highest and best use is to use it for residential purposes and hence, FV of land will be 5.7 mn
 is trying to

se apartment buildings).
ential use, although
Halves' land as a vacant

et the land into this condition.

asset should be determined

s evidence exists to the contrary

l to residential purposes, the

urposes is 6 mn

d will be 5.7 mn