The IASB published IFRS 13: Fair Value Measurement, in May 2011 and it is effective from 1 January 2013. FV has been required or permitted under many IASs/IFRSs.
The concept of FV has long been debated. In general, IFRS 13 establishes new requirements for the measurement of FV. However, it does not provide guidance as regard to when FV should be used. This article will summarise key points of the standard.
- Defines FV
- Sets out in a single IFRS framework for measuring FV
- Requires disclosures about FV measurements.
IFRS 13 applies when another IFRS requires or permits FV measurements or disclosures about FV (measurements such as FV less cost to sell on FV or disclosures about those measurements). IFRS 13 does not apply to IFRS 2 Share-based Payment, IAS 17 Leases and measurements that have similarities to FV, but that are not FV such as “net realisable value” in IAS 2 or “value in use” in IAS 36.
IFRS 13 defines FV 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).
Under the key definitions of the standard we see “exit price” as “the price that would be received to sell an asset or paid to transfer liability”. This indicates that FV is the exit price between market participants who are asset holders or debtors at the measurement date.
FV is market based, rather than an entity-specific measurement. It is measured using the assumptions that market participants would use when pricing the asset or liability including assumptions about risk (IFRS 13.2-3)
THE FV MEASUREMENT APPROACH
IFRS 13 states that, the objective of a FV 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. An entity must consider all of the following (IFRS 13.B2):
The particular asset or liability that is the subject of the measurement (consistently with its unit of account)
For a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use)
The principal (or most advantageous) market for the asset or liability
The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the FV hierarchy within which the inputs are categorised.
PRINCIPAL MARKET AND MOST ADVANTAGEOUS MARKET
FV measurement assumes that……..