Lesson 18 - Advanced Accounting Course

18. IFRS 13: Fair Value Measurement

🔍 What is IFRS 13?

IFRS 13 is an international accounting standard that defines how to measure fair value and provides a single framework for doing so. It applies when other standards require or permit fair value measurement, but it doesn’t dictate when to use fair value — only how.

💡 What Is Fair Value?

Fair value is 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.

In simpler terms:
👉 It's not what you paid for something, or what it's worth to you — it's the price someone else would pay for it today in the open market.

🧭 Key Principles of IFRS 13

1. Market-Based, Not Entity-Based

Fair value must reflect the price from the perspective of a market participant, not the company’s internal view or preferences.

2. Exit Price

It’s based on the exit price (what you'd receive to sell an asset or pay to transfer a liability), not the entry price (what you paid originally).

3. Highest and Best Use (for Non-Financial Assets)

When measuring the fair value of non-financial assets (like land or buildings), the assumption is the asset is used in its most valuable way, even if it’s not currently used that way.

📈 Fair Value Hierarchy (3 Levels)

IFRS 13 introduces a three-level hierarchy to classify inputs used in valuation. The goal is to maximize the use of observable market data.

🔍 The more observable the input, the more reliable the fair value.

🛠️ Valuation Techniques

IFRS 13 permits three approaches. Entities should use the method most appropriate for the situation and maximize observable inputs:

1. Market Approach – Uses market prices for similar assets or liabilities
   
   

2. Cost Approach – Based on the replacement cost of the asset
   
   

3. Income Approach – Uses discounted cash flows (DCF) or other present value methods
   
   

🧾 Disclosures Required

Entities must disclose:

• The valuation technique used
  
  

• The inputs used (Level 1, 2, or 3)
  
  

• Any changes in valuation methods
  
  

• A reconciliation of opening and closing balances for Level 3 inputs
  
  

🛡️ This helps users understand the risk and subjectivity behind fair value estimates.

🧠 Example

Imagine a company owns a piece of land:

• They bought it for $100,000 (entry price)
  
  

• Market participants are willing to pay $150,000 today (exit price)
  
  

👉 Under IFRS 13, the fair value is $150,000, regardless of what the company paid.

📌 Summary Table

✅ Why It Matters

• Enhances comparability across companies
  
  

• Improves transparency and credibility of financial statements
  
  

• Reduces subjective estimates when better market data is available