FAIR VALUE MEASUREMENT
Fair value measurement aims to determine the price at which an asset would be sold or a liability transferred in an orderly transaction between market participants at the measurement date under current market conditions, representing an “exit price” and a market-based assessment. This accounting concept, detailed in standards like IFRS 13, requires entities to consider market participant assumptions, the principal or most advantageous market, and specific valuation techniques to arrive at this price.
Key Aspects of Fair Value Measurement:
Market Participant Assumptions
Fair value measurements are based on the assumptions that independent market participants would use when pricing an asset or liability, not the entity’s own specific assumptions.
Orderly Transaction
The measurement assumes an orderly transaction, meaning it’s not a forced sale or liquidation.
Principal or Most Advantageous Market
The transaction is considered to occur in the principal market (the market with the greatest volume or activity) or, if no principal market exists, the most advantageous market (the one that maximizes the amount received for an asset or minimizes the amount paid for a liability).
Valuation Techniques
Various approaches can be used to estimate fair value, including market, income, or cost approaches, depending on the asset or liability.
Fair Value Hierarchy
Fair value measurements are categorized into a hierarchy based on the inputs used, with Level 1 inputs (quoted prices in active markets for identical assets) considered the most reliable.
Non-financial Assets
For non-financial assets, fair value also considers the “highest and best use” perspective of a market participant.
Liabilities and Own Equity Instruments
For liabilities and the entity’s own equity instruments, fair value assumes a transfer to a market participant without immediate settlement or cancellation.
Disclosure
Financial reporting standards emphasize the importance of transparency in disclosures related to fair value measurement, including the valuation approach, underlying assumptions, and management judgment.
FAIR VALUE UNDER IFRS
IFRS 13 defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements.
It applies when another Standard requires or permits fair value measurements or disclosures about fair value measurements (and measurements based on fair value, such as fair value less costs to sell), except in specified circumstances in which other Standards govern. For example, IFRS 13 does not specify the measurement and disclosure requirements for share-based payment transactions, leases or impairment of assets. Nor does it establish disclosure requirements for fair values related to employee benefits and retirement plans.
IFRS 13 defines fair value 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 (an exit price). When measuring fair value, an entity uses the assumptions that market participants would use when pricing the asset or the liability under current market conditions, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value.