Fair value measurement

IFRS 13 doesn't say when to use fair value — other standards do. It defines fair value, sets one framework for measuring it, and requires disclosures.

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. It's an exit price, market-based rather than entity-specific: the entity's own intentions (for example to keep using an asset) don't change it.

Which market? The principal market — the one with the greatest volume and level of activity for the asset — if there is one, even if prices are better elsewhere. Only if there is no principal market does the entity use the most advantageous market: the one that maximises the amount received after transaction costs and transport costs.

Transaction costs (such as broker fees) are used to identify the most advantageous market but are not deducted from fair value — they belong to the transaction, not the asset. Transport costs to get the asset to the market are deducted when location is a characteristic of the asset.

Highest and best use applies to non-financial assets: the use by market participants that is physically possible, legally permissible and financially feasible, even if the entity uses the asset differently.

Valuation techniques — the market approach, the cost approach and the income approach — should maximise relevant observable inputs and minimise unobservable ones.

The fair value hierarchy - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. - Level 2: inputs other than Level 1 prices that are observable, directly or indirectly — quoted prices for similar items, quotes in markets that aren't active, and observable inputs such as yield curves, implied volatilities and credit spreads. - Level 3: unobservable inputs — the entity's own data, adjusted to reflect market participants' assumptions.

A measurement is categorised in its entirety at the lowest level input that is significant to it. Level 3 measurements need the most disclosure: a reconciliation of opening to closing balances, valuation techniques and inputs, and a narrative on sensitivity. US GAAP (ASC 820) was developed jointly with IFRS 13 and is substantially the same.