MEASURING FAIR VALUE UNDER IFRS 13: IMPLEMENTATION GUIDELINES

Measuring Fair Value Under IFRS 13: Implementation Guidelines

Measuring Fair Value Under IFRS 13: Implementation Guidelines

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Fair value measurement is a critical aspect of financial reporting under International Financial Reporting Standards (IFRS), and IFRS 13 – Fair Value Measurement – provides the framework for how fair value should be determined and disclosed. The standard ensures that fair value measurements are consistent and comparable across entities, sectors, and jurisdictions. 

IFRS 13 is applied to all financial and non-financial assets and liabilities that require fair value measurement, whether in financial statements, or when disclosed. The guidelines set out in IFRS 13 are vital for ensuring transparency and providing stakeholders with meaningful information that reflects the true economic value of assets and liabilities.

The Role of IFRS 13 in Financial Reporting


IFRS 13 outlines how to measure fair value and provides guidance on the use of observable and unobservable inputs in the measurement process. One of the core principles of IFRS 13 is that fair value should reflect 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. This is referred to as the "exit price." Under IFRS 13, fair value is not determined by the cost to acquire or sell an asset but rather by the market conditions on the measurement date.

As organizations implement IFRS standards, they may seek IFRS implementation services to ensure compliance with the detailed requirements of IFRS 13. These services can provide the necessary expertise to assist companies in determining fair value, selecting appropriate inputs, and ensuring proper disclosure in their financial statements.

Key Elements of Fair Value Measurement


Under IFRS 13, fair value measurement consists of several key components:

  1. Market Participant Assumptions: Fair value is determined based on the assumptions that market participants would use when pricing the asset or liability. This means that the measurement reflects the conditions prevailing in the market at the time, rather than the specific intentions of the reporting entity.

  2. Exit Price: Fair value is an exit price, meaning it represents the price at which an asset would be sold or a liability would be transferred in a transaction with a market participant at the measurement date. This is distinct from the entry price, which would reflect the price at which an entity might acquire the asset or incur the liability.

  3. Highest and Best Use: The fair value of an asset is based on its highest and best use, considering the use that is physically possible, legally permissible, and financially feasible. If the asset is not being used in its highest and best use, fair value should reflect the price that would be received if the asset were put to its most optimal use.

  4. Three-Level Fair Value Hierarchy: IFRS 13 introduces a three-level hierarchy that prioritizes the inputs used to measure fair value. These inputs are classified as follows:

    • Level 1: Observable inputs that reflect quoted prices in active markets for identical assets or liabilities.

    • Level 2: Inputs that are directly or indirectly observable, such as quoted prices for similar assets or liabilities or market data.

    • Level 3: Unobservable inputs based on the entity's own assumptions, used when there is no observable market data.




This hierarchy is used to determine the quality of inputs used in fair value measurement, with Level 1 inputs being the most reliable and Level 3 inputs requiring the most judgment.

Steps in Fair Value Measurement


To properly implement IFRS 13 and measure fair value, companies must follow a systematic process. The following steps outline how to approach fair value measurement:

  1. Identify the Asset or Liability: The first step is to clearly define the asset or liability whose fair value is being measured. The nature and characteristics of the item must be understood in order to determine the appropriate inputs for its valuation.

  2. Select the Valuation Technique: IFRS 13 provides three valuation techniques to determine fair value:

    • Market approach: Uses prices and other relevant information from market transactions involving identical or similar assets or liabilities.

    • Income approach: Converts future amounts (such as cash flows or earnings) to a single present value amount using a discount rate.

    • Cost approach: Reflects the amount that would be required to replace the service capacity of an asset.



  3. The selection of the appropriate technique depends on the nature of the asset or liability and the availability of observable inputs.

  4. Use of Inputs: Once the valuation technique is selected, the next step is to determine the inputs to be used in the calculation. These inputs can be either observable or unobservable, and IFRS 13 emphasizes the importance of maximizing the use of observable inputs whenever possible.

  5. Establish Fair Value Based on Inputs: After identifying the appropriate inputs, the company must apply them to determine the fair value. This may involve adjusting for any discounts or premiums related to the asset or liability being measured.

  6. Provide Disclosures: Finally, IFRS 13 requires extensive disclosures regarding the fair value measurement. These disclosures include information about the valuation techniques used, the inputs considered, the level of the fair value hierarchy, and any significant judgments or assumptions made in the process.


Challenges in Fair Value Measurement


While IFRS 13 provides a clear framework for measuring fair value, there are challenges that companies may encounter during implementation:

  1. Subjectivity in Level 3 Inputs: The use of Level 3 inputs, which are based on unobservable data, can introduce a significant degree of subjectivity. Determining the appropriate assumptions for these inputs requires judgment, and it is often difficult to measure the impact of changes in these inputs on the overall fair value.

  2. Complexity of Valuation Techniques: For some assets and liabilities, determining the appropriate valuation technique can be complex. For example, measuring the fair value of illiquid assets, such as private equity investments or real estate, may require the use of sophisticated models and assumptions.

  3. Lack of Active Market Data: Fair value measurement relies heavily on market data. In some cases, there may be a lack of active market data, particularly for specialized or unique assets. This can make it difficult to accurately measure fair value and can lead to greater reliance on unobservable inputs.

  4. Harmonizing Valuation Methods Across Multiple Jurisdictions: For multinational corporations, implementing IFRS 13 across different jurisdictions may be challenging, especially when local accounting standards or regulatory environments differ. Companies must ensure that their fair value measurements are consistent with IFRS, even if local markets or regulatory conditions pose limitations.


The Role of Financial Advisory Services in IFRS 13 Implementation


Given the complexities involved in fair value measurement, companies may benefit from seeking financial advisory services. These services can assist in several key areas of IFRS 13 implementation, including the selection of appropriate valuation techniques, the determination of appropriate inputs, and the preparation of disclosures. Financial advisors with expertise in IFRS can help companies navigate challenges related to fair value measurement and ensure that their financial statements are compliant with IFRS 13.

Advisory services can also provide guidance on the valuation of complex or illiquid assets and help organizations establish consistent methodologies for applying IFRS 13 across multiple entities and jurisdictions.

Measuring fair value under IFRS 13 is an essential process for ensuring transparency and consistency in financial reporting. By following the implementation guidelines set out in the standard, companies can ensure that they measure fair value accurately and disclose the necessary information in their financial statements. 

However, the complexity of the fair value measurement process and the challenges associated with subjective inputs and valuation techniques require careful consideration. Engaging IFRS implementation services and financial advisory services can provide companies with the expertise needed to implement IFRS 13 successfully, manage risks, and optimize the accuracy and reliability of their fair value measurements.

Related Resources: 

IFRS Implementation in Shared Service Centers: Standardizing Global Processes
Post-Implementation Review: Optimizing IFRS Reporting Efficiency
IFRS Implementation Budget Planning: Cost Management Strategies
Business Combinations Under IFRS 3: Implementation Framework
IFRS Implementation for Joint Ventures and Associates

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