CHAPTER 37: PFRS 13 - FAIR VALUE MEASUREMENT

FAIR VALUE

Fair value of an asset is the price that would be received to sell an asset in an orderly transaction between market
participants.

Fair value of liability is the price that would be paid to transfer a liability in an orderly transaction between market
participants.

Based on the new definition, the following should be noted:

a. Fair value refers to an “exit price" or market price under current market conditions at measurement date.
b. Fair value is the price in an orderly transaction.

An orderly transaction is a transaction that allows for normal marketing activities that are usual and customary.

c. Fair value is the price agreed upon by market participants.

Market participants

The market participants are the buyers and sellers in the principal market who are:

a. Independent or unrelated parties

b. Knowledgeable or having a reasonable understanding of the transaction
c. Willing or motivated but not forced and compelled to enter into the transaction

Principal or most advantageous market

An active market is a market in which transactions for the asset or liability take place with sufficient regularity and
volume to provide pricing information on an ongoing basis.

A principal market is the market with the greatest volume and level of activity for the asset or liability.

In the absence of a principal market, the entity should consider the most advantageous market.

The most advantageous market is the market that maximizes the amount that would be received to sell the asset or
minimizes the amount that could be paid to transfer the liability.

Generally, the market that an entity enters when it sells an asset or transfers a liability is the principal market or the
most advantageous market.

Valuation premise

In determining the fair value of an asset or a liability, an entity may refer to information that is directly observable or
readily available.

The entity can also estimate the fair value by using a valuation method.

The fair value shall not be adjusted for transaction cost.

If location is a characteristic of an asset, the fair value shall be adjusted for transport cost that would be incurred to
transport the asset from its current location to the principal] or most advantageous market.

Highest and best use

In measuring the fair value of nonfinancial asset, an entity must take into consideration the highest and best use of the
asset.
CHAPTER 37: PFRS 13 - FAIR VALUE MEASUREMENT

Highest and best use is defined as the use of nonfinancial asset by market participants that would maximize the value of
asset.

The highest and best use of the asset should possess the following:

a. Physically possible, meaning, it reflects the physical characteristics of an asset.

b. Legally permissible, meaning, it reflects any legal restrictions on the use of the asset.
c. Financially feasible, meaning, it reflects whether the use would generate sufficient income or cash flows.

The highest and best use of the asset might provide maximum value either on a stand-alone basis, or as a group in
combination with other asset and liability.

Valuation method

Three valuation techniques can be used to measure fair value:

a. Market approach - uses prices and relevant information for market transactions for identical and comparable
asset and liability.
b. Income approach - Focuses on converting future amounts into discounted cash flows.
c. Cost approach - relies on the current replacement cost to replace the asset with a comparable asset.

Fair value hierarchy

The fair value hierarchy or best evidence of fair value is enumerated as follows:

1. Level 1 inputs are the quoted prices in an active market for identical asset or liability.

A quoted price in an active market provides the most reliable evidence of fair value and shall be used without
adjustment.
2. Level 2 inputs are inputs that are observable either directly or indirectly.

Level 2 inputs include quoted prices for similar asset or | liability in an active market and quoted prices for
identical or similar asset or liability in an inactive market.

3. Level 3 inputs are unobservable inputs for the asset or lability. Unobservable inputs are usually developed by the
entity using the best available information from the entity's own data.

Level 3 inputs include the present value of estimated cash flows.