IFRS 13, Fair Value Measurement

© 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

IFRS 13 deals with fair value measurement. IFRS 13 was

developed in conjunction with FASB’s standard on fair
value (FASB ASC 820, Fair Value Measurement), so the
guidance is genuinely global in its reach.

57
Learning objectives

• Identify fair value and the unit of

account for fair value measurement.
• Recall the factors that are taken into
account when determining fair value.
• Recall how IFRS 13 is applied to
nonfinancial assets, liabilities and an
entity’s own equity instruments.
• Distinguish between the various
valuation techniques that are
appropriate under different
circumstances
• Recall the fair value hierarchy.

58 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

• Identify fair value and the unit of account for fair value measurement.
• Recall the factors that are taken into account when determining fair value.
• Recall how IFRS 13 is applied to nonfinancial assets, liabilities, and an entity’s
own equity instruments.
• Distinguish between the various valuation techniques that are appropriate
under different circumstances.
• Recall the fair value hierarchy.

58
Scope exceptions of IFRS 13

• Share-based payment transactions (IFRS 2)

• Leasing transactions (IFRS 16)
• Inventory valuation (IAS 2)
• Impairment testing (IAS 36)
• Employee benefit plan assets (IAS 19)

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Presenter notes:

Measurement and/or disclosure criteria in IFRS 13 do

not apply to the following items. They’re covered under
other standards as listed:
• Share-based payment transactions (IFRS 2, Share-
Based Payment)
• Leasing transactions (IFRS 16, Property, Plant and
Equipment)
• Inventory valuation (IAS 2, Inventories)
• Impairment testing (IAS 36, Impairment of Assets)
• Employee benefit plan assets (IAS 19, Employee
Benefits)

59
IFRS 13 applicability

IFRS 13 is applicable when other standards permit or require an item

to be measured at fair value.

Note: The standard does not indicate which assets or liabilities should be measured at fair
value, but it provides guidance on how to measure fair value and what to disclose when
another standard requires it.

60 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

IFRS 13 applies when another standard either requires or

permits fair value measurement. It doesn’t say which
assets or liabilities should be measured at fair value, but
it gives guidance on how to measure fair value and what
to disclose when another standard does require it.

60
Fair value — Definition

“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).”

Orderly transaction Market participants

• Independent
• Knowledgeable
FORCED SALE • Able
• Willing

61 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

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).”

Notice the words are geared toward ascertaining an exit

value or price.

An orderly transaction is a transaction that allows exposure

to the market to allow for marketing activities that are
typical for the particular assets or liability. It is not a forced
liquidation or distress sale. It assumes that market
participants are knowledgeable and motivated to buy or
sell.

61
Fair value measurement under IFRS 13

Market-based approach:

Highest and Principal Most

Asset / Unit of advantageous
Liability account best use market market
• Condition? • Individual? • Physically • Consider • If no principal
• Location? • Group? possible first market exists
• Legally • Greatest • Maximizes
permissible volume resources
• Financially • After
feasible transaction
and
transportation
costs
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Presenter notes:
IFRS 13 aims at arriving at a fair value that is market-based rather than entity-specific. IFRS 13
is based on assumptions that market participants would use when pricing the asset under
current market conditions, taking into account any relevant characteristics of the asset such
as age or any restrictions on use.

Fair value measurements are based on an asset or a liability's unit of account. These are
usually the individual asset or liability but could be a group of equity shares held, if for
example, the fair value reflects a control premium.

Under IFRS 13, the fair value of a nonfinancial asset is determined based on its highest and
best use. This is the use that would maximize the value of the asset or the business within
which the asset would be used. Highest and best use is determined from the point of view of
market participants, even if the entity intends for a different use. The highest and best use
should be physically possible, legally permissible, and financially feasible.

The principal market is the market with the greatest volume and level of activity for the asset
or liability. It is only where there is no principal market that the most advantageous market is
considered, even if a more advantageous market exists. The most advantageous market is
the one that maximizes the amount that would be received or minimizes the amount that
would be paid after taking into account both transaction and transportation costs.

62
Transport and transaction
costs
• Include both in
determining
most advantageous
market

• Include transport
costs only in
determining fair
value

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Presenter notes:

Both transportation and transaction costs are taken into account if the most advantageous market is being

identified, but only transportation costs are included in determining fair value.

63
Discussion exercise — Market-based approach

Scenario
Mirabel Plc acquires a piece of land that is currently used as a factory site. The
fair value of the land is £5 million. Nearby sites have been redeveloped for
residential use. The fair value is £7 million when used as a residential
development. The costs of demolishing the factory are £1 million.

Questions
1. What would be the highest and best use of the land?
2. What is the fair value of the land?

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Presenter notes:

Scenario
Mirabel Plc acquires a piece of land that is currently used
as a factory site. The fair value of the land is £5m.
Nearby sites have been redeveloped for residential use.
The fair value is £7m when used as a residential
development. The costs of demolishing the factory are
£1m.

Questions
What would be the highest and best use of the land?
What is the fair value of the land?

64
Discussion exercise solution

Factory use Residential use

Fair value price £5m £7m
Demolition costs (£1m)
£5m £6m

Note: Need to consider all relevant facts and circumstances such as:
Can the land be converted to residential use?

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Presenter notes:

There is not enough information provided in the

scenario to answer these questions. Emphasize to
participants that all relevant facts and circumstances
should be considered when determining the highest and
best use. For example, if there was a restriction on the
ability to use the land for residential use, then this
wouldn’t be the highest and best use.
Refer to Case study

65
Valuation techniques
Use the most appropriate technique based on circumstances:
Market Cost Income
Inputs approach approach approach

• Maximize • Prices of • Current • Valuation

observable comparable replacement technique
inputs assets and cost (ex. (ex. unquoted
• Minimize liabilities (ex. custom-made shares)
unobservable quoted shares) machinery)
inputs

Apply technique consistently from period to period

66 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:
IFRS 13 does not require the use of a specific valuation technique; however,
whichever technique is used should be applied consistently from period to period.
Therefore, the requirement is a valuation technique that is “appropriate in the
circumstances” and that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs.

A market approach to valuation is one that uses prices and other relevant information
generated by market transactions involving identical or comparable assets and
liabilities. An example of the application of this approach is the use of quoted shares.

A cost approach reflects the amount that would be required currently to replace the
service capacity of an asset. This might be appropriate for a custom-made machine.

Lastly, the income approach uses discounted cash flow techniques. These calculations
involve assumptions about future cash flows.

66
Fair value hierarchy of inputs into valuation techniques

Level 1 Level 2 Level 3

• Quoted prices • Observable • Unobservable

inputs other inputs using
than quoted assumptions
prices
• Cash flow
• Quoted prices forecast
for similar information
assets in active
markets
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Presenter notes:

The more reliable and observable the input, the less the
disclosure required. IFRS 13 categorizes inputs into the
following 3 levels:
 Level 1: Quoted prices (unadjusted) in active markets for
identical assets or liabilities that the entity can access at
the measurement date
 Level 2: Inputs other than quoted prices included within
level 1 that are observable for the asset or liability,
either directly or indirectly; for example, quoted prices
for similar assets in active markets
 Level 3: Inputs that are unobservable inputs for the
asset or liability, and that are based on the entity's own
assumptions

67
IFRS 13 and IFRS 9 — Financial assets

Unlisted equity
Quoted investments
investments

• FV is typically • Significant judgment

the spread
between bid • Different valuation
versus ask techniques
price.
• Level 3 valuation

68 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

IFRS 13 offers additional guidance for financial instruments

measured at fair value in accordance with IFRS 9.

For financial assets, if a quoted item such as an equity share

has a bid price (the price that buyers are willing to pay) and
an ask price (the price that sellers are willing to achieve), the
price within the bid-ask spread that is most representative
of fair value is used to measure fair value.

With unquoted equity investments, it is likely that valuation

will be based on some unobservable inputs and, as a result,
the overall fair value will be classified as a level 3
measurement.

68
IFRS 13 and IFRS 9 — Liabilities

Liabilities are measured on the assumption that the liability or equity

is transferred to a market participant at the measurement date.

Therefore:
A liability would Measurement is NOT The fair value of a
remain outstanding on the assumption of liability must factor in
and the market settlement of a liability nonperformance risk.
participant would be or cancellation of an
required to fulfill the entity’s own equity
obligation. instrument.

69 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

For financial liabilities, fair value is measured on the

assumption that the liability will not be settled. The fair
value on assumption of settlement could be significantly
different. IFRS 13 also requires that the fair value of a
liability must factor in nonperformance risk, which
includes anything that could influence the likelihood of
an obligation being fulfilled, such as an entity's own
credit risk

69
IFRS 13 and IFRS 9 — Entity’s own equity instruments

An entity’s own equity instruments must be measured on the

assumption that the liability or equity is transferred to a market
participant at the measurement date.

Therefore:

An entity's own equity instrument would remain outstanding and

the market participant would take on the rights and responsibilities
associated with the instrument.

70 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

Similarly, the fair value of an entity’s own equity

instruments is based on the assumption that the shares
would remain outstanding.

70
Summary — Valuation of financial liabilities and an entity’s
own equity instruments

If quoted price available:

• Use this

If identical item held by another entity as an asset:

• Measure fair value of the liability or equity instrument from the perspective of market
participant that holds the identical item as an asset at the measurement date

If no quoted price or corresponding asset available:

• Measure fair value using a valuation technique from the perspective of the
participant that owes the liability or issued the equity

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Presenter notes:

If a quoted price is available, that should be used,

resulting in a level 1 fair value. If no quoted price is
available but an identical item is held as an asset by
another entity, then fair value should be measured from
the perspective of the market participant that holds the
identical asset, giving a level 2 fair value. If neither of the
above apply, then fair value should be determined using
a valuation technique from the point of view of the
participant that owes the liability or issued the equity.
This results in a level 3 valuation.

71
Discussion exercise — Valuation of financial liability

Scenario

Bamburgh Co. and Alnwick Co. both enter into an agreement to pay Ripley
Co. $400,000 in three years’ time in exchange for some goods. Bamburgh
has a very good credit profile and can borrow at 4%. Alnwick has a poor
credit rating and can only borrow at 7%.

Question

What is the fair value of the liability that Bamburgh

and Alnwick must record in their financial statements?

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Presenter notes:

Bamburgh Co. and Alnwick Co. both enter into an

agreement to pay Ripley Co. $400,000 in three years’
time in exchange for some goods. Bamburgh has a very
good credit profile and can borrow at 4 percent. Alnwick
has a poor credit rating and can only borrow at 7
percent.

What is the fair value of the liability that Bamburgh and

Alnwick must record in their financial statements?

72
Discussion exercise solution — Valuation of financial liability

Question

What is the fair value of the liability that Bamburgh

and Alnwick must record in their financial statements?

• The fair value of Bamburgh’s liability is approximately $355,599, which is

the present value of $400,000 in three years’ time at 4% (400,000/(1.04³))

• The fair value of Alnwick’s liability is approximately $326,519. It is the

present value of $400,000 in three years’ time at 7% (400,000/(1.07³))

73 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

The fair value of Bamburgh’s liability is approximately US$355,599, which is the present value of US$400,000 in three years’
time at 4 percent (400,000/(1.04³))

The fair value of Alnwick’s liability is approximately

US$326,519,
which is the present value of US$400,000 in three years’
time at 7 percent
(400,000/(1.07³))

Highlight how the difference in credit rating affects the

numbers.

The two values are different, even though the amount and
period are the same, due to the different risk profiles of the
two companies.

73
Disclosures under IFRS 13

IFRS 13 requires enhanced disclosures similar to IFRS 7 that apply to

all assets and liabilities measured at fair value. Specifically, the
following should be disclosed:
• Use of valuation techniques
• Categorization level within the fair value hierarchy
• The effect of changes in measurement that effect profit or loss or OCI for
recurring fair value measurements using unobservable inputs (level 3)
• Reconciliations of opening to closing balances with explanations for
recurring fair value measurements categorized as level 3

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Presenter notes:

IFRS 13 has extensive disclosure requirements. As mentioned

before, a level 3 categorization requires more disclosures than a
level 1 categorization.

Specifically, the following should be disclosed:

• Use of valuation techniques.
• Categorization level within the fair value hierarchy.
• The effect of changes in measurement that effect profit or loss
or OCI for recurring fair value measurements using
unobservable inputs (level 3).
• Reconciliations of opening to closing balances with explanations
for recurring fair value measurements categorized as level 3.

An example of a recurring FV measurement may be a property held

at fair value that would have to be kept up to date.

74
Comparison to U.S. GAAP — Fair value

IFRS U.S. GAAP

An entity cannot recognize inception Where an asset or a liability is
gains or losses for a financial measured initially at fair value, any
instrument unless the instrument’s difference between the transaction
fair value is demonstrated by level 1 price and fair value is recognized
inputs. immediately as a gain or loss in
earnings unless otherwise specified.

75 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Presenter notes:

IFRS and U.S. GAAP are substantially converged, with the

following exception:

IFRS: An entity cannot recognize inception gains or losses

for a financial instrument unless the instrument’s fair
value is demonstrated by level 1 inputs.

U.S. GAAP: Where an asset or a liability is measured

initially at fair value, any difference between the
transaction price and fair value is recognized
immediately as a gain or loss in earnings unless
otherwise specified.

75