IFRS 13 Fair Value Measurement — Complete Guide
IFRS 13 Fair Value Measurement explained: the definition of fair value, the fair value hierarchy (Level 1, 2, 3), principal market, highest and best use, and key exam points for ACCA students.
What is IFRS 13?
IFRS 13 Fair Value Measurement provides a single framework for measuring fair value across all IFRS standards. It defines fair value, establishes a framework for measurement, and requires disclosures about fair value measurements. IFRS 13 does not change when fair value is required — it explains how to measure it.
Definition of Fair Value
Fair value is defined 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.
Key elements of this definition:
- Exit price: The price to sell/transfer (exit), not the price to buy/acquire (entry)
- Orderly transaction: Not a forced sale or distressed disposal
- Market participants: Knowledgeable, willing buyers and sellers, not the specific entity's circumstances
- Measurement date: The specific reporting date, not a future date
The Principal Market
Fair value is measured using the price in the principal market — the market with the greatest volume and level of activity. If no principal market exists, the most advantageous market (the market that maximises the selling price) is used.
Highest and Best Use (Non-Financial Assets)
For non-financial assets, fair value is measured based on the highest and best use of the asset by market participants — the use that would maximise the value of the asset. This may differ from the entity's current use.
The Fair Value Hierarchy
IFRS 13 establishes a three-level fair value hierarchy based on the inputs used in valuation:
| Level | Description | Examples |
|---|---|---|
| Level 1 (Highest quality) | Unadjusted quoted prices in active markets for identical assets/liabilities | Listed shares traded on NSE/BSE; government bonds with active market |
| Level 2 | Observable inputs other than Level 1 quoted prices | Quoted prices for similar assets; interest rates; yield curves; credit spreads |
| Level 3 (Lowest quality) | Unobservable inputs — entity's own assumptions about market participant assumptions | Discounted cash flow models using internal forecasts; illiquid private equity |
Entities must classify fair value measurements in this hierarchy and provide more extensive disclosures for Level 3 measurements.
Valuation Techniques
IFRS 13 recognises three approaches:
- Market approach: Uses prices from market transactions for identical or comparable assets
- Income approach: Converts future cash flows or earnings to a present value (DCF, option pricing models)
- Cost approach: Reflects the current replacement cost (current cost to replace service capacity)
Disclosure Requirements
For assets and liabilities measured at fair value, entities must disclose the fair value hierarchy level, valuation techniques used, and — for Level 3 — the significant unobservable inputs and sensitivity analysis.
Exam Tips for IFRS 13
- The hierarchy levels are frequently tested — know the distinctions clearly
- Remember: fair value = exit price (selling price), not entry price (acquisition cost)
- Level 3 requires the most disclosure — and involves the most judgement and risk of manipulation
- For non-financial assets: always consider highest and best use, not current use
Prepare for ACCA with Learnsignal — our SBR courses cover IFRS 13 in depth with exam-focused practice.
Further Reading
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