IFRS 13 Fair Value Measurement: A Practical Guide

IFRS 13 Fair Value Measurement is the accounting standard that defines fair value and sets out a single framework for measuring it. Many other standards require or permit assets and liabilities to be measured at fair value — IFRS 13 is the standard that explains how to do so consistently. This practical guide explains what IFRS 13 covers, how fair value is defined, the fair value hierarchy, the valuation approaches, and why it matters — in clear, plain language. It's a core financial-reporting topic, relevant to ACCA study and connects to standards like IAS 16.

What is IFRS 13?

IFRS 13 provides a single, consistent framework for measuring fair value and for the related disclosures. Importantly, it does not dictate when fair value should be used — that is determined by other standards (such as IAS 16's revaluation model or IFRS 9 for financial instruments). Instead, IFRS 13 explains how to measure fair value whenever another standard requires or permits it, bringing consistency to what had previously been scattered across many standards.

How fair value is defined

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. Several features of this definition are important:

• It is an exit price — the price to sell or transfer, not the price to buy.
• It assumes an orderly transaction — not a forced sale or distressed transaction.
• It is based on market participants — knowledgeable, willing and independent parties — so it's a market-based measure, not an entity-specific one.
• It is measured in the principal market for the asset (or, in its absence, the most advantageous market).

The fair value hierarchy

To improve consistency and comparability, IFRS 13 establishes a three-level hierarchy based on the inputs used in the measurement, prioritising observable market data over the entity's own assumptions:

• Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities. These are the most reliable inputs.
• Level 2 — inputs other than quoted prices that are observable, either directly or indirectly (such as quoted prices for similar assets, or observable interest rates).
• Level 3 — unobservable inputs, based on the entity's own assumptions about what market participants would use. These are the least reliable and require the most disclosure.

The level a measurement sits in determines the extent of disclosure required — Level 3 measurements attract the most scrutiny because they rely on judgement rather than observable prices.

Valuation techniques

IFRS 13 describes three widely-used valuation approaches that an entity may apply, choosing the most appropriate for the circumstances and maximising the use of observable inputs:

• Market approach — uses prices and other relevant information from market transactions in identical or comparable assets.
• Income approach — converts future amounts (such as cash flows) to a single present value, for example through discounting.
• Cost approach — reflects the amount needed to replace the service capacity of an asset (its current replacement cost).

For non-financial assets, fair value also reflects the asset's highest and best use by market participants.

Why IFRS 13 matters

IFRS 13 matters because fair value is used widely across financial reporting, and inconsistent measurement would undermine comparability and trust. By giving a single definition, a clear hierarchy that prioritises observable data, and a consistent set of valuation approaches and disclosures, IFRS 13 makes fair value measurements more reliable and transparent — and helps users understand how much judgement underlies a given figure. For accountants, it's an important framework that sits behind many other standards.

Frequently asked questions

What is IFRS 13?

The international standard that defines fair value and provides a single framework for measuring it and disclosing it — explaining how to measure fair value when other standards require or permit it.

How does IFRS 13 define fair value?

The price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date — an exit price, based on the principal (or most advantageous) market.

What is the fair value hierarchy?

A three-level ranking of inputs: Level 1 (quoted prices in active markets for identical items), Level 2 (other observable inputs) and Level 3 (unobservable inputs). It prioritises observable data and drives disclosure.

What valuation techniques does IFRS 13 allow?

The market approach (using comparable transactions), the income approach (discounting future cash flows to present value) and the cost approach (current replacement cost) — chosen for the circumstances and maximising observable inputs.

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Standards like IFRS 13 are central to financial reporting. Learnsignal's tutor-led ACCA and CIMA courses develop the reporting knowledge the IFRS and IAS standards require — with clear teaching and exam-focused practice. (Always refer to the latest text of the standard for authoritative requirements.)

What does IFRS 13 require?

IFRS 13 defines fair value and sets out a single framework for measuring it and the related disclosures, including the fair-value hierarchy. It applies when other standards require or permit fair-value measurement rather than mandating its use. Refer to the current standard for the detail.