IFRS 13 Fair Value Measurement: A Practical Guide

What Is IFRS 13?

IFRS 13 Fair Value Measurement provides a single, unified definition of fair value and a framework for measuring it consistently across all IFRS standards that require or permit fair value measurement. Before IFRS 13, different standards contained their own fair value guidance, leading to inconsistent application.

The Definition of Fair Value

Fair value is 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 points: it is an exit price (what you would receive/pay), not an entry price (what you paid); it assumes an orderly transaction (not a distressed sale); it is market-based (from the perspective of market participants), not entity-specific.

The Fair Value Hierarchy

IFRS 13 establishes a three-level fair value hierarchy based on the inputs used: Level 1: Quoted prices in active markets for identical assets or liabilities. Most reliable — no adjustment required. Example: listed shares, traded commodities. Level 2: Observable inputs other than Level 1 quoted prices — quoted prices for similar assets, interest rates, yield curves, credit spreads. Example: interest rate swaps valued using market rates. Level 3: Unobservable inputs — based on the entity's own assumptions about what market participants would use. Most judgement required. Example: private equity investments, complex financial instruments. Entities must maximise the use of observable inputs and minimise unobservable inputs.

Disclosure Requirements

For assets and liabilities measured at fair value on a recurring basis, entities must disclose: the level of the hierarchy; any transfers between levels; and for Level 3 measurements, a reconciliation of opening to closing balances and the effect of changes in unrealised gains or losses.

Practical Relevance

IFRS 13 affects any entity holding investment property (IAS 40), biological assets (IAS 41), financial instruments at fair value (IFRS 9), or making business combinations (IFRS 3). It is examined in ACCA FR and SBR.