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Other standards · IFRS 13

IFRS 13 Fair Value Measurement

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Objective
  2. Scope
  3. Key definitions
  4. Recognition & measurement
  5. Key disclosures
  6. Common exam traps
  7. Worked example
  8. Related standards
  9. Practise MCQs

Objective

Defines fair value, sets out a single framework for measuring it and requires disclosures about fair value measurements.

Scope

  • Applies when another standard requires or permits fair value measurement or disclosure.
  • Excludes share-based payments (IFRS 2), leasing transactions (IFRS 16), and measures that resemble but are not fair value, such as net realisable value (IAS 2) and value in use (IAS 36).

Key definitions

Fair value
An exit price: what would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
Principal market
The market with the greatest volume and level of activity for the asset or liability.
Most advantageous market
The market that maximises the amount received for an asset (or minimises the amount paid for a liability) after transaction and transport costs.
Highest and best use
The use of a non-financial asset by market participants that would maximise its value, if physically possible, legally permissible and financially feasible.

Recognition & measurement

Measurement

  • Use the price in the principal market; if there is none, the most advantageous market.
  • Fair value is not adjusted for transaction costs, but is adjusted for transport costs if location is a characteristic of the asset.
  • Use market participant assumptions, not entity-specific ones.
  • Non-financial assets are measured at their highest and best use, even if the entity uses them differently.
  • Valuation approaches: market, cost and income approaches; maximise relevant observable inputs and minimise unobservable inputs.

Fair value hierarchy

  • Level 1: unadjusted quoted prices in active markets for identical items that the entity can access.
  • Level 2: other inputs that are observable, directly or indirectly (e.g. quoted prices for similar items, observable interest rates).
  • Level 3: unobservable inputs, based on the best information available.
  • A measurement is categorised at the lowest level of any input that is significant to it.

Key disclosures

  • Fair value measurements by level of the hierarchy, and transfers between levels.
  • Valuation techniques and inputs used for Level 2 and Level 3.
  • For recurring Level 3 measurements: a reconciliation of opening and closing balances and a narrative of sensitivity to unobservable inputs.

Common exam traps

  • Fair value is an exit price, not the entry price paid.
  • Transaction costs are used to identify the most advantageous market but are not deducted in measuring fair value.
  • Highest and best use applies to non-financial assets only.

Worked example: Principal vs most advantageous market

Scenario. An asset is sold in two markets. Market A: price $26, transaction costs $3, transport $2. Market B: price $25, transaction costs $1, transport $2.

  1. If Market A is the principal market: fair value = 26 − 2 (transport) = $24.
  2. If there is no principal market, compare net amounts: A = 26 − 3 − 2 = $21; B = 25 − 1 − 2 = $22, so B is most advantageous.
  3. Fair value using Market B = 25 − 2 = $23 (transaction costs not deducted).

Answer: $24 if Market A is principal; otherwise $23 using Market B.

Practise MCQs on this standard

Test your understanding of IFRS 13 with free chapter-wise MCQs and explanations in these question banks.

CAF-6 Corporate ReportingICAP CAFACCA FR Financial ReportingACCACA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IFRS 13 text on ifrs.org