International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13) is set out in paragraphs 1–99 and Appendices A–D. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the IFRS. Definitions of other terms are given in the Glossary for International Financial Reporting Standards. IFRS 13 should be read in the context of its objective and the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. [Refer:IAS 8 paragraphs 10–12]
1 | This IFRS:
[Note:IFRS 13 explains how to measure fair value for financial reporting. It does not require fair value measurements in addition to those already required or permitted by other IFRS Standards and is not intended to establish valuation standards or affect valuation practices outside financial reporting. Refer: Basis for Conclusions paragraphs BC1–BC18 for background about the development of the Standard.]
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2 | Fair value is a market‑based measurement, not an entity‑specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same—to estimate the price at which an orderly transaction to sell the asset [Refer:Basis for Conclusions paragraph BC39] or to transfer the liability [Refer:Basis for Conclusions paragraph BC40] would take place between market participants at the measurement date under current market conditions (ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). [Refer:Basis for Conclusions paragraphs BC36–BC45] |
3 | When a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. Because fair value is a market‑based measurement, it is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair value. |
4 | The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting measurement. In addition, this IFRS shall be applied to an entity’s own equity instruments measured at fair value. |
5 | This IFRS applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except as specified in paragraphs 6 and 7. |
6 | The measurement and disclosure requirements of this IFRS do not apply to the following:
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7 | The disclosures required by this IFRS are not required for the following:
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8 | The fair value measurement framework described in this IFRS applies to both initial and subsequent measurement if fair value is required or permitted by other IFRSs. |
9 | This IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction [Refer:paragraphs B43 and B44] between market participants at the measurement date. |
10 | Paragraph B2 describes the overall fair value measurement approach. |
11 | A fair value measurement is for a particular asset or liability [Refer:paragraph B2(a)]. Therefore, when measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example, the following:
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12 | The effect on the measurement arising from a particular characteristic will differ depending on how that characteristic would be taken into account by market participants. |
13 | The asset or liability measured at fair value might be either of the following:
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14 | Whether the asset or liability is a stand‑alone asset or liability, a group of assets, a group of liabilities or a group of assets and liabilities for recognition or disclosure purposes depends on its unit of account [Refer:Appendix A]. The unit of account for the asset or liability shall be determined in accordance with the IFRS that requires or permits the fair value measurement, except as provided in this IFRS. [Refer:paragraphs 32, 39(b), 44, 69, 80, B2(a), B4(c) and Basis for Conclusions paragraph BC77] |
15 | A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction [Refer:paragraphs 2, 9, 24, B43 and B44] between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. |
16 | A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: [Refer:Illustrative Examples, example 6]
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17 | An entity need not undertake an exhaustive search of all possible markets to identify the principal market or, in the absence of a principal market, the most advantageous market, but it shall take into account all information that is reasonably available. In the absence of evidence to the contrary, the market in which the entity would normally enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal market or, in the absence of a principal market, the most advantageous market. |
18 | If there is a principal market for the asset or liability, the fair value measurement shall represent the price in that market (whether that price is directly observable or estimated using another valuation technique) [Refer:paragraphs 61 and 62], even if the price in a different market is potentially more advantageous at the measurement date. |
19 | The entity must have access to the principal (or most advantageous) market at the measurement date. Because different entities (and businesses within those entities) with different activities may have access to different markets, the principal (or most advantageous) market for the same asset or liability might be different for different entities (and businesses within those entities). Therefore, the principal (or most advantageous) market (and thus, market participants) shall be considered from the perspective of the entity, thereby allowing for differences between and among entities with different activities. |
20 | Although an entity must be able to access the market, the entity does not need to be able to sell the particular asset or transfer the particular liability on the measurement date to be able to measure fair value on the basis of the price in that market. |
21 | Even when there is no observable market to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owes the liability. [Refer:paragraph 62] That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability. |
22 | An entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. [Refer:paragraph B2(d)] |
23 | In developing those assumptions, an entity need not identify specific market participants. Rather, the entity shall identify characteristics that distinguish market participants generally, considering factors specific to all the following:
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24 | Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique [Refer:paragraphs 61 and 62]. |
25 | The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs [Refer:Illustrative Examples, example 6]. Transaction costs shall be accounted for in accordance with other IFRSs. Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a transaction and will differ depending on how an entity enters into a transaction for the asset or liability. |
26 | Transaction costs do not include transport costs. If location is a characteristic of the asset (as might be the case, for example, for a commodity), the price in the principal (or most advantageous) market shall be adjusted for the costs, if any, that would be incurred to transport the asset from its current location to that market. [Refer:Illustrative Examples, example 6] |
27 | A fair value measurement of a non‑financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. |
28 | The highest and best use of a non‑financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows:
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29 | Highest and best use is determined from the perspective of market participants, even if the entity intends a different use [Refer:Basis for Conclusions paragraph BC70]. However, an entity’s current use of a non‑financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset. [Refer:Basis for Conclusions paragraph BC71] |
30 | To protect its competitive position, or for other reasons, an entity may intend not to use an acquired non‑financial asset actively or it may intend not to use the asset according to its highest and best use [Refer:Basis for Conclusions paragraph BC70]. For example, that might be the case for an acquired intangible asset that the entity plans to use defensively by preventing others from using it. [Refer:Illustrative Examples, example 3] Nevertheless, the entity shall measure the fair value of a non‑financial asset assuming its highest and best use by market participants. |
31 | The highest and best use [Refer:paragraphs 27–30] of a non‑financial asset establishes the valuation premise used to measure the fair value of the asset, as follows:
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32 | The fair value measurement of a non‑financial asset assumes that the asset is sold consistently with the unit of account specified in other IFRSs (which may be an individual asset). [Refer:paragraph 14] That is the case even when that fair value measurement assumes that the highest and best use of the asset is to use it in combination with other assets or with other assets and liabilities because a fair value measurement assumes that the market participant already holds the complementary assets and the associated liabilities. [Refer:Basis for Conclusions paragraph BC77] |
33 | Paragraph B3 describes the application of the valuation premise concept for non‑financial assets. |
34 | A fair value measurement assumes that a financial or non‑financial liability or an entity’s own equity instrument (eg equity interests issued as consideration in a business combination) is transferred to a market participant [Refer:paragraphs 22 and 23] at the measurement date. The transfer of a liability or an entity’s own equity instrument assumes the following:
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35 | Even when there is no observable market to provide pricing information about the transfer of a liability or an entity’s own equity instrument (eg because contractual or other legal restrictions prevent the transfer of such items [Refer:paragraphs 45 and 46 and Basis for Conclusions paragraphs BC99 and BC100]), there might be an observable market for such items if they are held by other parties as assets (eg a corporate bond or a call option on an entity’s shares). |
36 | In all cases, an entity shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs to meet the objective of a fair value measurement, which is to estimate the price at which an orderly transaction to transfer the liability or equity instrument would take place between market participants at the measurement date under current market conditions. [Refer:paragraphs 2 and 61] |
37 | When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical item is held by another party as an asset, an entity shall measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date. [Refer:Basis for Conclusions paragraphs BC86–BC89] |
38 | In such cases, an entity shall measure the fair value of the liability or equity instrument as follows:
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39 | An entity shall adjust the quoted price [Refer:paragraph 79(c) and 83(b)] of a liability or an entity’s own equity instrument held by another party as an asset only if there are factors specific to the asset that are not applicable to the fair value measurement of the liability or equity instrument. An entity shall ensure that the price of the asset does not reflect the effect of a restriction preventing the sale of that asset [Refer:Illustrative Examples, example 8]. Some factors that may indicate that the quoted price of the asset should be adjusted include the following:
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40 | When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical item is not held by another party as an asset, an entity shall measure the fair value of the liability or equity instrument using a valuation technique from the perspective of a market participant [Refer:paragraphs 22 and 23] that owes the liability or has issued the claim on equity [Refer:Basis for Conclusions paragraph BC90]. |
41 | For example, when applying a present value technique an entity might take into account either of the following [Refer:paragraphs B12–B30 and Illustrative Examples, example 11]:
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42 | The fair value of a liability reflects the effect of non‑performance risk. Non‑performance risk includes, but may not be limited to, an entity’s own credit risk (as defined in IFRS 7 Financial Instruments: Disclosures). Non‑performance risk is assumed to be the same before and after the transfer of the liability. |
43 | When measuring the fair value of a liability, an entity shall take into account the effect of its credit risk (credit standing) and any other factors that might influence the likelihood that the obligation will or will not be fulfilled. That effect may differ depending on the liability, for example:
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44 | The fair value of a liability reflects the effect of non‑performance risk on the basis of its unit of account [Refer:paragraph 14]. The issuer of a liability issued with an inseparable third‑party credit enhancement [Refer:paragraph 39(b)] that is accounted for separately from the liability shall not include the effect of the credit enhancement (eg a third‑party guarantee of debt) in the fair value measurement of the liability. If the credit enhancement is accounted for separately from the liability, the issuer would take into account its own credit standing and not that of the third party guarantor when measuring the fair value of the liability. [Refer:Basis for Conclusions paragraphs BC96–BC98] |
45 | When measuring the fair value of a liability or an entity’s own equity instrument, an entity shall not include a separate input or an adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the item. The effect of a restriction that prevents the transfer of a liability or an entity’s own equity instrument is either implicitly or explicitly included in the other inputs to the fair value measurement. |
46 | For example, at the transaction date, both the creditor and the obligor accepted the transaction price for the liability with full knowledge that the obligation includes a restriction that prevents its transfer. As a result of the restriction being included in the transaction price, a separate input or an adjustment to an existing input is not required at the transaction date to reflect the effect of the restriction on transfer. Similarly, a separate input or an adjustment to an existing input is not required at subsequent measurement dates to reflect the effect of the restriction on transfer. |
47 | The fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.E1 |
| E1 | [IFRIC® Update, May 2008, Agenda Decision, ‘IAS 37 Provisions, Contingent Liabilities and Contingent Assets—Deposits on returnable containers’ The IFRIC was asked to provide guidance on the accounting for the obligation to refund deposits on returnable containers. In some industries, entities that distribute their products in returnable containers collect a deposit for each container delivered and have an obligation to refund this deposit when containers are returned by the customer. The issue was whether the obligation should be accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The IFRIC noted that paragraph 11 of IAS 32 defines a financial instrument as ‘any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.’ Following delivery of the containers to its customers, the seller has an obligation only to refund the deposit for any returned containers. In circumstances in which the containers are derecognised as part of the sale transaction, the obligation is an exchange of cash (the deposit) for the containers (non‑financial assets). Whether that exchange transaction occurs is at the option of the customer. Because the transaction involves the exchange of a non‑financial item, it does not meet the definition of a financial instrument in accordance with IAS 32. In contrast, when the containers are not derecognised as part of the sale transaction, the customer’s only asset is its right to the refund. In such circumstances, the obligation meets the definition of a financial instrument in accordance with IAS 32 and is therefore within the scope of IAS 39. In particular, paragraph 49 of IAS 39 [paragraph 49 of IAS 39 is now paragraph 47 of IFRS 13 Fair Value Measurement] states that ‘the fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid.’ The IFRIC concluded that divergence in this area was unlikely to be significant and therefore decided not to add this issue to its agenda.] |
48 | An entity that holds a group of financial assets and financial liabilities is exposed to market risks (as defined in IFRS 7) and to the credit risk (as defined in IFRS 7) of each of the counterparties. If the entity manages that group of financial assets and financial liabilities on the basis of its net exposure [Refer:paragraph 49] to either market risks or credit risk, the entity is permitted to apply an exception to this IFRS for measuring fair value. That exception permits an entity to measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (ie an asset) for a particular risk exposure or paid to transfer a net short position (ie a liability) for a particular risk exposure in an orderly transaction [Refer:paragraphs B43 and B44] between market participants [Refer:paragraphs 22 and 23] at the measurement date under current market conditions. Accordingly, an entity shall measure the fair value of the group of financial assets and financial liabilities consistently with how market participants would price the net risk exposure at the measurement date. [Refer:paragraphs 53–56] |
49 | An entity is permitted to use the exception in paragraph 48 only if the entity does all the following: [Refer:Basis for Conclusions paragraphs BC120 and BC121]
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50 | The exception in paragraph 48 does not pertain to financial statement presentation. In some cases the basis for the presentation of financial instruments in the statement of financial position differs from the basis for the measurement of financial instruments, for example, if an IFRS does not require or permit financial instruments to be presented on a net basis [Refer:IAS 32 paragraphs 42–50]. In such cases an entity may need to allocate the portfolio‑level adjustments (see paragraphs 53–56) to the individual assets or liabilities that make up the group of financial assets and financial liabilities managed on the basis of the entity’s net risk exposure. An entity shall perform such allocations on a reasonable and consistent basis using a methodology appropriate in the circumstances. |
51 | An entity shall make an accounting policy decision in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors [Refer:IAS 8 paragraphs 7–29] to use the exception in paragraph 48. An entity that uses the exception shall apply that accounting policy, including its policy for allocating bid‑ask adjustments (see paragraphs 53–55) and credit adjustments (see paragraph 56), if applicable, consistently from period to period for a particular portfolio. [Refer:paragraph 96] |
52 | The exception in paragraph 48 applies only to financial assets, financial liabilities and other contracts [Refer:Basis for Conclusions BC119A and BC119B] within the scope of IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement, if IFRS 9 has not yet been adopted). [Refer:IFRS 9 paragraphs 2.1–2.7 and B2.1–B2.6] The references to financial assets and financial liabilities in paragraphs 48–51 and 53–56 should be read as applying to all contracts within the scope of, and accounted for in accordance with, IFRS 9 (or IAS 39, if IFRS 9 has not yet been adopted), regardless of whether they meet the definitions of financial assets [Refer:IAS 32 paragraph 11 (definition of a financial asset)] or financial liabilities [Refer:IAS 32 paragraph 11 (definition of a financial liability)] in IAS 32 Financial Instruments: Presentation. |
53 | When using the exception in paragraph 48 to measure the fair value of a group of financial assets and financial liabilities managed on the basis of the entity’s net exposure to a particular market risk (or risks), the entity shall apply the price within the bid‑ask spread that is most representative of fair value in the circumstances to the entity’s net exposure to those market risks (see paragraphs 70 and 71). |
54 | When using the exception in paragraph 48, an entity shall ensure that the market risk (or risks) to which the entity is exposed within that group of financial assets and financial liabilities is substantially the same. For example, an entity would not combine the interest rate risk associated with a financial asset with the commodity price risk associated with a financial liability because doing so would not mitigate the entity’s exposure to interest rate risk or commodity price risk. When using the exception in paragraph 48, any basis risk resulting from the market risk parameters not being identical shall be taken into account in the fair value measurement of the financial assets and financial liabilities within the group. |
55 | Similarly, the duration of the entity’s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities shall be substantially the same. For example, an entity that uses a 12‑month futures contract against the cash flows associated with 12 months’ worth of interest rate risk exposure on a five‑year financial instrument within a group made up of only those financial assets and financial liabilities measures the fair value of the exposure to 12‑month interest rate risk on a net basis and the remaining interest rate risk exposure (ie years 2–5) on a gross basis. |
56 | When using the exception in paragraph 48 to measure the fair value of a group of financial assets and financial liabilities entered into with a particular counterparty, the entity shall include the effect of the entity’s net exposure to the credit risk of that counterparty or the counterparty’s net exposure to the credit risk of the entity in the fair value measurement when market participants [Refer:paragraphs 22 and 23] would take into account any existing arrangements that mitigate credit risk exposure in the event of default (eg a master netting agreement [Refer:IAS 32 paragraph 50] with the counterparty or an agreement that requires the exchange of collateral on the basis of each party’s net exposure to the credit risk of the other party). The fair value measurement shall reflect market participants’ expectations about the likelihood that such an arrangement would be legally enforceable in the event of default. |
57 | When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (an entry price). In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price). Entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not necessarily transfer liabilities at the prices received to assume them. |
58 | In many cases the transaction price will equal the fair value (eg that might be the case when on the transaction date the transaction to buy an asset takes place in the market in which the asset would be sold). |
59 | When determining whether fair value at initial recognition equals the transaction price, an entity shall take into account factors specific to the transaction and to the asset or liability. Paragraph B4 describes situations in which the transaction price might not represent the fair value of an asset or a liability at initial recognition. |
60 | If another IFRS requires or permits an entity to measure an asset or a liability initially at fair value and the transaction price differs from fair value, the entity shall recognise the resulting gain or loss in profit or loss unless that IFRS specifies otherwise. [Refer:Basis for Conclusions paragraph BC137] |
61 | An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. [Refer:paragraphs 67 and 74] |
62 | The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. [Refer:paragraph 2] Three widely used valuation techniques are the market approach, the cost approach and the income approach. The main aspects of those approaches are summarised in paragraphs B5–B11. An entity shall use valuation techniques consistent with one or more of those approaches to measure fair value.
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63 | In some cases a single valuation technique will be appropriate (eg when valuing an asset or a liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques [Refer:Illustrative Examples, examples 4 and 5 and Basis for Conclusions paragraph BC142] will be appropriate (eg that might be the case when valuing a cash‑generating unit). If multiple valuation techniques are used to measure fair value, the results (ie respective indications of fair value) shall be evaluated considering the reasonableness of the range of values indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances. [Refer:paragraph B40] |
64 | If the transaction price is fair value at initial recognition [Refer:paragraphs 57–60 and B4] and a valuation technique that uses unobservable inputs will be used to measure fair value in subsequent periods, the valuation technique shall be calibrated so that at initial recognition the result of the valuation technique equals the transaction price. Calibration ensures that the valuation technique reflects current market conditions, and it helps an entity to determine whether an adjustment [Refer:paragraphs 69 and B39 and Basis for Conclusions paragraphs BC143–BC146] to the valuation technique is necessary (eg there might be a characteristic of the asset or liability [Refer:paragraph 11] that is not captured by the valuation technique). After initial recognition, when measuring fair value using a valuation technique or techniques that use unobservable inputs, an entity shall ensure that those valuation techniques reflect observable market data (eg the price for a similar asset or liability) at the measurement date. |
65 | Valuation techniques used to measure fair value shall be applied consistently. [Refer:paragraph B40 and Basis for Conclusions paragraph BC147] However, a change in a valuation technique or its application (eg a change in its weighting when multiple valuation techniques are used or a change in an adjustment applied to a valuation technique) is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. That might be the case if, for example, any of the following events take place:
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66 | Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate in accordance with IAS 8 [Refer:IAS 8 paragraphs 32–38 and Basis for Conclusions paragraph BC148]. However, the disclosures in IAS 8 for a change in accounting estimate [Refer:IAS 8] are not required for revisions resulting from a change in a valuation technique or its application. |
67 | Valuation techniques used to measure fair value shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs. |
68 | Examples of markets in which inputs might be observable for some assets and liabilities (eg financial instruments) include exchange markets, dealer markets, brokered markets and principal‑to‑principal markets (see paragraph B34). |
69 | An entity shall select inputs that are consistent with the characteristics of the asset or liability that market participants would take into account in a transaction for the asset or liability (see paragraphs 11 and 12). In some cases those characteristics result in the application of an adjustment, [Refer:Basis for Conclusions paragraphs BC143–BC146 and BC152–BC159] such as a premium or discount (eg a control premium or non‑controlling interest discount). However, a fair value measurement shall not incorporate a premium or discount that is inconsistent with the unit of account in the IFRS that requires or permits the fair value measurement (see paragraphs 13 and 14). Premiums or discounts that reflect size as a characteristic of the entity’s holding (specifically, a blockage factor that adjusts the quoted price of an asset or a liability because the market’s normal daily trading volume is not sufficient to absorb the quantity held by the entity, as described in paragraph 80) rather than as a characteristic of the asset or liability (eg a control premium when measuring the fair value of a controlling interest) are not permitted in a fair value measurement. [Refer:Basis for Conclusions paragraphs BC156–BC157] In all cases, if there is a quoted price in an active market (ie a Level 1 input) for an asset or a liability, an entity shall use that price without adjustment when measuring fair value, except as specified in paragraph 79. [Refer:Basis for Conclusion paragraph BC168] |
70 | If an asset or a liability measured at fair value has a bid price and an ask price (eg an input from a dealer market), the price within the bid‑ask spread that is most representative of fair value in the circumstances shall be used to measure fair value regardless of where the input is categorised within the fair value hierarchy (ie Level 1, 2 or 3; see paragraphs 72–90). The use of bid prices for asset positions and ask prices for liability positions is permitted, but is not required. |
71 | This IFRS does not preclude the use of mid‑market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid‑ask spread. |
72 | To increase consistency and comparability in fair value measurements and related disclosures, this IFRS establishes a fair value hierarchy that categorises into three levels (see paragraphs 76–90) the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) [Refer:paragraphs 76–80 and Basis for Conclusions paragraphs BC168–BC170] and the lowest priority to unobservable inputs (Level 3 inputs).E2 [Refer:paragraphs 86–90, B36 and Basis for Conclusions paragraphs BC172–BC175] |
| E2 | [IFRIC® Update, January 2015, Agenda Decision, ‘IFRS 13 Fair Value Measurement—the fair value hierarchy when third-party consensus prices are used’ The Interpretations Committee received a request to clarify under what circumstances prices that are provided by third parties would qualify as Level 1 in the fair value hierarchy in accordance with IFRS 13 Fair Value Measurement. The submitter noted that there are divergent views on the level within the hierarchy in which fair value measurements based on prices received from third parties should be classified. The Interpretations Committee noted that when assets or liabilities are measured on the basis of prices provided by third parties, the classification of those measurements within the fair value hierarchy will depend on the evaluation of the inputs used by the third party to derive those prices, instead of on the pricing methodology used. In other words, the fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value. In accordance with IFRS 13, only unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date qualify as Level 1 inputs. Consequently, the Interpretations Committee noted that a fair value measurement that is based on prices provided by third parties may only be categorised within Level 1 of the fair value hierarchy if the measurement relies solely on unadjusted quoted prices in an active market for an identical instrument that the entity can access at the measurement date. The Interpretations Committee also observed that the guidance in IFRS 13 relating to the classification of measurements within the fair value hierarchy is sufficient to draw an appropriate conclusion on the issue submitted. On the basis of the analysis performed, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.] |
73 | In some cases, the inputs used to measure the fair value of an asset or a liability might be categorised within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Assessing the significance of a particular input to the entire measurement requires judgement, taking into account factors specific to the asset or liability. Adjustments to arrive at measurements based on fair value, such as costs to sell when measuring fair value less costs to sell, shall not be taken into account when determining the level of the fair value hierarchy within which a fair value measurement is categorised. |
74 | The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation techniques (see paragraph 61). However, the fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value. For example, a fair value measurement developed using a present value technique [Refer:paragraphs B12–B30] might be categorised within Level 2 [Refer:paragraphs 81–85, B35 and Basis for Conclusions paragraph BC171] or Level 3, depending on the inputs that are significant to the entire measurement and the level of the fair value hierarchy within which those inputs are categorised. |
75 | If an observable input requires an adjustment using an unobservable input and that adjustment results in a significantly higher or lower fair value measurement, the resulting measurement would be categorised within Level 3 of the fair value hierarchy. For example, if a market participant would take into account the effect of a restriction on the sale of an asset [Refer:paragraph 11(b) and Illustrative Examples, example 8] when estimating the price for the asset [Refer:paragraph 12], an entity would adjust the quoted price to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment [Refer:paragraph B39] is an unobservable input that is significant to the entire measurement, the measurement would be categorised within Level 3 of the fair value hierarchy. |
76 | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. |
77 | A quoted price in an active market [Refer:Basis for Conclusions paragraph BC169] provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available, except as specified in paragraph 79. [Refer:Basis for Conclusions paragraph BC168] |
78 | A Level 1 input will be available for many financial assets and financial liabilities, some of which might be exchanged in multiple active markets (eg on different exchanges). Therefore, the emphasis within Level 1 is on determining both of the following:
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79 | An entity shall not make an adjustment to a Level 1 input except in the following circumstances:
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80 | If an entity holds a position in a single asset or liability (including a position comprising a large number of identical assets or liabilities, such as a holding of financial instruments) and the asset or liability is traded in an active market, the fair value of the asset or liability shall be measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity. That is the case even if a market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. [Refer:paragraph 69 and Basis for Conclusions paragraph BC155] |
81 | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
82 | If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: [Refer:paragraph B35]
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83 | Adjustments to Level 2 inputs will vary depending on factors specific to the asset or liability [Refer:paragraph B35]. Those factors include the following:
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84 | An adjustment to a Level 2 input that is significant to the entire measurement might result in a fair value measurement categorised within Level 3 of the fair value hierarchy if the adjustment uses significant unobservable inputs. [Refer:paragraph 75]
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85 | Paragraph B35 describes the use of Level 2 inputs for particular assets and liabilities. |
86 | Level 3 inputs are unobservable inputs for the asset or liability. [Refer:paragraph B36]
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87 | Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, [Refer:paragraph 67] thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective [Refer:paragraph 2] remains the same, ie an exit price at the measurement date from the perspective of a market participant [Refer:paragraphs 22 and 23] that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. |
88 | Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and the risk inherent in the inputs to the valuation technique. A measurement that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one when pricing the asset or liability. For example, it might be necessary to include a risk adjustment when there is significant measurement uncertainty (eg when there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities, and the entity has determined that the transaction price or quoted price does not represent fair value, as described in paragraphs B37–B47). [Refer:Basis for Conclusions paragraphs BC143–BC146, BC149 and BC150] |
89 | An entity shall develop unobservable inputs using the best information available in the circumstances, which might include the entity’s own data. In developing unobservable inputs, an entity may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants [Refer:paragraphs 22 and 23] would use different data or there is something particular to the entity that is not available to other market participants (eg an entity‑specific synergy). [Refer:Basis for Conclusions paragraph BC174] An entity need not undertake exhaustive efforts to obtain information about market participant assumptions. [Refer:Basis for Conclusions paragraph BC175] However, an entity shall take into account all information about market participant assumptions that is reasonably available. Unobservable inputs developed in the manner described above are considered market participant assumptions and meet the objective of a fair value measurement. |
90 | Paragraph B36 describes the use of Level 3 inputs for particular assets and liabilities. |
91 | An entity shall disclose information that helps users of its financial statements assess both of the following: [Refer:Basis for Conclusions paragraph BC185]
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92 | To meet the objectives in paragraph 91, an entity shall consider all the following: [Refer:Illustrative Examples, example 17]
If the disclosures provided in accordance with this IFRS and other IFRSs are insufficient to meet the objectives in paragraph 91, an entity shall disclose additional information necessary to meet those objectives.
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93 | To meet the objectives in paragraph 91, an entity shall disclose, at a minimum, the following information for each class of assets and liabilities (see paragraph 94 for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this IFRS) in the statement of financial position after initial recognition:
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94 | An entity shall determine appropriate classes of assets and liabilities on the basis of the following:
The number of classes may need to be greater for fair value measurements categorised within Level 3 of the fair value hierarchy [Refer:Basis for Conclusions paragraph BC193] because those measurements have a greater degree of uncertainty and subjectivity. Determining appropriate classes of assets and liabilities for which disclosures about fair value measurements should be provided requires judgement. A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position. However, an entity shall provide information sufficient to permit reconciliation to the line items presented in the statement of financial position. If another IFRS specifies the class for an asset or a liability, an entity may use that class in providing the disclosures required in this IFRS if that class meets the requirements in this paragraph.
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95 | An entity shall disclose and consistently follow its policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred in accordance with paragraph 93(c) and (e)(iv). The policy about the timing of recognising transfers shall be the same for transfers into the levels as for transfers out of the levels. Examples of policies for determining the timing of transfers include the following:
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96 | If an entity makes an accounting policy decision to use the exception in paragraph 48, it shall disclose that fact.
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97 | For each class of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed, [Refer:IFRS 7 paragraph 25, IAS 16 paragraph 79(d) and IAS 40 paragraph 79(e)] an entity shall disclose the information required by paragraph 93(b), (d) and (i) [Refer:Basis for Conclusions paragraphs BC215–BC217]. However, an entity is not required to provide the quantitative disclosures about significant unobservable inputs used in fair value measurements categorised within Level 3 of the fair value hierarchy required by paragraph 93(d). For such assets and liabilities, an entity does not need to provide the other disclosures required by this IFRS.
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98 | For a liability measured at fair value and issued with an inseparable third‑party credit enhancement, an issuer shall disclose the existence of that credit enhancement and whether it is reflected in the fair value measurement of the liability. [Refer:paragraphs 39(b) and 44]
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99 | An entity shall present the quantitative disclosures required by this IFRS in a tabular format unless another format is more appropriate. [Refer:paragraphs 15–17 and Illustrative Examples, examples 15 and 17] |
This appendix is an integral part of the IFRS.
A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). [Refer:paragraphs B8 and B9]
The price paid to acquire an asset or received to assume a liability in an exchange transaction.
The price that would be received to sell an asset or paid to transfer a liability. [Refer:Basis for Conclusions paragraphs BC36–BC45]
The probability‑weighted average (ie mean of the distribution) of possible future cash flows.
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. [Refer:Basis for Conclusions paragraphs BC27–BC35]
The use of a non‑financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (eg a business) within which the asset would be used. [Refer:paragraphs 27–30, Basis for Conclusions paragraphs BC68–BC73 and Illustrative Examples, examples 1–5]
Valuation techniques that convert future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts. [Refer:paragraphs B10 and B11]
The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as the following:
(a) | the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model); and |
(b) | the risk inherent in the inputs to the valuation technique. |
Inputs may be observable or unobservable.
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. [Refer:paragraphs 76–80 and Basis for Conclusions paragraphs BC168–BC170]
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. [Refer:paragraphs 81–85, B35 and Basis for Conclusions paragraph BC171]
Unobservable inputs for the asset or liability. [Refer:paragraphs 86–90, B36 and Basis for Conclusions paragraphs BC172–BC175]
A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (ie similar) assets, liabilities or a group of assets and liabilities, such as a business. [Refer:paragraphs B5–B7]
Inputs that are derived principally from or corroborated by observable market data by correlation or other means. [Refer:Basis for Conclusions paragraph BC171]
Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: [Refer:paragraphs 22 and 23 and Basis for Conclusions paragraphs BC55 and BC56]
(a) | They are independent [Refer:Basis for Conclusions paragraph BC57] of each other, ie they are not related parties as defined in IAS 24, although the price in a related party transaction may be used as an input to a fair value measurement if the entity has evidence that the transaction was entered into at market terms. |
(b) | They are knowledgeable, [Refer:Basis for Conclusions paragraph BC58] having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary. |
(c) | They are able to enter into a transaction for the asset or liability. [Refer:Basis for Conclusions paragraph BC56] |
(d) | They are willing [Refer:Basis for Conclusions paragraphs BC56 and BC59] to enter into a transaction for the asset or liability, ie they are motivated but not forced or otherwise compelled to do so. |
The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs. [Refer:Basis for Conclusions paragraphs BC48–BC54 and Illustrative Examples, example 6]
The risk that an entity will not fulfil an obligation. Non‑performance risk includes, but may not be limited to, the entity’s own credit risk. [Refer:paragraphs 42–44 and Basis for Conclusions paragraphs BC92–BC95]
Inputs that are developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions that market participants would use when pricing the asset or liability.
A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (eg a forced liquidation or distress sale). [Refer:paragraph B43 and Basis for Conclusions paragraph BC181]
The market with the greatest volume and level of activity for the asset or liability. [Refer:Illustrative Examples, example 6]
Compensation sought by risk‑averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability. Also referred to as a ‘risk adjustment’. [Refer:paragraphs B16 and B44]
The costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria:
(a) | They result directly from and are essential to that transaction. |
(b) | They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made (similar to costs to sell, as defined in IFRS 5). |
The costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market. [Refer:paragraph 26]
The level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes. [Refer:paragraph B4(c) and Basis for Conclusions paragraph BC77]
Inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability. [Refer:paragraphs 87 and 89]
This appendix is an integral part of the IFRS. It describes the application of paragraphs 1–99 and has the same authority as the other parts of the IFRS.
B1 | The judgements applied in different valuation situations may be different. This appendix describes the judgements that might apply when an entity measures fair value in different valuation situations. |
B2 | The objective of a fair value measurement [Refer:paragraph 2] is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants [Refer:paragraphs 22 and 23] at the measurement date under current market conditions. A fair value measurement requires an entity to determine all the following:
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B3 | When measuring the fair value of a non‑financial asset used in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities [Refer:paragraph 31(a)] (eg a business), the effect of the valuation premise depends on the circumstances. For example:
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B4 | When determining whether fair value at initial recognition equals the transaction price, an entity shall take into account factors specific to the transaction and to the asset or liability. For example, the transaction price might not represent the fair value of an asset or a liability at initial recognition if any of the following conditions exist:
[Refer:Illustrative Examples, example 7]
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B5 | The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (ie similar) assets, liabilities or a group of assets and liabilities, such as a business. [Refer:paragraph 82(a) and 82(b)]
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B6 | For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might be in ranges with a different multiple for each comparable. The selection of the appropriate multiple within the range [Refer:paragraph 63] requires judgement, considering qualitative and quantitative factors specific to the measurement.
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B7 | Valuation techniques consistent with the market approach include matrix pricing. [Refer:paragraph 79(a) and Basis for Conclusions paragraph BC170] Matrix pricing is a mathematical technique used principally to value some types of financial instruments, such as debt securities, without relying exclusively on quoted prices for the specific securities, but rather relying on the securities’ relationship to other benchmark quoted securities.
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B8 | The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). |
B9 | From the perspective of a market participant [Refer:paragraphs 22 and 23] seller, the price that would be received for the asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. That is because a market participant buyer would not pay more for an asset than the amount for which it could replace the service capacity of that asset. Obsolescence encompasses physical deterioration, functional (technological) obsolescence and economic (external) obsolescence and is broader than depreciation for financial reporting purposes (an allocation of historical cost) or tax purposes (using specified service lives). In many cases the current replacement cost method is used to measure the fair value of tangible assets that are used in combination with other assets or with other assets and liabilities. [Refer:paragraph 31(a)] |
B10 | The income approach converts future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those future amounts. [Refer:paragraph 22] |
B11 | Those valuation techniques include, for example, the following:
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B12 | Paragraphs B13–B30 describe the use of present value techniques to measure fair value. Those paragraphs focus on a discount rate adjustment technique and an expected cash flow (expected present value) technique. Those paragraphs neither prescribe the use of a single specific present value technique nor limit the use of present value techniques to measure fair value to the techniques discussed. The present value technique used to measure fair value will depend on facts and circumstances specific to the asset or liability being measured (eg whether prices for comparable assets or liabilities can be observed in the market) and the availability of sufficient data. |
B13 | Present value (ie an application of the income approach) is a tool used to link future amounts (eg cash flows or values) to a present amount using a discount rate. A fair value measurement of an asset or a liability using a present value technique captures all the following elements from the perspective of market participants [Refer:paragraphs 22 and 23] at the measurement date:
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B14 | Present value techniques differ in how they capture the elements in paragraph B13. However, all the following general principles govern the application of any present value technique used to measure fair value:
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B15 | A fair value measurement using present value techniques is made under conditions of uncertainty because the cash flows used are estimates rather than known amounts. In many cases both the amount and timing of the cash flows are uncertain. Even contractually fixed amounts, such as the payments on a loan, are uncertain if there is risk of default. |
B16 | Market participants [Refer:paragraphs 22 and 23] generally seek compensation (ie a risk premium) for bearing the uncertainty inherent in the cash flows of an asset or a liability. A fair value measurement should include a risk premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows. Otherwise, the measurement would not faithfully represent fair value. In some cases determining the appropriate risk premium might be difficult. However, the degree of difficulty alone is not a sufficient reason to exclude a risk premium. |
B17 | Present value techniques differ in how they adjust for risk and in the type of cash flows they use. For example:
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B18 | The discount rate adjustment technique uses a single set of cash flows from the range of possible estimated amounts, whether contractual or promised (as is the case for a bond) or most likely cash flows. In all cases, those cash flows are conditional upon the occurrence of specified events (eg contractual or promised cash flows for a bond are conditional on the event of no default by the debtor). The discount rate used in the discount rate adjustment technique is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Accordingly, the contractual, promised or most likely cash flows are discounted at an observed or estimated market rate for such conditional cash flows (ie a market rate of return). |
B19 | The discount rate adjustment technique requires an analysis of market data for comparable assets or liabilities. Comparability is established by considering the nature of the cash flows (eg whether the cash flows are contractual or non‑contractual and are likely to respond similarly to changes in economic conditions), as well as other factors (eg credit standing, collateral, duration, restrictive covenants and liquidity). Alternatively, if a single comparable asset or liability does not fairly reflect the risk inherent in the cash flows of the asset or liability being measured, it may be possible to derive a discount rate using data for several comparable assets or liabilities in conjunction with the risk‑free yield curve (ie using a ‘build‑up’ approach). |
B20 | To illustrate a build‑up approach, assume that Asset A is a contractual right to receive CU8001 in one year (ie there is no timing uncertainty). There is an established market for comparable assets, and information about those assets, including price information, is available. Of those comparable assets:
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B21 | On the basis of the timing of the contractual payments to be received for Asset A relative to the timing for Asset B and Asset C (ie one year for Asset B versus two years for Asset C), Asset B is deemed more comparable to Asset A. Using the contractual payment to be received for Asset A (CU800) and the one‑year market rate derived from Asset B (10.8 per cent), the fair value of Asset A is CU722 (CU800/1.108). Alternatively, in the absence of available market information for Asset B, the one‑year market rate could be derived from Asset C using the build‑up approach. In that case the two‑year market rate indicated by Asset C (11.2 per cent) would be adjusted to a one‑year market rate using the term structure of the risk‑free yield curve. Additional information and analysis might be required to determine whether the risk premiums for one‑year and two‑year assets are the same. If it is determined that the risk premiums for one‑year and two‑year assets are not the same, the two‑year market rate of return would be further adjusted for that effect. |
B22 | When the discount rate adjustment technique is applied to fixed receipts or payments, the adjustment for risk inherent in the cash flows of the asset or liability being measured is included in the discount rate. In some applications of the discount rate adjustment technique to cash flows that are not fixed receipts or payments, an adjustment to the cash flows may be necessary to achieve comparability with the observed asset or liability from which the discount rate is derived. |
B23 | The expected present value technique uses as a starting point a set of cash flows that represents the probability‑weighted average of all possible future cash flows (ie the expected cash flows). The resulting estimate is identical to expected value, which, in statistical terms, is the weighted average of a discrete random variable’s possible values with the respective probabilities as the weights. Because all possible cash flows are probability‑weighted, the resulting expected cash flow is not conditional upon the occurrence of any specified event (unlike the cash flows used in the discount rate adjustment technique). |
B24 | In making an investment decision, risk‑averse market participants [Refer:paragraphs 22 and 23] would take into account the risk that the actual cash flows may differ from the expected cash flows. Portfolio theory distinguishes between two types of risk:
Portfolio theory holds that in a market in equilibrium, market participants will be compensated only for bearing the systematic risk inherent in the cash flows. (In markets that are inefficient or out of equilibrium, other forms of return or compensation might be available.) |
B25 | Method 1 of the expected present value technique adjusts the expected cash flows of an asset for systematic (ie market) risk by subtracting a cash risk premium (ie risk‑adjusted expected cash flows). Those risk‑adjusted expected cash flows represent a certainty‑equivalent cash flow, which is discounted at a risk‑free interest rate. A certainty‑equivalent cash flow refers to an expected cash flow (as defined), adjusted for risk so that a market participant [Refer:paragraphs 22 and 23] is indifferent to trading a certain cash flow for an expected cash flow. For example, if a market participant was willing to trade an expected cash flow of CU1,200 for a certain cash flow of CU1,000, the CU1,000 is the certainty equivalent of the CU1,200 (ie the CU200 would represent the cash risk premium). In that case the market participant would be indifferent as to the asset held. |
B26 | In contrast, Method 2 of the expected present value technique adjusts for systematic (ie market) risk by applying a risk premium to the risk‑free interest rate. Accordingly, the expected cash flows are discounted at a rate that corresponds to an expected rate associated with probability‑weighted cash flows (ie an expected rate of return). Models used for pricing risky assets, such as the capital asset pricing model, can be used to estimate the expected rate of return. Because the discount rate used in the discount rate adjustment technique is a rate of return relating to conditional cash flows, it is likely to be higher than the discount rate used in Method 2 of the expected present value technique, which is an expected rate of return relating to expected or probability‑weighted cash flows. |
B27 | To illustrate Methods 1 and 2, assume that an asset has expected cash flows of CU780 in one year determined on the basis of the possible cash flows and probabilities shown below. The applicable risk‑free interest rate for cash flows with a one‑year horizon is 5 per cent, and the systematic risk premium for an asset with the same risk profile is 3 per cent.
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B28 | In this simple illustration, the expected cash flows (CU780) represent the probability‑weighted average of the three possible outcomes. In more realistic situations, there could be many possible outcomes. However, to apply the expected present value technique, it is not always necessary to take into account distributions of all possible cash flows using complex models and techniques. Rather, it might be possible to develop a limited number of discrete scenarios and probabilities that capture the array of possible cash flows. For example, an entity might use realised cash flows for some relevant past period, adjusted for changes in circumstances occurring subsequently (eg changes in external factors, including economic or market conditions, industry trends and competition as well as changes in internal factors affecting the entity more specifically), taking into account the assumptions of market participants. |
B29 | In theory, the present value (ie the fair value) of the asset’s cash flows is the same whether determined using Method 1 or Method 2, as follows:
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B30 | When using an expected present value technique to measure fair value, either Method 1 or Method 2 could be used. The selection of Method 1 or Method 2 will depend on facts and circumstances specific to the asset or liability being measured, the extent to which sufficient data are available and the judgements applied. |
B31 | When using a present value technique to measure the fair value of a liability that is not held by another party as an asset (eg a decommissioning liability [Refer:Illustrative Examples, example 11]), an entity shall, among other things, estimate the future cash outflows that market participants [Refer:paragraphs 22 and 23] would expect to incur in fulfilling the obligation. Those future cash outflows shall include market participants’ expectations [Refer:paragraph 89] about the costs of fulfilling the obligation and the compensation that a market participant would require for taking on the obligation. Such compensation includes the return that a market participant would require for the following:
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B32 | For example, a non‑financial liability does not contain a contractual rate of return and there is no observable market yield for that liability. In some cases the components of the return that market participants would require will be indistinguishable from one another (eg when using the price a third party contractor would charge on a fixed fee basis). In other cases an entity needs to estimate those components separately (eg when using the price a third party contractor would charge on a cost plus basis because the contractor in that case would not bear the risk of future changes in costs). |
B33 | An entity can include a risk premium in the fair value measurement of a liability or an entity’s own equity instrument that is not held by another party as an asset in one of the following ways: [Refer:Basis for Conclusions paragraph BC91]
An entity shall ensure that it does not double‑count or omit adjustments for risk. For example, if the estimated cash flows are increased to take into account the compensation for assuming the risk associated with the obligation, the discount rate should not be adjusted to reflect that risk. [Refer:paragraph B14] |
B34 | Examples of markets in which inputs might be observable for some assets and liabilities (eg financial instruments) include the following: [Refer:paragraph 68]
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B35 | Examples of Level 2 inputs for particular assets and liabilities include the following:
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B36 | Examples of Level 3 inputs for particular assets and liabilities include the following:
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B37 | The fair value of an asset or a liability might be affected when there has been a significant decrease in the volume or level of activity for that asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities). [Refer:Illustrative Examples, example 14] To determine whether, on the basis of the evidence available, there has been a significant decrease in the volume or level of activity for the asset or liability, an entity shall evaluate the significance and relevance of factors such as the following:
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B38 | If an entity concludes that there has been a significant decrease in the volume or level of activity for the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities), further analysis of the transactions or quoted prices is needed. A decrease in the volume or level of activity on its own may not indicate that a transaction price or quoted price does not represent fair value or that a transaction in that market is not orderly. However, if an entity determines that a transaction or quoted price does not represent fair value (eg there may be transactions that are not orderly), an adjustment to the transactions or quoted prices will be necessary if the entity uses those prices as a basis for measuring fair value and that adjustment may be significant to the fair value measurement in its entirety. [Refer:paragraphs 72, 73 and 75] Adjustments also may be necessary in other circumstances (eg when a price for a similar asset requires significant adjustment to make it comparable to the asset being measured [Refer:paragraph 83(b)] or when the price is stale [Refer:paragraph 83(c)]). |
B39 | This IFRS does not prescribe a methodology for making significant adjustments to transactions or quoted prices. See paragraphs 61–66 and B5–B11 for a discussion of the use of valuation techniques when measuring fair value. Regardless of the valuation technique used, an entity shall include appropriate risk adjustments, [Refer:paragraphs 64, 88, B15, B16 and Basis for Conclusions paragraphs BC143–BC146, BC149 and BC150] including a risk premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in the cash flows of an asset or a liability (see paragraph B17). Otherwise, the measurement does not faithfully represent fair value. In some cases determining the appropriate risk adjustment might be difficult. [Refer:Basis for Conclusions paragraph BC150] However, the degree of difficulty alone is not a sufficient basis on which to exclude a risk adjustment. The risk adjustment shall be reflective of an orderly transaction between market participants at the measurement date under current market conditions. [Refer:Basis for Conclusions paragraphs BC143–BC146] |
B40 | If there has been a significant decrease in the volume or level of activity for the asset or liability, a change in valuation technique [Refer:paragraph 65] or the use of multiple valuation techniques may be appropriate (eg the use of a market approach and a present value technique). When weighting indications of fair value resulting from the use of multiple valuation techniques, an entity shall consider the reasonableness of the range of fair value measurements. The objective is to determine the point within the range that is most representative of fair value under current market conditions. A wide range of fair value measurements may be an indication that further analysis is needed. [Refer:Basis for Conclusions paragraphs BC147 and BC148] |
B41 | Even when there has been a significant decrease in the volume or level of activity for the asset or liability, the objective of a fair value measurement remains the same [Refer:paragraph 2]. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (ie not a forced liquidation or distress sale) between market participants at the measurement date under current market conditions. |
B42 | Estimating the price at which market participants would be willing to enter into a transaction at the measurement date under current market conditions if there has been a significant decrease in the volume or level of activity for the asset or liability depends on the facts and circumstances at the measurement date and requires judgement. An entity’s intention to hold the asset or to settle or otherwise fulfil the liability is not relevant when measuring fair value because fair value is a market‑based measurement, not an entity‑specific measurement. [Refer:paragraph 3] |
B43 | The determination of whether a transaction is orderly [Refer:paragraph 15] (or is not orderly) is more difficult if there has been a significant decrease in the volume or level of activity for the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities). [Refer:paragraph B37] In such circumstances it is not appropriate to conclude that all transactions in that market are not orderly (ie forced liquidations or distress sales). [Refer:Basis for Conclusions paragraph BC181] Circumstances that may indicate that a transaction is not orderly include the following:
An entity shall evaluate the circumstances to determine whether, on the weight of the evidence available, the transaction is orderly. |
B44 | An entity shall consider all the following when measuring fair value or estimating market risk premiums: [Refer:paragraphs B15 and B16]
An entity need not undertake exhaustive efforts to determine whether a transaction is orderly, but it shall not ignore information that is reasonably available. When an entity is a party to a transaction, it is presumed to have sufficient information to conclude whether the transaction is orderly. |
B45 | This IFRS does not preclude the use of quoted prices provided by third parties, such as pricing services or brokers, [Refer:paragraph B34(c)] if an entity has determined that the quoted prices provided by those parties are developed in accordance with this IFRS. |
B46 | If there has been a significant decrease in the volume or level of activity for the asset or liability, [Refer:paragraph B37] an entity shall evaluate whether the quoted prices provided by third parties are developed using current information that reflects orderly transactions or a valuation technique that reflects market participant assumptions (including assumptions about risk [Refer:paragraphs 88, B15 and B16]). In weighting a quoted price as an input to a fair value measurement, an entity places less weight [Refer:paragraph 63] (when compared with other indications of fair value that reflect the results of transactions) on quotes that do not reflect the result of transactions. |
B47 | Furthermore, the nature of a quote (eg whether the quote is an indicative price or a binding offer) shall be taken into account when weighting the available evidence, with more weight given to quotes provided by third parties that represent binding offers. |
This appendix is an integral part of the IFRS and has the same authority as the other parts of the IFRS.
C1 | An entity shall apply this IFRS for annual periods beginning on or after 1 January 2013. Earlier application is permitted. If an entity applies this IFRS for an earlier period, it shall disclose that fact. [Refer:Basis for Conclusions paragraphs BC227 and BC228] |
C2 | This IFRS shall be applied prospectively as of the beginning of the annual period in which it is initially applied. [Refer:Basis for Conclusions paragraph BC229] |
C3 | The disclosure requirements of this IFRS need not be applied in comparative information provided for periods before initial application of this IFRS. [Refer:Basis for Conclusions paragraph BC230] |
C4 | Annual Improvements Cycle 2011–2013 issued in December 2013 amended paragraph 52. An entity shall apply that amendment for annual periods beginning on or after 1 July 2014. An entity shall apply that amendment prospectively from the beginning of the annual period in which IFRS 13 was initially applied. [Refer:Basis for Conclusions paragraph BC230A] Earlier application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact. |
C5 | IFRS 9, as issued in July 2014, amended paragraph 52. An entity shall apply that amendment when it applies IFRS 9. |
C6 | IFRS 16 Leases, issued in January 2016, amended paragraph 6. An entity shall apply that amendment when it applies IFRS 16. |
This appendix sets out amendments to other IFRSs that are a consequence of the Board issuing IFRS 13. An entity shall apply the amendments for annual periods beginning on or after 1 January 2013. If an entity applies IFRS 13 for an earlier period, it shall apply the amendments for that earlier period. Amended paragraphs are shown with new text underlined and deleted text struck through.
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The amendments contained in this appendix when this IFRS was issued in 2011 have been incorporated into the relevant IFRSs published in this volume.
International Financial Reporting Standard 13 Fair Value Measurement was approved for issue by the fifteen members of the International Accounting Standards Board.
| Sir David Tweedie | Chairman |
| Stephen Cooper | |
| Philippe Danjou | |
| Jan Engström | |
| Patrick Finnegan | |
| Amaro Luiz de Oliveira Gomes | |
| Prabhakar Kalavacherla | |
| Elke König | |
| Patricia McConnell | |
| Warren J McGregor | |
| Paul Pacter | |
| Darrel Scott | |
| John T Smith | |
| Tatsumi Yamada | |
| Wei-Guo Zhang |
| 1 | In this IFRS monetary amounts are denominated in ‘currency units (CU)’. (back) |