Reporting the financial performance of a range of entities (C5)-IFRS 13

IFRS 13-Fair Value Measurement

1. Definition and Scope
   IFRS 13 defines fair value as the price at which a market participant can sell an asset or transfer a liability in an orderly transaction at the measurement date (exit price).
   Example: The price a piece of machinery sells for in an active secondary market must be the price buyers would pay in that market.

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2. Scope Exclusions
   The standard does not apply to certain transactions like share-based payments (IFRS 2), leases (IFRS 16), or net realizable value in IAS 2.
   Example: The net realizable value of inventory is calculated per IAS 2 and not IFRS 13.

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3. Principle of Orderly Transactions
   Fair value assumes transactions are orderly, not forced or distressed.
   Example: A company liquidating assets in a fire sale cannot use these prices as fair value.

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4. Unit of Account
   The unit of account (e.g., single asset, group of assets) is determined by the relevant IFRS standard. Entity-specific characteristics are not included in fair value measurement.
   Example: A block discount applied when selling a large shareholding does not affect the share price used for fair value.

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5. Market Focus
   Fair value is measured in the principal market or, if unavailable, the most advantageous market.
   Example: A commodity sold on two exchanges would use the exchange offering the highest net proceeds after transport costs.

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6. Valuation Approaches
   IFRS 13 permits three valuation techniques:
   • Market Approach: Uses observable prices in active markets.
   • Income Approach: Based on future cash flows or earnings.
   • Cost Approach: Reflects the cost of replacing the asset.
     Example: A listed stock is valued using the market approach (Level 1 inputs), while a privately-held company might use the income approach (Level 3 inputs).

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7. Fair Value Hierarchy
   Inputs are categorized into three levels:
   • Level 1: Unadjusted quoted prices in active markets (e.g., stock prices).
   • Level 2: Observable inputs other than quoted prices (e.g., interest rates).
   • Level 3: Unobservable inputs (e.g., internal forecasts).
     Example: A corporate bond might use Level 2 inputs like credit spreads, while a start-up valuation might rely on Level 3 inputs like projected cash flows.

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8. Highest and Best Use for Non-Financial Assets
   Fair value is considered the highest and best use of non-financial assets.
   Example: A parking lot plot may be more valuable if redeveloped as a commercial building.

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9. Liabilities and Equity Measurement
   For liabilities and equity, fair value assumes transfer to a market participant. Non-performance risk, such as the entity’s own credit risk, is considered.
   Example: The fair value of a decommissioning liability includes adjustments for credit risk and contractor profit margins.

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10. Enhanced Disclosures
    Entities must disclose:

• The hierarchy level of measurements.
• Transfers between levels.
• Methods, inputs, and changes in valuation techniques.
• Reconciliations for Level 3 inputs.
  Example: A company discloses its use of Level 3 inputs for valuing a private equity investment and explains the assumptions behind the valuation.

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These points provide a concise yet comprehensive understanding of IFRS 13's key aspects.

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