ifrs 13: fair value measurement

OVERVIEW


The objective of the IFRS 13 is to define the fair value set out a framework for the measurement of the fair value and specify the accounting disclosures about the fair value measurement.


Fair value is the price that is received by an entity to sell an asset under the normal market conditions while it is the amount to pay to satisfy the obligations of an entity at a given date. This means that the fair value is the exit price from the perspective of an entity that holds an asset or has the liability.

Key Takeaway Points


=> Objective of the IFRS 13 is to define the fair value set out a framework for the measurement of the fair value and specify the accounting disclosures about the fair value measurement.


=> IFRS 13 states that entities shall use the appropriate valuation techniques to value the assets and liabilities. These valuation techniques are as under:


Market approach

Cost approach

Income approach

 

=> IFRS  13 also categorizes the fair value hierarchy which categorizes the three-level of inputs to measure the fair value. These three levels are given as follows:


Level 1

Level 2

Level 3

 

=> IFRS 13 gives the highest preference to the level 1 inputs and gives less preference to the level 3 inputs. Therefore, it suggests entities use level 1 input in measuring the fair value of the assets and liabilities.


MEASUREMENT OF THE FAIR VALUE


IFRS 13 states that entities shall use the appropriate valuation techniques to value the assets and liabilities. These valuation techniques are as under:


Market approach


Under this approach, the prices are generated using the market transactions of identical or comparable assets. For example, the shares prices listed on the stock exchange.


Cost approach


Under this approach, the transactions are valued at the current replacement cost.


Income approach


Under this approach, the future amounts (cash flows)  are converted into the single current discounted amount e.g at present value.


IFRS  13 also categorizes the fair value hierarchy which categorizes the three-level of inputs to measure the fair value. These three levels are given as follows:


Level 1

Under this level, the quoted prices in the active markets for the assets and liabilities are used.


Level 2

At this level, the inputs are observable for the assets and liabilities either in a direct way or indirect way. An example of level 2 inputs are the interest rates.


Level 3

At this level, the inputs are unobservable inputs for the assets and liabilities. The example of level 3 inputs is the information that is available about the assumptions that the market participants would make when calculating the prices of the assets and liabilities.


IFRS 13 gives the highest preference to the level 1 inputs and gives less preference to the level 3 inputs. Therefore, it suggests entities use level 1 input in measuring the fair value of the assets and liabilities.


DISCLOSURES


Entities are required to disclose the following information at a minimum to assess:


=> The measurement techniques are used in the determination of the fair value of the assets and liabilities disclose the input level that is used in the measurement of the fair value.

=> The fair value measurement by using the level 3 inputs and the effects of the usage of the level 3 inputs on the entity’s profit or loss and other comprehensive income.