IFRS 13 defines fair value as "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" (IFRS 13.9). This is an exit price concept — it reflects the perspective of market participants, not the entity itself, and assumes the asset or liability is exchanged in the principal market (or most advantageous market in the absence of a principal market) (IFRS 13.16–17).

---

Key Conceptual Building Blocks

• Orderly transaction: The transaction is assumed to occur under normal market conditions, not a forced liquidation or distressed sale (IFRS 13.15).
• Market participants: Hypothetical buyers and sellers who are independent, knowledgeable, able, and willing to transact (IFRS 13.23).
• Principal market: The market with the greatest volume and level of activity for the asset or liability; if none exists, the most advantageous market is used (IFRS 13.17–18).
• Highest and best use: For non-financial assets, fair value considers the use that would maximise value from a market participant's perspective, even if the entity intends a different use (IFRS 13.27–29).

---

The Fair Value Hierarchy

IFRS 13 establishes a three-level hierarchy to prioritise inputs used in valuation techniques (IFRS 13.72):

• Level 1: Quoted prices in active markets for identical assets or liabilities — the most reliable evidence of fair value (IFRS 13.76).
• Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets, interest rates, yield curves, or implied volatilities (IFRS 13.81).
• Level 3: Unobservable inputs based on the entity's own assumptions about what market participants would use, supported by the best available information (IFRS 13.86).

Entities must maximise the use of observable inputs and minimise unobservable inputs (IFRS 13.67).

---

Valuation Techniques

IFRS 13 permits three broadly accepted valuation approaches (IFRS 13.62):

• Market approach: Uses prices and other relevant information from market transactions involving identical or comparable assets/liabilities.
• Income approach: Converts future cash flows or income and expenses to a single discounted present value (e.g., DCF models, option pricing models).
• Cost approach: Reflects the amount required to replace the service capacity of an asset (current replacement cost).

The chosen technique must be applied consistently, though a change is permitted if it results in a more representative fair value (IFRS 13.65).

---

Liabilities and Own Credit Risk

When measuring the fair value of a liability, IFRS 13 assumes the liability is transferred to a market participant and remains outstanding — it is not settled or extinguished (IFRS 13.34). Importantly, non-performance risk, including the entity's own credit risk, must be reflected in the fair value of a liability (IFRS 13.42).

---

Disclosure Requirements

Entities must disclose the valuation techniques and inputs used, the fair value hierarchy level, and for Level 3 measurements, a reconciliation of opening and closing balances along with sensitivity analysis (IFRS 13.91–99).