How is fair value defined and measured under IFRS 13?

Core rule Fair value under IFRS 13 is 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). It is always an exit price from the perspective of the entity holding the asset or owing the liability. How it works - Definition and scope — Fair value applies to a wide range of assets and liabilities across IFRS standards (investment property under IAS 40, financial instruments under IFRS 9, business combinations under IFRS 3, and impairment testing under IAS 36). IFRS 13.1 clarifies that the definition is uniform across all these applications. The measurement assumes an orderly transaction, not a forced or distressed sale, and reflects the assumptions that market participants would use. - The valuation hierarchy — IFRS 13.72 establishes a three-level hierarchy prioritizing observable market data. Level 1 uses quoted prices in active markets for identical assets or liabilities (e.g., listed equity securities). Level 2 relies on observable inputs other than quoted prices (e.g., interest rate curves, credit spreads, comparable transaction prices). Level 3 uses unobservable inputs when market data is unavailable (e.g., management estimates, internal cash flow projections). Entities must maximize use of observable inputs and minimize reliance on Level 3. - Measurement approach — IFRS 13.61 permits three valuation te

How does IFRS 13 fair value measurement differ from IAS 36 value-in-use, and when do both apply to the same asset?

chniques: market approach (comparable asset prices), cost approach (replacement cost), and income approach (present value of future cash flows). For many financial assets and liabilities, the income approach (discounted cash flow) predominates, while physical assets often employ the cost approach. The entity must select the technique(s) most appropriate to the asset or liability and the available data. Multiple techniques may be reconciled if they yield significantly different results. - Non-performance risk and credit adjustments — IFRS 13.49 requires entities to account for the entity's own credit risk when measuring the fair value of a liability. For financial liabilities, this adjustment reflects the counterparty's view of the entity's default probability. Similarly, IFRS 13.48 mandates that when measuring asset fair values, counterparty credit risk must be reflected (a credit valuation adjustment or CVA). This principle applies equally to derivatives and debt securities. - Presentation and disclosure — IFRS 13.91 requires disclosure of the fair value hierarchy classification (Level 1, 2, or 3) for each class of asset or liability. For Level 3 measurements, IFRS 13.93 mandates reconciliation from opening to closing balances, showing transfers, gains/losses, and sensitivity analyses to key unobservable inputs. These disclosures provide users with transparency on measurement uncertainty. - Exit price principle — IFRS 13

What are the practical steps to determine if a market is 'active' under IFRS 13.2, and how does this affect Level 1 vs Level 2 classification?

.15 clarifies that fair value is always an exit price, even for assets the entity intends to hold indefinitely. This differs from some previous guidance and reinforces that historical cost or in-use value concepts do not override the exit price principle for fair value measurements. Practical example A bank holds a portfolio of available-for-sale corporate bonds with a nominal value of €10,000,000. At the measurement date (31 December 20X3), the entity obtains the following valuation inputs: - Quoted market price in an active bond exchange: €9,850,000 (this is a Level 1 input). - For a subset of bonds not actively traded, comparable bond yields and credit spreads suggest a fair value of €1,200,000 (Level 2). - A private placement tranche lacks observable market data; the entity uses a discounted cash flow model with 3.5% credit spread above risk-free rate, yielding €950,000 (Level 3). Total fair value of the portfolio: €12,000,000 (€9,850,000 + €1,200,000 + €950,000). If the carrying amount at 31 December 20X3 was €11,800,000 (measured at amortized cost for held-to-maturity bonds reclassified to available-for-sale), the entity records: | Account | Dr (€) | Cr (€) | |---|---|---| | Investment in Debt Securities (AFS) | 200,000 | | | Fair Value Gain – OCI | | 200,000 | The entity then discloses in the notes that €9.85m is Level 1, €1.2m is Level 2, and €0.95m is Level 3, along with reconciliation of Level 3 movements and se

How should an entity model credit valuation adjustment (CVA) for a derivative liability when counterparty credit spreads are not directly observable?

nsitivity analysis showing how fair value would change if credit spreads moved ±50 basis points. Common pitfalls - Confusing entry price with exit price — Practitioners often inadvertently anchor fair value to what the entity paid (entry price) rather than what it would receive (exit price). IFRS 13.15 is explicit: the exit price principle applies even for long-held assets. This leads to overstating fair value of distressed or impaired assets. - Underweighting Level 3 sensitivity disclosures — Many entities provide inadequate reconciliation of Level 3 movements and fail to quantify the range of unobservable inputs used. Auditors flag this as a deficiency, as users cannot assess the reliability of valuations. IFRS 13.93–95 requires comprehensive tables and range sensitivity. - Ignoring credit risk adjustments on liabilities — Entities often measure fair value of debt liabilities at par or without adjusting for own credit risk improvement. IFRS 13.49 requires that a decline in the entity's creditworthiness increases the fair value of the liability (counterintuitive but correct). Failing to apply this violates IFRS 13. Key paragraphs to know - IFRS 13.9 — Definition of fair value - IFRS 13.15 — Exit price principle - IFRS 13.48–49 — Credit risk adjustments - IFRS 13.61–63 — Valuation techniques - IFRS 13.72–90 — Valuation hierarchy (Levels 1, 2, 3) - IFRS 13.91–95 — Fair value hierarchy disclosures and Level 3 reconciliation

IFRS 13 Fair Value Measurement — Level 1 2 3

IFRS 13 Fair Value Measurement — Core Rule

Fair value under IFRS 13 is 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). It is always an exit price from the perspective of the entity holding the asset or owing the liability.

How IFRS 13 Fair Value Measurement Works

Definition and scope — Fair value applies to a wide range of assets and liabilities across IFRS standards (investment property under IAS 40, financial instruments under IFRS 9, business combinations under IFRS 3, and impairment testing under IAS 36). IFRS 13.1 clarifies that the definition is uniform across all these applications. The measurement assumes an orderly transaction, not a forced or distressed sale, and reflects the assumptions that market participants would use.

The valuation hierarchy — IFRS 13.72 establishes a three-level hierarchy prioritizing observable market data. Level 1 uses quoted prices in active markets for identical assets or liabilities (e.g., listed equity securities). Level 2 relies on observable inputs other than quoted prices (e.g., interest rate curves, credit spreads, comparable transaction prices). Level 3 uses unobservable inputs when market data is unavailable (e.g., management estimates, internal cash flow projections). Entities must maximize use of observable inputs and minimize reliance on Level 3.