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 an exit price — always measured from the perspective of market participants, not the reporting entity's intentions.

IFRS 13.9 — Fair value definition

Fair value assumes an orderly transaction (not forced or distressed) in the principal market for the asset or liability, or in the most advantageous market if no principal market exists (IFRS 13.16–17). The measurement reflects assumptions that market participants would use in pricing the asset, including risk assumptions. The entity's own intention to hold or use the asset is irrelevant — what matters is how an independent market participant would price it at the measurement date.

IFRS 13.72 — Valuation hierarchy (Levels 1–3)

IFRS 13 establishes a three-level hierarchy based on the observability of inputs:

• Level 1: Quoted prices in active markets for identical assets or liabilities (e.g., listed equity shares, exchange-traded derivatives). Highest priority — no adjustment permitted.
• Level 2: Observable inputs other than Level 1 quoted prices (e.g., interest rate curves, credit spreads, prices for similar assets, comparable transaction prices). Adjustments for differences between the comparable and measured item are permitted.
• Level 3: Unobservable inputs developed using the entity's own assumptions (e.g., internal DCF projections, management estimates). Entities must maximise observable inputs and minimise reliance on Level 3.

When multiple levels are used in a single measurement, the classification follows the lowest-level input that is significant to the entire measurement.

IFRS 13.61 — Valuation techniques

Entities must use valuation techniques appropriate to the circumstances and for which sufficient data is available (IFRS 13.61). Three approaches are permitted:

• Market approach: Uses prices and information from market transactions involving identical or comparable assets or liabilities
• Cost approach: Reflects the current replacement cost of the service capacity of the asset
• Income approach: Converts future amounts (cash flows, income) to a single current discounted amount

Multiple techniques may be used. If they yield materially different results, the entity evaluates the reasons and selects the value most representative of fair value given the facts and circumstances.

IFRS 13.48–49 — Credit risk adjustments

Non-performance risk must be reflected in the fair value of a liability (IFRS 13.42). This includes the entity's own credit risk: a liability's fair value increases when the entity's creditworthiness deteriorates, because a market participant assuming that obligation would demand compensation for higher default probability. For financial assets, a credit valuation adjustment (CVA) for counterparty credit risk must be incorporated (IFRS 13.48). These adjustments apply equally to derivatives, debt instruments and financial guarantees.

IFRS 13.91–93 — Disclosures

Entities must disclose the hierarchy level for each class of asset or liability measured at fair value. For Level 3 measurements, IFRS 13.93 requires:

• Reconciliation from opening to closing balance (transfers into/out of Level 3, gains/losses in P&L and OCI, purchases, disposals, settlements)
• Description of valuation processes and roles
• Quantitative information about significant unobservable inputs
• Sensitivity analysis showing how fair value would change if key unobservable inputs were altered to reasonably possible alternatives

IFRS 13 Fair Value Measurement — Practical Example

A bank holds a portfolio of corporate bonds at 31 December 20X3:

• Actively traded bonds with quoted exchange prices: €9,850,000 — Level 1
• Bonds valued using comparable yields and credit spreads: €1,200,000 — Level 2
• Private placement bonds valued via DCF with management-estimated 3.5% credit spread: €950,000 — Level 3

Total fair value: €12,000,000. If carrying amount was €11,800,000, the entity records:

Notes disclose €9.85m at Level 1, €1.2m at Level 2, €0.95m at Level 3, plus Level 3 reconciliation and sensitivity (±50bp on credit spread → ±€28,000 change in fair value).

IFRS 13 Fair Value Measurement — Common Pitfalls

• Confusing entry price with exit price: Practitioners anchor fair value to acquisition cost rather than what a market participant would pay today. IFRS 13.15 is explicit — exit price applies even for long-held or strategic assets.

• Inadequate Level 3 disclosures: Many entities provide insufficient reconciliation of Level 3 movements and omit quantified sensitivity ranges. IFRS 13.93–95 requires comprehensive movement tables and sensitivity analysis — auditors routinely flag missing ranges of unobservable inputs.

• Ignoring own credit risk on liabilities: Entities measure debt at par or fail to adjust for own creditworthiness changes. IFRS 13.49 requires that a decline in the entity's credit quality increases the fair value of the liability — counterintuitive but mandatory.

IFRS 13 Fair Value Measurement — Key Paragraphs

• IFRS 13.9 — definition of fair value (exit price)
• IFRS 13.16–17 — principal and most advantageous market
• IFRS 13.42–49 — non-performance and credit risk adjustments
• IFRS 13.61–63 — valuation techniques
• IFRS 13.72–90 — valuation hierarchy (Levels 1, 2, 3)
• IFRS 13.91–95 — disclosure requirements and Level 3 reconciliation