Fair Value Measurements - Ifrs 13

Fair Value Measurement
IFRS 13
Presented
By
A M Adetuyi, MBA, FCA
November, 2014
FAIR VALUE MEASUREMENTS – IFRS 13
Assets and liabilities are important elements of financial statements and must be fairly and reliably measured in order not to give a false and misleading
financial statements of a reporting entity.
IFRS 13 is issued to give guidance on the correct definition of fair value, how it should be measure and what information to be disclosed about fair value
measurements.
Definition of fair value
Fair value is the price that would be received to sell an asset or pair to transfer a liability in an orderly transaction between market participants at the measurement date.
Measurement of fair value

Measurement of fair value involves how best to determine the price of assets and liabilities to be exchanged between market participants in an orderly transaction at the measurement date and under current market
conditions.
Fair value is market-based measurement and not on entity-specific measurement. As a result, it is measured using the assumptions that market participants would use when pricing assets and liabilities under the
prevailing market conditions, taking into account the characteristics of the assets and liabilities.
Some of these assumptions include:
That the transaction would take place in the principal market for the
assets and liabilities.
That in the absence of a principal market, in the most advantageous

market.
The principal market is the market with the great volume and level of
activity for the assets or liabilities while the most advantageous market is
the market that maximizes the amount that would be received to sell the
asset or minimizes the amount that would be paid to transfer the
liabilities, after taking into account both transaction and transportation
cost.
In most cases, the principal market and the most advantageous market
will be the same.
Level 3 inputs – These are unobservable
inputs obtained from the entity’s own
data after taking into account all
information about market participant
assumptions that are reasonably
available.
It should be noted that the fair value of an assets or liability in the principal market is the quoted market price
after adjusting for transportation costs but before adjusting for transaction costs as such costs are not a feature
or part of the asset or liability. The two costs would be only be adjusted under the most advantageous market.
Measurement techniques or approaches
There are three approaches that may be used is establishing the fair value of an asset or a liability depending
on the nature of the asset or liability and the sufficiency of information available. These techniques are:
Market approach: This approach uses the prices and other
information obtained from the market in respect of similar or
comparable assets or liabilities.
Income approach: This approach determines fair value by

converting the future or expected cash flows or asset or a
liability into a single current amount. It is also called the
discounted or present value method.
Cost approach: This approach determines fair value by

estimation the current amount that would be needed to
replace the service capacity of an asset. It is also called the
current replacement cost method.
In line with IFRS 13 whichever of the above techniques adopted by an entity is immaterial. What is more important
is that entities should adopt the approach that maximizes observable inputs and minimizes unobservable inputs.
In view of maximizing observable inputs and minimizing unobservable inputs, IFRS 13 categorizes date inputs into
three (3) levels, depending on their reliability and observability. These levels are:
Level 1 inputs – These are quoted prices for identical assets or liabilities in an
active market to which an entity can access at the measurement date before
adjusting for transport costs. They are highly observable and reliable and are
mainly used to value equity shares.
Level 2 inputs – These are inputs other than quoted prices that are observable either directly or indirectly.
Examples of level 2 inputs include:
Quoted prices of other similar assets in an active market
Quoted prices of other similar assets in a non-active market
Interest rates observable at individuals

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Fair Value Measurement

A M Adetuyi, MBA, FCA

Measurement of fair value

That in the absence of a principal market, in the most advantageous

Income approach: This approach determines fair value by

Cost approach: This approach determines fair value by

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