IFRS 13 : Fair Value Part 1 Flashcards
(162 cards)
1
Q
INTRODUCTION AND BACKGROUND
A
INTRODUCTION AND BACKGROUND
2
Q
The framework of IFRS 13 is based on a number of key concepts including unit of account, exit price, valuation premise, highest and best use, principal market, market participant assumptions and the fair value hierarchy. The requirements incorporate financial theory and valuation techniques, but are solely focused on how these concepts are to be applied when determining fair value for financial reporting purposes.
A
IFRS 13 does not address the issue of what to measure at fair value or when to measure fair value. The IASB separately considers these issues on a project-by-project basis. Other IFRSs determine which items must be measured at fair value and when. IFRS 13
addresses how to measure fair value.
3
Q
The definition of fair value in IFRS 13 is based on an exit price notion, which incorporates the following key concepts:
• Fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price.
A
• The exit price for an asset or liability is conceptually different from its transaction price (an entry price). While exit and entry price may be identical in many
situations, the transaction price is not presumed to represent the fair value of an asset or liability on its initial recognition.
4
Q
• Fair value is an exit price in the principal market, i.e. the market with the highest volume and level of activity. In the absence of a principal market, it is assumed that the transaction to sell the asset or transfer the liability would occur in the most
advantageous market. This is the market that would maximise the amount that would be received to sell an asset or minimise the amount that would be paid to
transfer a liability, taking into account transport and transaction costs. In either case, the entity must have access to the market on the measurement date.
A
While transaction costs are considered in determining the most advantageous market, they do not form part of a fair value measurement (i.e. they are not added
to or deducted from the price used to measure fair value). However, an exit price would be adjusted for transportation costs if location is a characteristic of the asset or liability being measured.
5
Q
• Fair value is a market-based measurement, not an entity-specific measurement. When determining fair value, management uses the assumptions that
market participants would use when pricing the
asset or liability.
A
However, an entity need not identify specific market participants.
6
Q
These key concepts and the following aspects of the guidance in IFRS 13 require particular focus when applying the standard.
• If another standard provides a fair value measurement exemption that applies when fair value cannot be measured reliably, an entity may need to consider the measurement framework in IFRS 13 in order to determine whether fair value can be
reliably measured
A
• If there is a principal market for the asset or liability, a fair value measurement represents the price in that market at the measurement date (regardless of
whether that price is directly observable or estimated using another valuation technique), even if the price in a different market is potentially more advantageous
7
Q
• Fair value measurements should take into consideration the characteristics of the asset or liability being measured, but not characteristics of the transaction to sell the asset or transfer a liability. Transportation costs, for example, must be deducted
from the price used to measure fair value when location is a characteristic of the item being measured at fair value (see THE ASSET OR LIABILITY and THE PRICE below).
A
This principle also clarifies when a restriction on the sale or use of an asset or transfer of a liability affects the measurement of fair value (see THE ASSET OR LIABILITY below) and when premiums and discounts can be included. In particular, an entity is prohibited from making adjustments for the size of an entity’s holding in comparison to current trading volumes (i.e. blockage factors, see INPUTS TO VALUATION TECHNIQUES below).
8
Q
• The fair value measurement of non-financial assets must reflect the highest and best use of the asset from a market participant’s perspective, which might be its
current use or some alternative use. This establishes whether to assume a market participant would derive value from using the non-financial asset on its own or in combination with other assets or with other assets and liabilities (see APPLICATION TO NON-FINANCIAL ASSETS below);
A
• The standard clarifies that a fair value measurement of a liability must consider non-performance risk (which includes, but is not limited to, an entity’s own credit
risk, see APPLICATION TO LIABILITIES AND AN ENTITY’S OWN EQUITY below).
9
Q
• IFRS 13 provides guidance on how to measure the fair value of an entity’s own equity instruments (see APPLICATION TO LIABILITIES AND AN ENTITY’S OWN EQUITY below) and aligns it with the fair value measurement of liabilities.
A
If there are no quoted prices available for the transfer of an identical or a similar liability or entity’s own equity instrument, but the identical item is held by another party as an asset, an entity uses the fair value of the corresponding asset (from the perspective of the market participant that holds that asset) to measure
the fair value of the liability or equity instrument. When no corresponding asset exists, the fair value of the liability is measured from the perspective of a market
participant that owes the liability
(see APPLICATION TO LIABILITIES AND AN ENTITY’S OWN EQUITY below).
10
Q
• A measurement exception in IFRS 13 allows entities to measure financial instruments with offsetting risks on a portfolio basis, provided certain criteria are met both initially and on an ongoing basis (see FINANCIAL ASSETS AND LIABILITIES WITH OFFSETTING POSITIONS below).
A
• The requirements of IFRS 13 in relation to valuation techniques apply to all methods of measuring fair value. Traditionally, references to valuation
techniques in IFRS have indicated a lack of market-based information with which to value an asset or liability. Valuation techniques as discussed in IFRS 13
are broader and, importantly, include market-based approaches (see VALUATION TECHNIQUES below). When selecting inputs to use, an entity must prioritise observable inputs over unobservable inputs (see THE FAIR VALUE HIERARCHY below).
11
Q
• IFRS 13 provides application guidance to assist entities measuring fair value in situations where there has been a decrease in the volume or level of activity
(see THE TRANSACTION below).
A
• Categorisation within the fair value hierarchy is required for all fair value measurements. Disclosures required by IFRS 13 are substantially greater for those
fair value measurements that are categorised within Level 3 (see THE FAIR VALUE HIERARCHY and DISCLOSURES below).
12
Q
Objective of IFRS 13 .1
A primary goal of IFRS 13 is to increase the consistency and comparability of fair value measurements used in financial reporting under IFRS. It provides a common objective whenever IFRS permits or requires a fair value measurement, irrespective of the type of asset or liability being measured or the entity that holds it.
A
The objective of a fair value measurement is to estimate the price at which an orderly transaction would take place between market participants under the market conditions that exist at the measurement date.
[IFRS 13.2].
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Objective of IFRS 13 .2
By highlighting that fair value considers market conditions that exist at the measurement date, the IASB is emphasising that the intent of the measurement is to carry the current value of the asset or liability at the measurement date and not its potential value at some future date.
A
In addition, a fair value measurement does not consider management’s intent to sell the asset or transfer the liability at the measurement date.
Instead, it represents a market-based measurement that view a hypothetical transaction between market participants at the measurement date (these concepts are discussed further at THE PRINCIPAL (OR MOST ADVANTAGEOUS) MARKET, MARKET PARTICIPANTS, THE TRANSACTION, THE PRICE below). [IFRS 13.3].
14
Q
Objective of IFRS 13 .3
IFRS 13 makes it clear that the objective of a fair value measurement remains the same, regardless of the reason for the fair value measurement (e.g. impairment
testing or a recurring measurement) or the extent of observable information available to support the measurement. While the standard requires that the inputs used to measure fair value be prioritised based on their relative observability (see THE FAIR VALUE HIERARCHY below), the nature of the inputs does not affect the objective of the measurement.
A
That is, the requirement to determine an exit price under current market conditions is not relaxed because the reporting entity cannot observe similar assets or liabilities being transacted at the measurement date. [IFRS 13.2].
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Objective of IFRS 13 .4
Even when fair value is estimated using significant unobservable inputs (because observable inputs do not exist), the goal is to determine an exit price based on the assumptions that market participants would consider when transacting for the asset or liability on the measurement date, including assumptions about risk. This might require the inclusion of a risk premium in the measurement to compensate(repay) market participants for the uncertainty inherent in the expected cash flows of the asset or liability being
measured. [IFRS 13.3].
A
IFRS 13 generally does not provide specific rules or detailed ‘how-to’ guidance. Given the broad use of fair value measurements in accounting for various kinds of assets and liabilities (both financial and non-financial), providing detailed valuation guidance was not deemed practical. As such, the application of IFRS 13 requires significant judgement; but this judgement is applied using the core concepts of the standard’s principles-based framework for fair value measurements.
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SCOPE
A
SCOPE
17
Q
IFRS 13 applies whenever another IFRS requires or permits the measurement or disclosure of fair value, or a measure that is based on fair value (such as fair value less costs to sell), [IFRS 13.5], with the following exceptions:
(a) The measurement and disclosure requirements do not apply to:
• share-based payment transactions within the scope of IFRS 2 – Share-based Payment;
• leasing transactions accounted for in accordance with IFRS 16 – Leases; and
• measurements that are similar to fair value, but are not fair value, such as net realisable value in IAS 2 – Inventories – or value in use in IAS 36 –
Impairment of Assets. [IFRS 13.6].
A
(b) The measurement requirements in IFRS 13 apply, but the disclosure requirements do not apply to:
• plan assets measured at fair value in accordance with IAS 19 – Employee Benefits;
• retirement benefit plan investments measured at fair value in accordance with IAS 26 – Accounting and Reporting by Retirement Benefit Plans; and
• assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36. [IFRS 13.7].
18
Q
Items in the scope of IFRS 13
The measurement framework in IFRS 13 applies to both fair value measurements on initial recognition and subsequent fair value measurements, if permitted or required by another IFRS. [IFRS 13.8]. Fair value measurement at initial recognition is discussed
further at FAIR VALUE AT INITIAL RECOGNITION below.
IFRS 13 establishes how to measure fair value. It does not prescribe:
• what should be measured at fair value;
• when to measure fair value (i.e. the measurement date); or
A
• how (or whether) to account for any subsequent changes in fair value (e.g. in profit or loss or in other comprehensive income). However, the standard does partly address day one gains or losses on initial recognition at fair value, requiring that they be recognised in profit or loss immediately unless the IFRS that permits or requires initial measurement at fair value specifies otherwise.
An entity must consider the relevant IFRSs (e.g. IFRS 3 – Business Combinations, IFRS 9 – Financial Instruments – or IAS 40 – Investment Property) for each of these requirements.
19
Q
Items in the scope of IFRS 13 - Fair value disclosures 1
The scope of IFRS 13 includes disclosures of fair value. This refers to situations where an entity is permitted, or may be required, by a standard or interpretation to disclose the fair value of an item whose carrying amount in the financial statements is not fair
value. Examples include:
A
- IAS 40, which requires the fair value to be disclosed for investment properties measured using the cost model; [IAS 40.79(e)] and
- IFRS 7 – Financial Instruments: Disclosures, which requires the fair value of financial instruments that are subsequently measured at amortised cost in accordance with IFRS 9 to be disclosed. [IFRS 7.25].
20
Q
Items in the scope of IFRS 13 - Fair value disclosures 2
In such situations, the disclosed fair value must be measured in accordance with IFRS 13 and an entity would also need to make certain disclosures about that fair value measurement in accordance with IFRS 13 (see DISCLOSURES below).
A
In certain circumstances, IFRS 7 provides relief from the requirement to disclose the fair value of a financial instrument that is not measured subsequently at fair value. An example is when the carrying amount is considered a reasonable approximation of fair
value. [IFRS 7.29]. In these situations, an entity would not need to measure the fair value of the financial asset or financial liability for disclosure purposes. However, it would need to consider the requirements of IFRS 13 in order to determine whether the
carrying amount is a reasonable approximation of fair value.
21
Q
Items in the scope of IFRS 13 - Measurements based on fair value 1
The measurement of amounts (whether recognised or only disclosed) that are based on fair value, such as fair value less costs to sell, are within the scope of IFRS 13. This includes the following:
• a non-current asset (or disposal group) held for sale measured at fair value less costs to sell in accordance with IFRS 5 – Non-current Assets Held for Sale and
Discontinued Operations – where the fair value less costs to sell is lower than its carrying amount (see Chapter THE FAIR VALUE FRAMEWORK);
A
• commodity inventories that are held by commodity broker-traders and measured at fair value less costs to sell, as discussed in IAS 2;
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Q
Items in the scope of IFRS 13 - Measurements based on fair value 2
• where the recoverable amount for an asset or cash-generating unit(s), determined in accordance with IAS 36, is its fair value less costs of disposal.
This includes impairment testing of investments in associates accounted for in accordance with IAS 28 – Investments in Associates and Joint Ventures –
where that standard requires the test to be performed in accordance with IAS 36; and
A
• biological assets (including produce growing on a bearer plant), agricultural produce measured at fair value less costs to sell in accordance with IAS 41 –
Agriculture.
In each of these situations, the fair value component is measured in accordance with IFRS 13. Costs to sell or costs of disposal are determined in accordance with the
applicable standard, for example, IFRS 5.
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Q
DEFINITIONS
A
DEFINITIONS
24
Q
Active market
- A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Cost approach
- A valuation technique that reflects the amount
that would be required currently to replace the
service capacity of an asset (often referred to
as current replacement cost).
A
Entry price
- The price paid to acquire an asset or received to assume a liability in an exchange transaction.
Exit price
- The price that would be received to sell an asset or paid to transfer a liability.
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Expected cash flow
- The probability-weighted average (i.e. mean of the distribution) of possible future cash flows.
Fair value
- 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.
Highest and best use
- The use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used.
Income approach
- Valuation techniques that convert future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about
those future amounts.
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Inputs
- The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as the following:
(a) the risk inherent in a particular valuation technique used to measure fair value (such as a pricing
model) ; and
(b) the risk inherent in the inputs to the valuation technique.
Inputs may be observable or unobservable.
Level 1 inputs
- Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 inputs
- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs
- Unobservable inputs for the asset or liability.
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Market approach
- A valuation technique that uses prices and other relevant information generated by
market transactions involving identical or comparable (i.e. similar) assets, liabilities or
a group of assets and liabilities, such as a business.
Market corroborated inputs
- Inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
Most advantageous market
- The market that maximises the amount that would be received to sell the asset or inimises the amount that would be paid to transfer the liability, after taking into
account transaction costs and transport costs.
Nonperformance risk
- The risk that an entity will not fulfil an obligation. Non-performance risk includes, but may not be limited to, the entity’s own credit risk.
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Market participant
- Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:
(a) They are independent of each other, i.e. they are not related parties as defined in IAS 24 – Related Party Disclosures, although the price in a related party transaction may be used as an input to a fair value measurement if the entity has evidence that the transaction was entered into at market terms.
(b) They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary.
(c) They are able to enter into a transaction for the asset or liability.
(d) They are willing to enter into a transaction for the asset or liability, i.e. they are motivated but not forced or otherwise compelled to do so.
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Observable inputs
- Inputs that are developed using market data, such as publicly available information about actual events or transactions, and that reflect the assumptions that market participants would use when pricing the
asset or liability.
Orderly transaction
- A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or
distress sale).
Principal market
- The market with the greatest volume and level of activity for the asset or liability.
Risk premium
- Compensation sought by risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability. Also referred to as a ‘risk adjustment’.
Transport costs
- The costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market.
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Transaction costs
- The costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the disposal of the asset or the transfer of the liability and meet both of the following criteria:
(a) They result directly from and are essential to that transaction.
(b) They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made (similar to costs to sell,
as defined in IFRS 5).
Unit of account
- The level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes.
Unobservable inputs
- Inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.
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THE FAIR VALUE FRAMEWORK
THE FAIR VALUE FRAMEWORK
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Definition of fair value 1
Fair value is defined 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 themeasurement date’. [IFRS 13.9].
The definition of fair value in IFRS 13 is not significantly different from previous definitions in IFRS, which was ‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’. [IFRS 13.BC29].
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Definition of fair value 2
However, the definition in IFRS 13 and its guidance in the fair value framework clarify the following :
• The definition of fair value in IFRS 13 is a current exit price, not an entry price. [IFRS 13.BC36].
The exit price for an asset or liability is conceptually different from its transaction price (an entry price). While exit and entry prices may be identical in many
situations, the transaction price is not presumed to represent the fair value of an asset or liability on its initial recognition as measured in accordance with IFRS 13.
• The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date. [IFRS 13.BC39, BC40]. Fair value is the exit price in the principal market (or in the
absence of a principal market, the most advantageous market – in which the reporting entity would transact). However, the price in the exit market should not be adjusted for transaction costs – i.e. transaction costs incurred to acquire an item are not added to the price used to measure fair value and transaction costs incurred to sell an item are not deducted from the price used to measure fair value. [IFRS 13.25]. In addition, fair value is a market-based measurement, not an entity-specific measurement, and, as such, is determined based on the assumptions that market participants would use when pricing the asset
or liability. [IFRS 13.BC31]
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Definition of fair value 3
• A fair value measurement contemplates (view)
the sale of an asset or transfer of a liability, not a transaction to offset the risks associated with an asset or liability (see THE TRANSACTION below for further discussion).
• The transaction to sell the asset or transfer the liability is a hypothetical transaction as at the measurement date that is assumed to be orderly and considers an appropriate period of exposure to the market (see THE TRANSACTION below for further discussion). [IFRS 13.15].
• The objective of a fair value measurement does not change based on the level of activity in the exit market or the valuation technique(s) used. That is, fair value
remains a market-based exit price that considers the current market conditions as at the measurement date, even if there has been a significant decrease in the
volume and level of activity for the asset or liability.
[IFRS 13.2, B41].
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The fair value measurement framework 1
In addition to providing a single definition of fair value, IFRS 13 includes a framework for applying this definition to financial reporting. Many of the key concepts used in the fair value framework are interrelated and their interaction should be considered in the context of the entire approach.
As discussed at 1.3 above, the objective of a fair value measurement is ‘to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market
conditions’. [IFRS 13.B2].
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The fair value measurement framework 2
In light of this objective, when measuring fair value, an entity must determine all of the following:
(a) the particular asset or liability that is the subject of the measurement (consistent with its unit of account – see 5 below);
(b) for a non-financial asset, the valuation premise that is appropriate for the measurement (consistent with its highest and best use – see 10 below);
(c) the principal (or most advantageous) market for the asset or liability (see 6 below); and
(d) the valuation technique(s) appropriate for the measurement (see 14 below), considering the availability of data with which to develop inputs (see 15 below) that represent the assumptions that market participants would use when pricing the asset or liability (see 7 below) and the level of the fair value hierarchy within which the inputs are categorised (see 16 below). [IFRS 13.B2].
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The fair value measurement framework 3
The following diagram illustrates our view of the interdependence of the various components of the fair value measurement framework in IFRS 13.
Figure 14.2: The fair value measurement framework, see
OneNote
In practice, navigating the fair value framework may be more straight-forward for certain types of assets (e.g. assets that trade in a formalised market) than for others (e.g. intangible assets). For non-financial assets that derive value when used in combination
with other assets or for which a developed market does not exist, resolving the circular nature of the relationship between valuation premise, highest and best use and exit market is important in applying the fair value framework (refer to 10 below for
additional discussion on the fair value measurement of non-financial assets).
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The fair value measurement framework 4
IFRS 13 clarifies that the concepts of ‘highest and best use’ and ‘valuation premise’ are only applicable when determining the fair value of non-financial assets. Therefore, the fair value framework is applied differently to non-financial assets versus other items, such as financial instruments, non-financial liabilities and instruments classified in a reporting entity’s shareholders’ equity (refer to 12 below for additional discussion on the fair value of financial instruments with offsetting positions and to 11 below for the fair
value measurement of liabilities and instruments classified in an entity’s shareholders’ equity).
Although there are differences in the application of the fair value framework for non-financial assets, the objective of the fair value measurement remains the same, that is, an exit price in the principal (or most advantageous) market.
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The fair value measurement framework 5
As discussed in more detail at FINANCIAL ASSETS AND LIABILITIES WITH OFFSETTING POSITIONS below, IFRS 13 provides an exception to the principles of fair value, allowing entities to measure a group of financial instruments based on the price to sell (or transfer) its net position for a particular risk exposure,
if certain criteria are met.
The use of this exception may require a reporting entity to allocate portfolio level valuation adjustments to the appropriate unit of account.
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THE ASSET OR LIABILITY
THE ASSET OR LIABILITY
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IFRS 13 states that a fair value measurement is for a particular asset or liability, which is different from the price to offset certain of the risks associated with that particular asset or liability.
This is an important distinction, particularly in the valuation of certain financial instruments that are typically not ‘exited’ through a sale or transfer, but whose risks are hedged through other transactions (e.g. derivatives). However, IFRS 13 does allow for
financial instruments with offsetting risks to be measured based on their net risk exposure to a particular risk, in contrast to the assets or liabilities that give rise to this exposure (see 12 below for
additional discussion on the criteria to qualify for
this measurement exception and application considerations).
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The unit of account 1
The identification of exactly what asset or liability is being measured is fundamental to determining its fair value. Fair value may need to be measured for either :
* a stand-alone asset or liability (e.g. a financial instrument or an operating asset); or
* a group of assets, a group of liabilities, or a group of assets and liabilities (e.g. a cash generating unit or a business).
The unit of account defines what is being measured for financial reporting purposes. It is an accounting concept that determines the level at which an asset or liability is aggregated or disaggregated for the purpose of applying IFRS 13, as well as other standards.
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The unit of account 2
Unless specifically addressed in IFRS 13 (see 5.1.1 and 5.1.2 below), the appropriate unit of account is determined by the applicable IFRS (i.e. the standard that permits or requires the fair value measurement or disclosure). [IFRS 13.13, 14]. Assume, for example,
that an investment property is valued at CU100. Further assume that the investment property is owned by a single asset entity (or corporate wrapper) and the shares in the entity are only valued at CU90. If another entity were to acquire the shares of the single
asset entity for CU90, at acquisition, the entity would allocate the purchase price to the property inside it. The property would, therefore, initially be recognised at CU90.
Assume that, at year-end, the fair value of the property is CU110 and that the entity measures the property at fair value in accordance with IAS 40. Assume that the fair value of the shares in the single asset entity are CU99. IAS 40 requires that an entity measure an investment property, not the shares of a single entity that owns it. As such, the property would be measured at its fair value of CU110.
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Characteristics of the asset or liability
When measuring fair value, IFRS 13 requires an entity to consider the characteristics of the asset or liability. For example, age and miles flown are attributes to
be considered in determining a fair value measure
for an aircraft. Examples of such characteristics could include:
• the condition and location of an asset; and
• restrictions, if any, on the sale or use of an asset or transfer of a liability (see Restrictions on assets or liabilities, Highest and best use and Restrictions preventing the transfer of a liability or an entity’s
own equity below).
The fair value of the asset or liability must take into account those characteristics that market participants would take into consideration when pricing the asset or liability at the measurement date. [IFRS 13.11, 12]. For example, when valuing individual shares in an unlisted company, market participants might consider factors such as the nature of the company’s operations; its performance to date and forecast future performance; and how the business is funded, including whether it is highly leveraged.
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Characteristics of the asset or liability - Condition and location
An asset may not be in the condition or location that market participants would require for its sale at an observable market price. In order to determine the fair value of the asset as it currently exists, the market price needs to be adjusted to the price market participants would be prepared to pay for the asset in its current condition and location. This includes deducting the cost of transporting the asset to the market, if location is a
characteristic of the asset being measured, and may include deducting the costs of converting or transforming the asset, as well as a normal profit margin.
For non-financial assets, condition and location considerations may influence, or be dependent on, the highest and best use of an asset. That is, an asset’s
highest and best use may require an asset to be in a different condition. However, the objective of a fair value measurement is to determine the price for the asset in its current form. Therefore, if no market exists for an asset in its current form, but there is a market
for the converted or transformed asset, an entity could adjust this market price for the costs a market participant would incur to re-condition the asset (after acquiring the asset in its current condition) and the compensation they would expect for the effort.
Example 14.1 below illustrates how costs to convert or transform an asset might be considered in determining fair value based on the current use of the asset.
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Characteristics of the asset or liability - Restrictions on assets or liabilities 1
IFRS 13 indicates that the effect on fair value of a restriction on the sale or use of an asset will differ depending on whether the restriction is deemed to be a characteristic of the asset or the entity holding the asset. A restriction that would transfer with the
asset in an assumed sale would generally be deemed a characteristic of the asset and, therefore, would likely be considered by market participants when pricing the asset. Conversely, a restriction that is specific to the entity holding the asset would not transfer with the asset in an assumed sale and, therefore, would not be considered when measuring fair value. Determining whether a restriction is a characteristic of the asset or of the entity holding the asset may be contractual in some cases. In other cases, this determination may require judgement based on the specific facts and circumstances.
The following illustrative examples highlight the distinction between restrictions that are characteristics of the asset and those of the entity holding the asset, including how this determination affects the fair value measurement. [IFRS 13.IE28-29]. Restrictions on
non-financial assets are discussed further at APPLICATION TO NON-FINANCIAL ASSETS below.
Example 14.2: Restrictions on assets
Example 14.3: Entity-specific restrictions on assets
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Characteristics of the asset or liability - Restrictions on assets or liabilities 2
The calculation of the fair value should take account of any restrictions on the sale or use of an asset, if those restrictions relate to the asset rather than to the holder of the asset and the market participant would take those restrictions into account in his determination of the price that he is prepared to pay.
A liability or an entity’s own equity instrument may be subject to restrictions that prevent the transfer of the item. When measuring the fair value of a liability or equity instrument, IFRS 13 does not allow an entity to include a separate input (or an adjustment to other inputs) for such restrictions. This is because the effect of the restriction is either implicitly or explicitly included in other inputs to the fair value measurement. Restrictions on liabilities and an entity’s own equity
are discussed further below.
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Characteristics of the asset or liability - Restrictions on assets or liabilities 3
IFRS 13 has different treatments for restrictions on assets and those over liabilities. The IASB believes this is appropriate because restrictions on the transfer of a liability relate to the performance of the obligation (i.e. the entity is legally obliged to satisfy the obligation and needs to do something to be relieved of the obligation), whereas restrictions on the transfer of an asset generally relate to the marketability of the asset. In addition, nearly all liabilities include a restriction preventing the transfer of the liability. In contrast, most assets do not include a similar restriction.
As a result, the effect of a restriction preventing the transfer of a liability, theoretically, would be consistent
for all liabilities and, therefore, would require no additional adjustment beyond the factors considered in determining the original transaction price. If an entity is aware that a restriction on the transfer of a liability is not already reflected in the price (or in the other inputs used in the measurement), it would adjust the price or inputs to reflect the existence of the restriction.
[IFRS 13.BC99, BC100]. However, this would be rare because nearly all liabilities include a restriction and, when measuring fair value, market participants are assumed by IFRS 13 to be sufficiently knowledgeable about the liability to be transferred.
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THE PRINCIPAL (OR MOST ADVANTAGEOUS)
MARKET
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THE PRINCIPAL (OR MOST ADVANTAGEOUS)
MARKET
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A fair value measurement contemplates an orderly transaction to sell the asset or transfer the liability in either:
(a) the principal market for the asset or liability; or
(b) in the absence of a principal market, the most advantageous market for the asset
or liability. [IFRS 13.16].
IFRS 13 is clear that, if there is a principal market for the asset or liability, the fair value measurement represents the price in that market at the measurement date (regardless of whether that price is directly observable or estimated using another valuation technique). The price in the principal market must be used even if the price in a different market is potentially more advantageous. [IFRS 13.18]. This is illustrated in Example 14.4. [IFRS 13.E19-20].
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The identification of a principal (or most advantageous) market could be impacted by whether there are observable markets for the item being measured. However, even where there is no observable market, fair value measurement assumes a transaction
takes place at the measurement date.
The assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability. [IFRS 13.21].
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The principal market 1
The principal market is the market for the asset or liability that has the greatest volume or level of activity for the asset or liability. [IFRS 13 Appendix A]. There is a general presumption that the principal market is the one in which the entity would normally enter into a transaction to sell the asset or transfer the liability, unless there is evidence to the contrary. In practice, an entity would first consider the markets it can access.
Then it would determine which of those markets has the greatest volume and liquidity in relation to the particular asset or liability. [IFRS 13.17]. Management is not required to perform an exhaustive search to identify the principal market; however, it cannot ignore
evidence that is reasonably available when considering which market has the greatest volume and level of activity. [IFRS 13.17].
For example, it may be appropriate to take into
account information available in trade journals, if reliable market information about volumes transacted is available in such journals. Absent evidence to the contrary, the
principal market is presumed to be the market in which an entity normally enters into transactions for the asset and liability.
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The principal market 2
The principal market is considered from the perspective of the reporting entity, which means that the principal market could be different for different entities (this is discussed further at Can an entity have more than one principal market for the same asset or liability? below). For example, a securities dealer may exit a financial instrument by selling it in the inter-dealer market, while a manufacturing company would sell a financial instrument in the retail market.
The entity must be able to access the principal market as at the measurement date. Therefore, continuing with our example, it would not be appropriate for a manufacturing company to assume that it would transact in the inter-dealer market (even when considering a hypothetical transaction) because the company does not have access to this market.
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The principal market 3
Because IFRS 13 indicates that the principal market is determined from the perspective of the reporting entity, some have questioned whether the principal market should be determined on the basis of: (a) entity-specific volume (i.e. the market where the
reporting entity has historically sold, or intends to sell, the asset with the greatest frequency and volume); or (b) market-based volume and activity. However, IFRS 13 is clear that the principal market for an asset or liability should be determined based on the market with the greatest volume and level of activity that the reporting entity can access.
It is not determined based on the volume or level of activity of the reporting entity’s transactions in a particular market. That is, the determination as to which market(s) a particular entity can access is entity-specific, but once the accessible markets are identified, market-based volume and activity determine the principal market. [IFRS 13.BC52].
BC52 Some respondents to the exposure draft stated that the language in US GAAP was unclear about whether the principal market should be determined on the basis of the volume or level of activity for the asset or liability or on the volume or level of activity of the reporting entity's transactions in a particular market. Consequently, the boards decided to clarify that the principal market is the market for the asset or liability that has the greatest volume or level of activity for the asset or liability. Because the principal market is the most liquid market for the asset or liability, that market will provide the most representative input for a fair value measurement. As a result, the boards also decided to specify that a transaction to sell an asset or to transfer a liability takes place in the principal (or most advantageous) market, provided that the entity can access that market on the measurement date.
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The principal market 4
The recognition in IFRS 13 that different entities may sell identical instruments in different markets (and therefore at different exit prices) has important implications, particularly with respect to the initial recognition of certain financial instruments, such
as derivatives. For example, a derivative contract between a dealer and a retail customer would likely be initially recorded at different fair values by the two entities, as they would exit the derivative in different markets and, therefore, at different exit prices.
Day one gains and losses are discussed further at 13.2 below.
Although an entity must be able to access the market at the measurement date, IFRS 13 does not require an entity to be able to sell the particular asset or transfer the particular liability on that date. [IFRS 13.20]. For example, if there is a restriction on the sale of the asset, IFRS 13 simply requires that the entity be able to access the market for that asset when that restriction ceases to exist (it is important to note that the existence of the
restriction may still affect the price a market participant would pay – see 5.2.2 above for discussion on restrictions on assets and liabilities).
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The principal market 5
In general, the market with the greatest volume and deepest liquidity will probably be the market in which the entity most frequently transacts. In these instances, the principal market would likely be the same as the most advantageous market (see The most advantageous market below).
Prior to the adoption of IFRS 13, some entities determined fair value based solely on the market where they transact with the greatest frequency (without considering other markets with greater volume and deeper liquidity). As noted above, IFRS 13 requires an entity to consider the market with the greatest volume and deepest liquidity for the asset.
Therefore, an entity cannot presume a commonly used market is the principal market. For example, if an entity previously measured the fair value of agricultural produce based on its local market, but there is a deeper and more liquid market for the same agricultural produce (for which transportation costs
are not prohibitive), the latter market would be deemed the principal market and would be used when measuring fair value.
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The principal market - Can an entity have more than one principal market for the same asset or liability? 1
IFRS 13 states that ‘because different entities (and businesses within those entities) with different activities may have access to different markets, the principal (or most advantageous) market for the same asset or liability might be different for different
entities (and businesses within those entities). Therefore, the principal (or most advantageous) market (and thus, market participants) shall be considered from the perspective of the entity, thereby allowing for differences between and among entities with different activities.’ [IFRS 13.19].
Therefore, in certain instances it may be appropriate for a reporting entity to determine that it has different principal markets for the same asset or liability. However, such a determination would need to be based on the reporting entity’s business units engaging in different activities to ensure they were accessing different markets.
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The principal market - Can an entity have more than one principal market for the same asset or liability? 2
Determining the principal market is not based on management’s intent. Therefore, we would not expect a reporting entity to have different principal markets for identical assets held within a business unit solely because management has different exit strategies for those assets.
Consider Example 14.5 below, in which multiple exit markets exist for an asset and the reporting entity has access to all of the various exit markets. The fact that a reporting entity (or business unit within a reporting entity) has historically exited virtually identical assets in different markets does not justify the entity utilising different exit markets in determining the fair value of these assets, unless the entity has different business units engaging in different activities. Instead, the concept of a principal market (and most advantageous market) implies that one consistent market should generally be considered in determining the fair
value of these identical assets.
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The principal market - In situations where an entity has access to multiple markets, should the determination of the principal market be based on entity-specific volume and activity or market-based volume and activity? 1
In most instances, the market in which a reporting entity would sell an asset (or transfer a liability) with the greatest frequency will also represent the market with the greatest volume and deepest liquidity for all market participants. In these instances, the principal market would be the same regardless of whether it is
determined based on entity-specific volume and activity or market-based volume and activity.
However, when this is not the case, a reporting entity’s principal market is determined using market-based volume.
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The principal market - In situations where an entity has access to multiple markets, should the determination of the principal market be based on entity-specific volume and activity or market-based volume and activity? 2
Different entities engage in different activities. Therefore, some entities have access to certain markets that other entities do not. For example, an entity that does not function as a wholesaler would
not have access to the wholesale market and, therefore, would need to look to the retail market
as its principal market.
Once the markets to which a particular entity has access have been identified, the determination of the principal
market should not be based on management’s intent or entity-specific volume, but rather should be based on the market with the greatest volume and level of activity for the asset or liability.
Example 14.6: Determining the principal market
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The most advantageous market 1
As noted above, if there is a principal market for the asset or liability being measured, fair value should be determined using the price in that market, even if the price in a different market is more advantageous at the measurement date. Only in situations where there is no principal market for the asset or liability being
measured, can an entity consider the most advantageous market. [IFRS 13.16]. The most advantageous market is the one that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after considering transaction costs and transport costs. [IFRS 13 Appendix A].
This definition reasonably assumes that most entities transact with an intention to maximise profits or net assets. Assuming economically rational behaviour, the IASB observed that the principal market would generally represent the most advantageous market. However, when this is not the case, the IASB decided to prioritise the price in the most liquid market (i.e. the principal market) as this market provides the most
representative input to determine fair value and also serves to increase consistency among reporting entities. [IFRS 13.BC52].
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The most advantageous market 2
When determining the most advantageous market, an entity must take into consideration the transaction costs and transportation costs it would incur to sell the
asset or transfer the liability. The market that would yield the highest price after deducting these costs is the most advantageous market. This is illustrated in
Example 14.7. [IFRS 13.IE19.21-22]
It is important to note that, while transaction costs and transportation costs are considered in determining the most advantageous market, the treatment of these costs
in relation to measuring fair value differs (transaction costs and transportation costs are discussed further at THE PRICE below).
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MARKET PARTICIPANTS
MARKET PARTICIPANTS
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When measuring fair value, an entity is required to use the assumptions that market participants would use when pricing the asset or liability. However, IFRS 13 does not require an entity to identify specific market participants. Instead, an entity must identify the characteristics of market participants that would generally transact for the asset or liability being measured. Determining these characteristics takes into consideration factors that are specific to the asset or liability; the principal (or most advantageous) market; and the market participants in that market. [IFRS 13.22, 23]. This determination, and how these characteristics affect a fair value measurement, may require significant judgement.
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The principal (or most advantageous) market is determined from the perspective of the reporting entity (or business units within a reporting entity). As a result, other entities within the same industry as the reporting entity will most likely be considered market participants. However, market participants may come from outside of the reporting entity’s industry,
especially when considering the fair value of assets on a stand-alone basis. For example, a residential real estate development entity may be considered a market participant when measuring the fair value of land held by a manufacturing company if the highest and best use of the land is deemed to be residential real estate development.
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Characteristics of market participants Characteristics of market participants 1
IFRS 13 defines market participants as ‘buyers and sellers in the principal (or most advantageous) market for the asset or liability’. [IFRS 13 Appendix A].
IFRS 13 assumes that market participants have all of the following characteristics:
• they are independent of each other, that is, they are not related parties, as defined in IAS 24;
* they are knowledgeable, having a reasonable understanding about the asset or liability using all available information, including information obtained through usual and customary due diligence efforts;
* they are able to enter into a transaction for the asset or liability; and
• they are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.
[IFRS 13.BC55-BC59].
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Characteristics of market participants Characteristics of market participants 2
Since market participants are independent of each other, the hypothetical transaction is assumed to take place between market participants at the measurement date, not between the reporting entity and another market participant. While market participants are not related parties, the standard does allow the price in a related party transaction
to be used as an input in a fair value measurement provided the entity has evidence the transaction was entered into at market terms. [IFRS 13.BC57].
Market participants in the principal (or most advantageous) market should have sufficient
knowledge about the asset or liability for which they are transacting. The appropriate level of knowledge does not necessarily need to come from publicly available information, but could be obtained in the course of a normal due diligence process.
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Characteristics of market participants Characteristics of market participants 3
When determining potential market participants, certain characteristics should be considered. These include the legal capability and the operating and financial capacity to purchase the asset or assume the liability. Market participants must have both the
willingness and the ability to transact for the item being measured.
For example, when measuring the fair value less costs of disposal of a cash-generating unit (CGU), as part of
testing the CGU for impairment in accordance with IAS 36, the market participants considered in the analysis should be in both a financial and operating position to
purchase the CGU.
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Market participant assumptions 1
IFRS 13 specifies that fair value is not the value specific to one entity, but rather is meant to be a market-based measurement. If market participants would consider adjustments for the inherent risk of the asset or liability, or consider the risk in the valuation
technique used to measure fair value, then such risk adjustments should be considered in the fair value assumptions.
For example, when measuring the fair value of certain
financial instruments, market participants may include adjustments for liquidity, uncertainty and/or non-performance risk.
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Market participant assumptions 2
Fair value is not the value specific to the reporting entity and it is not the specific value to one market participant whose risk assessment or specific synergies may differ from other market participants. The reporting entity should consider those factors that market participants, in general, would consider. Fair value should not be measured based on a
single market participant’s assumptions or their specific intent or use of the asset or liability.
To illustrate, assume a single market participant, Market Participant A, is willing to pay a higher price for an asset than the remaining market participants, due to specific synergies that only Market Participant A could achieve. In such a situation, fair value would not be the price that Market Participant A would be willing to pay for the asset. Instead, fair value would be the price that typical market participants would pay for the asset.
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Market participant assumptions 3
The underlying assumptions used in a fair value measurement are driven by the characteristics of the market participants that would transact for the item being measured and the factors those market participants would consider when pricing the
asset or liability. Importantly, IFRS 13 notes that fair value should be based on assumptions that market participants acting in their ‘economic best interest’ would use when pricing an asset or liability.
[IFRS 13.22].
That is, market participants are assumed to transact in a manner that is consistent with the objective of maximising the value of their business, their net assets or profits. In certain instances, this may result in market participants considering premiums or discounts (e.g. control premiums or discounts for lack of marketability) when determining the price at which they would transact for a particular asset or liability (see Premiums and discounts below for additional discussion on the consideration of premiums and discounts in a fair value measurement).
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Market participant assumptions 4
In situations where market observable data is not available, the reporting entity can use its own data as a basis for its assumptions. However, adjustments should be made to the entity’s own data if readily available market data indicates that market participant
assumptions would differ from the assumptions specific to that reporting entity (see LEVEL 3 INPUTS below for further discussion regarding Level 3 inputs).
The intended use and risk assumptions for an asset or asset group may differ among market participants transacting in the principal market for the asset. For example, the principal market in which the reporting entity would transact may contain both strategic
and financial buyers. Both types of buyers would be considered in determining the characteristics of market participants; however, the fair value measurement of an asset may differ among these two types of market participants. The following example from the standard illustrates this point. [IFRS 13.IE3-6].
Example 14.8: Asset group
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Market participant assumptions 5
The example above illustrates that the principal (or most advantageous) market for an asset group may include different types of market participants (e.g. strategic and
financial buyers), who would make different assumptions in pricing the assets.
When there are two or more different types of market participants that would transact for the asset, or the asset group, separate fair value estimates of the assets should generally be performed for each type of market participant in order to identify which
type of market participant (and the appropriate related assumptions) should be considered in the fair value measurement.
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Market participant assumptions 6
In each of these analyses, the intended use of the asset and any resulting market participant synergies are considered. These include synergies among the assets in the asset grouping and synergies in combination with other assets held by (or available to)
market participants generally.
The selection of the appropriate market participants is
| based on the type of market participants that generate the maximum value for the asset group, in aggregate.
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Market participant assumptions 7
This is illustrated in Example 14.8. Fair value would be measured by reference to assumptions made by the Strategic Buyer because the fair value of the group of assets (CU 650) exceeds that of the Financial Buyer (CU 600). Consequently, the fair value of the individual assets within the asset grouping would be estimated based on the indicated values related to the market participants with the highest overall value for the
asset grouping.
In other words, once the assets are appropriately grouped based on their valuation premise, they should be valued using a consistent set of assumptions (i.e. the
assumptions for the same type of market participants and the same related use). As shown in the example, this is true even though the fair value measurement of a specific asset, Asset C in the example, is deemed to be higher for the Financial Buyer.
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Market participant assumptions 8
Example 14.8 above also highlights the interdependence between the key concepts within the IFRS 13 fair value framework. Understanding the interrelationships between market participants, exit market and the concepts of valuation premise and highest and best use is important when measuring the fair value of non-financial assets (the concepts of ‘valuation premise’ and ‘highest and best use’ are discussed at APPLICATION TO NON-
FINANCIAL ASSETS below).
In the example, the indicated value for the assets as a group is determined based on the valuation premise (i.e. their use in combination with other assets) and market participant assumptions that would maximise the value of the asset group as a whole (i.e.
assumptions consistent with strategic buyers). The valuation premise for Assets A, B and C is based on their use in combination with each other (or with other related assets and liabilities held by or available to market participants), consistent with the highest and best use of these assets.
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Market participant assumptions 9
The example also highlights the distinction between the unit of account (i.e. what is being measured and presented for financial reporting purposes) and the valuation premise, which forms the basis of how assets are grouped for valuation purposes (i.e. as a group or on a stand-alone basis).
The unit of account may be the individual assets
(i.e. Asset A, separate from Asset B and Asset C), but the valuation premise is the asset group comprised of Assets A, B and C. Therefore, the indicated value of the assets in combination (CU 650) must be attributed to the assets based on their unit of account, resulting in the fair value measurement to be used for financial reporting purposes.
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THE TRANSACTION
THE TRANSACTION
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As at the measurement date, the transaction to sell an asset or transfer a liability is, by definition, a hypothetical transaction for the particular asset or liability being measured at fair value. If the asset had actually been sold or the liability actually transferred as at the measurement date, there would be no asset or liability for the reporting entity to measure at fair value.
IFRS 13 assumes this hypothetical transaction will take place in the principal (or most advantageous) market (see THE PRINCIPAL (OR MOST ADVANTAGEOUS) MARKET above) and will:
• be orderly in nature;
• take place between market participants that are independent of each other, but knowledgeable about the asset or liability (see MARKET PARTICIPANTS above for additional discussion on market participants);
• take place under current market conditions; and
• occur on the measurement date.
[IFRS 13.15].
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These assumptions are critical in ensuring that the estimated exit price in the hypothetical transaction is consistent with the objective of a fair value measurement. For example, the concept of an orderly transaction is intended to distinguish a fair value
measurement from the exit price in a distressed sale or forced liquidation. Unlike a forced liquidation, an orderly transaction assumes that the asset or liability is exposed to the market prior to the measurement date for a period that is usual and customary to
allow for information dissemination and marketing.
That is, the hypothetical transaction assumes that market participants have sufficient knowledge and awareness of the asset or liability, including that which would be obtained through customary due diligence even if, in actuality, this process may not have begun yet (or may never occur at all, if the entity does not sell the asset or transfer the liability).
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The hypothetical transaction between market participants does not consider whether management actually intends to sell the asset or transfer the liability at the measurement date; nor does it consider the reporting entity’s ability to enter into the transaction on
the measurement date. [IFRS 13.20].
To illustrate, consider a hypothetical transaction to
sell a security that, due to a restriction, cannot be sold as at the measurement date. Although the restriction may affect the measurement of fair value, it does not preclude the entity from assuming a hypothetical transaction to sell the security (see 5 above for
further discussion on restrictions).
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An orderly transaction assumes there will be adequate market exposure, so that market participants would be sufficiently knowledgeable about the asset or liability. This does not mean the hypothetical exchange takes place at some point in the future. A fair value
measurement considers market conditions as they exist at the measurement date and is intended to represent the current value of the asset or liability, not the potential value of the asset or liability at some future date. The transaction is therefore assumed to take place on the measurement date and the entity assumes that the marketing activities and due diligence activities have already been performed.
For example, assume an entity is required to re-measure an asset to fair value at its reporting date of 31 December 2018. The customary marketing activities and due diligence procedures required for the asset
to be sold take six months. The asset’s fair value should not be based on the price the entity expects to receive for the asset in June 2019. Instead, it must be determined based on the price that would be received if the asset were sold on 31 December 2018, assuming adequate market exposure had already taken place.
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Although a fair value measurement contemplates a price in an assumed transaction, pricing information from actual transactions for identical or similar assets and liabilities is considered in measuring fair value. IFRS 13 establishes a fair value hierarchy (discussed at THE FAIR VALUE HIERARCHY below) to prioritise the inputs used to measure fair value, based on the relative observability of those inputs. The standard requires that valuation techniques maximise the use of observable inputs and minimise the use of unobservable inputs.
As such, even in situations where the market for a particular asset is deemed to be inactive
(e.g. due to liquidity issues), relevant prices or inputs from this market should still be considered in the measurement of fair value. It would not be appropriate for an entity to default solely to a model’s value based on unobservable inputs (a Level 3 measurement), when Level 2 information is available. Judgement is required in assessing the relevance of observable market data to determine the priority of inputs under the fair value hierarchy, particularly in situations where there has been a significant decrease in market activity for an asset or liability, as discussed at below.
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Assessing whether a transaction is orderly can require significant judgement. The Boards believe this determination can be more difficult if there has been a significant decrease in the volume or level of activity for the asset or liability in relation to normal market activity.
As such, IFRS 13 provides various factors to consider when assessing whether there has been a significant decrease in the volume or level of activity in the
market (see 8.1 below) as well as circumstances that may indicate that a transaction is not orderly (see 8.2 below). Making these determinations is based on the weight of all available evidence. [IFRS 13.B43].
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Evaluating whether there has been a significant decrease in the volume and level of activity for
an asset or liability 1
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There are many reasons why the trading volume or level of activity for a particular asset or liability may decrease significantly. For example, shifts in supply and demand dynamics, changing levels of investors’ risk appetites and liquidity constraints of key
market participants could all result in a significant reduction in the level of activity for certain items or class of items. While determining fair value for any asset or liability that does not trade in an active market often requires judgement, the application guidance
in IFRS 13 is primarily focused on assets and liabilities in markets that have experienced a significant reduction in volume or activity.
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Prior to a decrease in activity, a market approach is often the primary valuation approach used to estimate fair value for these items, given the availability and relevance of observable data. Under a market approach,
fair value is based on prices and other relevant information generated by market transactions involving assets and liabilities that are identical or comparable to the item being measured. As transaction volume or activity for the asset decreases significantly,
application of the market approach can prove more challenging and the use of additional valuation techniques may be warranted.
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Evaluating whether there has been a significant decrease in the volume and level of activity for
an asset or liability 2
The objective of a fair value measurement remains the same even when there has been a significant decrease in the volume or level of activity for the asset or liability. Paragraph B37 of IFRS 13 provides a number of factors that should be considered when
evaluating whether there has been a significant decrease in the volume or level of activity for the asset or liability. The entity must ‘evaluate the significance and relevance of factors such as the following :
(a) there are few recent transactions;
(b) price quotations are not developed using current information;
(c) price quotations vary substantially either over time or among market-makers (e.g. some brokered markets);
(d) indices that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that
asset or liability;
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Evaluating whether there has been a significant decrease in the volume and level of activity for
an asset or liability 3
(e) there is a significant increase in implied liquidity risk premiums, yields or performance indicators (such as delinquency rates or loss severities) for observed
transactions or quoted prices when compared with the entity’s estimate of expected cash flows, taking into account all available market data about credit and
other non-performance risk for the asset or liability;
(f) there is a wide bid-ask spread or significant increase in the bid-ask spread;
(g) there is a significant decline in the activity of, or there is an absence of, a market for new issues (i.e. a primary market) for the asset or liability or similar assets or liabilities;
(h) little information is publicly available (e.g. for transactions that take place in a principal-to-principal market)’. [IFRS 13.B37].
These factors are not intended to be all-inclusive and should be considered along with any additional factors that are relevant based on the individual facts and circumstances. Determining whether the asset or liability has experienced a significant decrease in
activity is based on the weight of the available evidence.
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Evaluating whether there has been a significant decrease in the volume and level of activity for
an asset or liability 4
IFRS 13 is clear that a decrease in the volume or level of activity, on its own, does not necessarily indicate that a transaction price or quoted price does not represent fair value or that a transaction in that market is not orderly. Additional analysis is required in these
instances to assess the relevance of observed transactions or quoted prices in these markets. When market volumes decrease, adjustments to observable prices (which could be significant) may be necessary (see Estimating fair value when there has been a significant decrease in the volume and level of
activity below).
As discussed at 16 below, an adjustment based on unobservable inputs that is significant to the fair value
measurement in its entirety would result in a Level 3 measurement. Observed prices associated with transactions that are not orderly would not be deemed to be representative of fair value.
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Evaluating whether there has been a significant decrease in the volume and level of activity for
an asset or liability - Can a market exhibit a significant decrease in volume or level of activity and still be considered active? 1
A significant decrease in the volume of transactions does not automatically imply that a market is no longer active. IFRS 13 defines a market as active if transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
While the same factors may be used to assess whether a market has experienced a significant decrease in activity and to determine whether a market is active or inactive, these are separate and distinct determinations.
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Evaluating whether there has been a significant decrease in the volume and level of activity for
an asset or liability - Can a market exhibit a significant decrease in volume or level of activity and still be considered active? 2
The determination that a market has experienced a significant decrease in volume does not change the requirements of IFRS 13 related to the use of relevant observable data from active markets. That is, despite a decrease from recent (or historical) levels of activity,
transactions for an asset or liability in a particular market may still occur with sufficient frequency and volume to provide pricing information on an ongoing basis, thereby qualifying as an active market.
If there has been a significant decrease in activity, but a
market is still deemed to be active, entities would continue to measure the fair value of identical instruments that trade in this market using P×Q (Level 1 measurement).
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Identifying transactions that are not orderly 1
IFRS 13 defines an orderly transaction as ‘a transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale)’. [IFRS 13 Appendix A]. This definition includes two
key components :
(i) adequate market exposure is required in order to provide market participants the ability to obtain an awareness and knowledge of the asset or liability necessary for a market-based exchange; and
(ii) the transaction should involve market participants that, while being motivated to transact for the asset or liability, are not compelled to do so.
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Identifying transactions that are not orderly 1
According to IFRS 13, ‘circumstances that may indicate that a transaction is not orderly include the following:
(a) There was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets or liabilities under current market conditions;
(b) There was a usual and customary marketing period, but the seller marketed the asset or liability
to a single market participant;
(c) The seller is in or near bankruptcy or receivership (i.e. the seller is distressed);
(d) The seller was required to sell to meet regulatory or legal requirements (i.e. the seller was forced);
(e) The transaction price is an outlier when compared with other recent transactions for the same or a similar asset or liability’. [IFRS 13.B43].
These factors are not intended to be all-inclusive and should be considered along with any additional factors that may be pertinent to the individual facts and circumstances.
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Identifying transactions that are not orderly 2
An entity must consider the following when measuring fair value or estimating market risk premiums :
• if the evidence indicates that a transaction is not orderly, the entity places little, if any, weight (compared with other indications of fair value) on that transaction price;
if the evidence indicates that a transaction is not orderly, the entity places little, if any, weight (compared with other indications of fair value) on that transaction price;
• if the evidence indicates that a transaction is orderly, the entity must take that transaction price into
account. The amount of weight placed on that transaction
price (compared with other indications of fair value)
will depend on facts and circumstances, such as:
(i) the volume of the transaction;
(ii) the comparability of the transaction to the asset
or liability being measured; and
(iii) the proximity of the transaction to the
measurement date; and
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Identifying transactions that are not orderly 3
• if an entity does not have sufficient information to determine whether a transaction is orderly, it must take that transaction price into account. However, it may not be representative of fair value, particularly where it is not the only or primary measure of fair value or market risk premium. Therefore, the entity must place less weight on those transactions (i.e. transactions the entity cannot conclude are orderly) and more weight on transactions that are known to be orderly. [IFRS 13.B44].
IFRS 13 acknowledges that the determination of whether a transaction is orderly may be more difficult if there has been a significant decrease in the volume or level of activity. However, the standard is clear that, even when there has been a significant decrease in the volume or level of activity for an asset or liability, it is not appropriate to conclude that all transactions in that market are not orderly (i.e. distressed or forced).
[IFRS 13.B43].
Instead, further assessment as to whether an observed transaction is not orderly generally needs to be made at the individual transaction level.
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Identifying transactions that are not orderly 4
IFRS 13 does not require an entity to undertake all possible efforts in assessing whether a transaction is orderly. However, information that is available without undue cost and effort cannot be ignored. For instance, when an entity is party to a transaction, the
standard presumes it would have sufficient information to conclude whether the transaction is orderly.
[IFRS 13.B44].
Conversely, the lack of transparency into the details
of individual transactions occurring in the market, to which the entity is not a party, can pose practical challenges for many entities in making this assessment. Recognising this difficulty, the IASB provided additional guidance in paragraph B44(c) of IFRS 13, which indicates that while observable data should not be ignored when the reporting entity
does not have sufficient information to conclude on whether the transaction is orderly, the entity should place less weight on those transactions in comparison to other transactions that the reporting entity has concluded are orderly (see 8.3 below for further discussion). [IFRS 13.B44(c)].
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Identifying transactions that are not orderly - Are all transactions entered into to meet regulatory requirements or transactions initiated during bankruptcy assumed to be not orderly?
Although an entity may be viewed as being compelled to sell assets to comply with regulatory requirements, such transfers are not necessarily disorderly. If the entity was provided with the usual and customary period of time to market the asset to multiple potential buyers, the transaction price may be representative
of the asset’s fair value.
Similarly, transactions initiated during bankruptcy are not automatically assumed to be disorderly. The determination of whether a transaction is not orderly requires a thorough evaluation of the specific facts and circumstances, including the exposure period and the number of potential buyers.
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Identifying transactions that are not orderly - Is it possible for orderly transactions to take place in a ‘distressed’ market? 1
Yes. While there may be increased instances of transactions that are not orderly when a market has undergone a significant decrease in volume, it is not appropriate to assume that all transactions that occur in a market during a period of dislocation are distressed or forced. This determination is made at
the individual transaction level and requires the use of judgement based on the specific facts and circumstances.
While market factors such as an imbalance in supply and demand can affect the prices at which transactions occur in a given market, such an imbalance, in and of itself, does not indicate that the parties to a transaction were not knowledgeable and willing market participants or that a transaction was not orderly. For example, a transaction in a dislocated market is less likely to be considered a ‘distressed sale’ when multiple buyers
have bid on the asset.
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Identifying transactions that are not orderly - Is it possible for orderly transactions to take place in a ‘distressed’ market? 2
In addition, while a fair value measurement incorporates the assumptions that sellers, as well as buyers, would consider in pricing the asset or liability, an entity’s conclusion that it would not sell its own asset (or transfer its own liability) at prices currently
observed in the market does not mean these transactions should be presumed to be distressed. IFRS 13 makes clear that fair value is a market-based measurement, not an entity-specific measurement, and notes that the entity’s intention to hold an asset or
liability is not relevant in estimating its fair value.
The objective of a fair value measurement is to estimate the exit price in an orderly transaction between willing
market participants at the measurement date under current market conditions. This price should include a risk premium that reflects the amount market participants would require as compensation for bearing any uncertainty inherent in the cash flows, and this
uncertainty (as well as the compensation demanded to assume it) may be affected by current marketplace conditions. The objective of a fair value measurement does not change when markets are inactive or in a period of dislocation.
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Estimating fair value when there has been a significant decrease in the volume and level of activity 1
Estimating the price at which market participants would be willing to enter into a transaction if there has been a significant decrease in the volume or level of activity for the asset or liability will depend on the specific facts and circumstances and will require
judgement. However, the core concepts of the fair value framework continue to apply. For example, an entity’s intentions regarding the asset or liability, e.g. to sell an asset or settle a liability, are not relevant when measuring fair value because that would result in an entity-specific measurement. [IFRS 13.B42].
If there has been a significant decrease in the volume or level of activity for the asset or liability, it may be appropriate to reconsider the valuation technique being used or to use multiple valuation techniques, for example, the use of both a market approach and
a present value technique (see Selection and use of valuation techniques when there has been a significant decrease in volume or level of activity below for further discussion). [IFRS 13.B40].
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Estimating fair value when there has been a significant decrease in the volume and level of activity 2
If quoted prices provided by third parties are used, an entity must evaluate whether those quoted prices have been developed using current information that reflects orderly transactions or a valuation technique that reflects market participant assumptions,
including assumptions about risk. This evaluation
must take into consideration the nature of a quote
(e.g. whether the quote is an indicative price or a
binding offer).
In weighting a quoted price as an input to a fair value measurement, more weight is given to quotes that reflect the result of actual transactions or those that represent binding offers. Less weight is given to quotes that are not binding, reflect indicative pricing or do not reflect the result of transactions.
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Estimating fair value when there has been a significant decrease in the volume and level of activity 3
In some instances, an entity may determine that a transaction or quoted price requires an adjustment, such as when the price is stale (old) or when the price for a similar asset requires significant adjustment to make it comparable to the asset being measured.
[IFRS 13.B38].
The impact of these adjustments may be significant to the fair value measure and, if so, would affect its categorisation in the fair value hierarchy (see Categorisation within the fair value hierarchy below
for further discussion on categorisation within the fair
value hierarchy).
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Assessing the relevance of observable data 1
While observable prices from inactive markets may not be representative of fair value in all cases, this data should not be ignored. Instead, paragraphs B38 and B44 of IFRS 13 clarify that additional analysis is required to assess the relevance of the observable data. [IFRS 13.B38, B44].
The relevance of a quoted price from an inactive market is dependent on whether the transaction is determined to be orderly. If the observed price is based on a transaction that is determined to be forced or disorderly, little, if any, weight should be placed on it compared
with other indications of value.
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Assessing the relevance of observable data 2
If the quoted price is based on a transaction that is determined to be orderly, this data point should be considered in the estimation of fair value. However,
the relevance of quoted prices associated with orderly transactions can vary based on factors specific to
the asset or liability being measured and the facts
and circumstances surrounding the price. Some of
the factors to be considered include:
* the condition and(or) location of the asset or liability;
* the similarity of the transactions to the asset or liability being measured (e.g. the extent to which the inputs relate to items that are comparable to the asset or liability);
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Assessing the relevance of observable data 3
* the size of the transactions;
* the volume or level of activity in the markets within which the transactions are observed;
* the proximity of the transactions to the measurement date; and
• whether the market participants involved in the transaction had access to information about the asset or liability that is usual and customary.
If the adjustments made to the observable price are significant and based on unobservable data, the resulting measurement would represent a Level 3 measurement.
Figure 14.3: Orderly transactions: measuring fair value and estimating market risk premiums
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Selection and use of valuation techniques when there has been a significant decrease in volume or level of activity 1
As discussed above, when activity has significantly decreased for an asset or liability, an
assessment of the relevance of observable market data will be required and adjustments to observable market data may be warranted. A significant decrease in volume or activity can also influence which valuation technique(s) are used and how those techniques are applied.
The following example from IFRS 13 highlights some key valuation considerations for assets that trade in markets that have experienced a significant decrease in volume and level of activity. [IFRS 13.IE49-58].
Example 14.9: Estimating a market rate of return when there is a significant decrease in volume or level of activity
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Selection and use of valuation techniques when there has been a significant decrease in volume or level of activity 2
In Example 14.9 above, Entity A uses an income approach (i.e. discount rate adjustment technique, see 21 below for further discussion regarding present value techniques) to estimate the fair value of its residential mortgage-backed security (RMBS), because limited trading activity precluded a market approach as at the measurement date.
Example 14.9 illustrates that the entity’s use of an income approach does not change the objective of the fair value measurement, which is a current exit price.
Valuation models should take into account all the factors that market participants would consider when
pricing an asset or liability. The discount rate used by Entity A, for example, tries to incorporate all of the risks (e.g. liquidity risk, non-performance risk) market participants would consider in pricing the RMBS under current market conditions. Liquidity, credit or any other risk factors market participants would consider in pricing the asset or liability may require adjustments to model values if such factors are not sufficiently captured in the model.
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Selection and use of valuation techniques when there has been a significant decrease in volume or level of activity 3
Entity A prioritises observable inputs (to the extent available) over unobservable inputs in its application of the income approach. Entity A assesses market-based
data from various sources to estimate the discount rate. For example, the entity estimates the change in the credit spread of the RMBS since its issuance based on spread changes observed from the most comparable index, for which trades continue to occur. Using the best available market information, the entity adjusts this input to account for differences between the observed index and the RMBS. These adjustments include the entity’s assessment of the additional liquidity risk inherent in the RMBS compared to the index.
Paragraph 89 of IFRS 13 indicates that an entity may use its own internal assumptions when relevant observable market data does not exist. [IFRS 13.89]. However, if reasonably available data indicates that market participant assumptions would differ, the entity should adjust its assumptions to incorporate that information. Relevant market data is not limited to transactions for the identical asset or liability being measured.
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Selection and use of valuation techniques when there has been a significant decrease in volume or level of activity 4
In the above example, Entity A is unable to use a market approach because of limited trading activity for the RMBS. Therefore, Entity A considers implied liquidity risk premiums from recent transactions for a range of similar securities to estimate the
incremental premium market participants would demand for its RMBS in the current market (as compared to the benchmark spread). In addition, Entity A considers two indicative broker quotes to estimate an appropriate discount rate for its RMBS.
Although these quotes are specific to the RMBS being valued, Entity A puts less weight on these quotes since they are not binding and are not based on actual transactions. Furthermore, Entity A was unable to evaluate the valuation techniques and underlying
data used by the brokers.
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Estimating fair value when there has been a significant decrease in the volume and level of activity - Selection and use of valuation techniques when there has been a significant decrease in volume or level of activity 5
Importantly, the illustrative example is not intended to imply that an entity’s own assumptions carry more weight than non-binding broker quotes. Rather, the example illustrates that each indication of value needs to be assessed based on the extent these indications
rely on observable versus unobservable inputs.
Even though the market approach could not be used because of limited trading activity for the RMBS, Entity A was able to corroborate many of the assumptions used in developing the discount rate with relevant observable market data. As a result, the decision by the entity to place additional weight on its own market-corroborated assumptions (and less on the broker quotes) was warranted. When differences between
broker quotes or pricing service data and an entity’s own determination of value are significant, management should seek to understand the reasons behind these differences, if possible.
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THE PRICE
THE PRICE
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‘Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique’. [IFRS 13.24].
IFRS 13 requires the entity to estimate fair value based on the price that would be received to sell the asset or transfer the liability being measured (i.e. an exit price). While the determination of this price may be straightforward in some cases (e.g. when the
identical instrument trades in an active market), in others it will require significant judgement. However, IFRS 13 makes it clear that the price used to measure fair value shall not be adjusted for transaction costs, but would consider transportation costs.
[IFRS 13.25, 26].
The standard’s guidance on the valuation techniques and inputs to these techniques used in determining the exit price (including the prohibition on block discounts) is discussed at VALUATION TECHNIQUES and INPUTS TO VALUATION TECHNIQUES below.
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Transaction costs
Transaction costs are defined as the costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that are directly attributable to the disposal of an asset or the transfer of the liability. In addition, these costs must be incremental, i.e. they would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made. [IFRS 13 Appendix A].
Examples of transaction costs include commissions or certain due diligence costs. As noted above, transaction costs do not include transportation costs.
Fair value is not adjusted for transaction costs. This is because transaction costs are not a characteristic of an asset or a liability; they are a characteristic of the transaction. While not deducted from fair value, an entity considers transaction costs in the context of determining the most advantageous market (in the absence of a principal market – see The most advantageous market above) because in this instance the entity is seeking to determine the market that would maximise the net amount that would be received for the asset.
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Transaction costs - Are transaction costs in IFRS 13 the same as ‘costs to sell’ in other IFRSs? 1
As discussed at Measurements based on fair value above, some IFRSs permit or require measurements based on fair value, where costs to sell or costs of disposal are deducted from the fair value
measurement. IFRS 13 does not change the measurement objective for assets accounted
for at fair value less cost to sell. The ‘fair value less cost to sell’ measurement objective includes: (1) fair value; and (2) cost to sell. The fair value component is measured in accordance with the IFRS 13.
Consistent with the definition of transaction costs in IFRS 13, IAS 36 describes costs of disposal as ‘the direct incremental costs attributable to the disposal of the asset or cashgenerating unit, excluding finance costs and income tax expense’. [IAS 36.6]. IAS 41 and IFRS 5 similarly define costs to sell.
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Transaction costs - Are transaction costs in IFRS 13 the same as ‘costs to sell’ in other IFRSs? 2
As such, transaction costs excluded from the determination of fair value in accordance with IFRS 13 will generally be consistent with costs to sell or costs of disposal, determined in other IFRSs (listed at Measurements based on fair value above), provided
they exclude transportation costs.
Since the fair value component is measured in accordance with IFRS 13, the standard’s
disclosure requirements apply in situations where the fair value less cost to sell measurement is required subsequent to the initial recognition (unless specifically exempt from the disclosure requirements, see DISCLOSURES below). In addition, IFRS 13 clarifies
that adjustments used to arrive at measurements based on fair value (e.g. the cost to sell when estimating fair value less cost to sell) should not be considered when determining where to categorise the measurement in the fair value hierarchy (see THE FAIR VALUE HIERARCHY below).
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Transaction costs - Transaction costs in IFRS 13 versus acquisition-related transaction costs in other IFRSs 1
The term ‘transaction costs’ is used in many IFRSs, but sometimes it refers to transaction costs actually incurred when acquiring an item and sometimes to transaction costs expected to be incurred when selling an item. While the same term might be used, it is
important to differentiate between these types of transaction costs.
IAS 36, IAS 41 and IFRS 5 discuss costs to sell or dispose of an item (as discussed at Are transaction costs in IFRS 13 the same as ‘costs to sell’ in other IFRSs? above).
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Transaction costs - Transaction costs in IFRS 13 versus acquisition-related transaction costs in other IFRSs 2
In contrast, other standards refer to capitalising or expensing transaction costs incurred in the context of acquiring an asset, assuming a liability or issuing an entity’s own equity (a buyer’s perspective). IFRS 3, for example, requires acquisition-related costs to be
expensed in the period incurred. [IFRS 3.53].
IFRS 13 indicates that transaction costs are not included in a fair value measurement. As such, actual transaction costs (e.g. commissions paid) that are incurred by an entity when acquiring an asset would not be included at initial recognition when fair value is the measurement objective. Likewise, transaction costs that would be incurred in a hypothetical sales transaction would also not be included in a fair
value measurement.
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Transaction costs - Transaction costs in IFRS 13 versus acquisition-related transaction costs in other IFRSs 3
Some standards permit acquisition-related transaction costs to be capitalised at initial recognition, then permit or require the item, to which those costs relate, to be subsequently measured at fair value. In those situations, some or all of the acquisition related transaction costs that were capitalised will effectively be expensed as part of the resulting fair value gain or loss. This is consistent with current practice.
For example, IAS 40 permits transaction costs to be capitalised as part of an investment property’s cost on initial recognition. [IAS 40.20]. However, if the fair value model is applied to the subsequent measurement of the investment property, transaction costs would be
excluded from the fair value measurement.
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Transaction costs - Transaction costs in IFRS 13 versus acquisition-related transaction costs in other IFRSs 4
Similarly, at initial recognition, financial assets or liabilities in the scope of IFRS 9 are generally measured at their ‘fair value plus or minus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly
attributable to the acquisition or issue of the
financial asset or liability’. [IFRS 9.5.1.1].
For those items subsequently measured at amortised cost, these transaction costs will be captured as part of the instrument’s effective interest rate.
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Transportation costs
Transportation costs represent those that would be incurred to transport an asset or liability to (or from) the principal (or most advantageous) market. If location is a characteristic of the asset or liability being measured (e.g. as might be the case with a commodity), the price in the principal (or most advantageous) market should be adjusted for transportation costs.
The following simplified example illustrates this concept.
Example 14.10: Transportation costs
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APPLICATION TO NON-FINANCIAL ASSETS
APPLICATION TO NON-FINANCIAL ASSETS
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Many non-financial assets, either through the initial or subsequent measurement requirements of an IFRS or, the requirements of IAS 36 for impairment testing (if
recoverable amount is based on fair value less costs of disposal), are either permitted or required to be measured at fair value (or a measure based on fair value).
For example, management may need to measure the fair value of non-financial assets and liabilities
when completing the purchase price allocation for a business combination in accordance with IFRS 3. First-time adopters of IFRS might need to measure fair value of assets and liabilities if they use a ‘fair value as deemed cost’ approach in accordance with IFRS 1 – First-time Adoption of International Financial Reporting Standards
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The principles described in the sections above apply to non-financial assets. In addition, the fair value measurement of non-financial assets must reflect the highest and best use of the asset from a market participant’s perspective.
The highest and best use of an asset establishes the valuation premise used to measure the fair value of the asset. In other words, whether to assume market participants would derive value from using the non-financial asset (based on its highest and best use) on its own or in combination with other assets or with other assets and liabilities. As discussed below, this might be its current use or some alternative use.
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As discussed at 4.2 above, the concepts of highest and best use and valuation premise in IFRS 13 are only relevant for non-financial assets (and not financial assets and liabilities). This is because:
• financial assets have specific contractual terms; they do not have alternative uses. Changing the characteristics of the financial asset (i.e. changing the contractual terms) causes the item to become a different asset and the objective of a fair value measurement is to measure the asset as it exists as at the measurement date;
• the different ways by which an entity may relieve itself of a liability are not alternative uses. In addition, entity-specific advantages (or disadvantages) that
enable an entity to fulfil a liability more or less efficiently than other market participants are not considered in a fair value measurement; and
• the concepts of highest and best use and valuation premise were developed within the valuation profession to value non-financial assets, such as land. [IFRS 13.BC63].
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Highest and best use 1
Fair value measurements of non-financial assets take into account ‘a market participant’s ability to generate economic benefits by using the asset in its highest and
best use or by selling it to another market participant that would use the asset in its highest and best use’. [IFRS 13.27].
Highest and best use refers to ‘the use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used’. [IFRS 13 Appendix A].
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Highest and best use 2
The highest and best use of an asset considers uses of the asset that are:
(a) physically possible: the physical characteristics of the asset that market participants would take into account when pricing the asset (e.g. the location or
size of a property);
(b) legally permissible: any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (e.g. the zoning
regulations applicable to a property); and
(c) financially feasible: whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market
participants would require from an investment in that asset put to that use. [IFRS 13.28].
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Highest and best use 3
Highest and best use is a valuation concept that considers how market participants would use a non-financial asset to maximise its benefit or value. The maximum value of a non-financial asset to market participants may come from its use: (a) in combination with other assets or with other assets and liabilities; or (b) on a standalone basis.
In determining the highest and best use of a non-financial asset, paragraph 28 of IFRS 13 indicates uses that are physically possible, legally permissible (see Highest and best use: determining what is legally
permissible below for further discussion) and financially feasible should be considered. As such, when assessing alternative uses, entities should consider the physical characteristics of the asset, any legal restrictions on its use and whether the value generated provides an adequate investment return
for market participants.
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Highest and best use 4
Provided there is sufficient evidence to support these assertions, alternative uses that would enable market participants to maximise value should be considered, but a search for potential alternative uses need not be exhaustive.
In addition, any costs to transform the non-financial asset (e.g. obtaining a new zoning permit or converting the asset to the alternative use) and profit expectations from a market participant’s perspective are also considered in the fair value measurement.
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Highest and best use 5
If there are multiple types of market participants who would use the asset differently, these alternative scenarios must be considered before concluding on the asset’s highest and best use. While applying the fair value framework may be straightforward in many
situations, in other instances, an iterative process may be needed to consistently apply the various components. This may be required due to the interdependence among several key concepts in IFRS 13’s fair value framework (see Figure 14.2 at 4.2
above).
For example, the highest and best use of a non-financial asset determines its valuation premise and affects the identification of the appropriate market participants. Likewise, the determination of the principal (or most advantageous) market can be important in determining the highest and best use of a non-financial asset.
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Highest and best use 6
Determining whether the maximum value to market participants would be achieved either by using an asset in combination with other assets and liabilities as a group, or by using the asset on a stand-alone basis, requires judgement and an assessment of the
specific facts and circumstances.
A careful assessment is particularly important when the highest and best use of a nonfinancial asset is in combination with one or more non-financial assets.
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Highest and best use 7
As discussed at Valuation premise for non-financial assets below, assets in an asset group should all be valued using the same valuation premise. For example, if the fair value of a piece of machinery on a
manufacturing line is measured assuming its highest and best use is in conjunction with other equipment in the manufacturing line, those other non-financial assets in the asset group (i.e. the other equipment on the manufacturing line) would also be valued using the same premise.
As highlighted by Example 14.13 at Valuation premise – in combination with other assets and/or liabilities below,
once it is determined that the value for a set of assets is maximised when considered as a group, all of the assets in that group would be valued using the same premise,
regardless of whether any individual asset within the group would have a higher value on a stand-alone basis.
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Highest and best use - Highest and best use : determining what is legally permissible 1
To be legally permissible, the standard indicates a use of a non-financial asset need not be legal (or have legal approval) at the measurement date, but it must not be legally prohibited in the jurisdiction. [IFRS 13.BC69].
What is legally permissible is a matter of law. However, the IASB seems to be distinguishing between a use that is explicitly prohibited and a use that would be
permitted if the jurisdiction’s specific legal requirements were met. However, in some situations it may be difficult to determine whether a use is capable of being legally permitted when, at the measurement date, it is subject to legal restrictions that are not easily overcome.
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Highest and best use - Highest and best use : determining what is legally permissible 1
To be legally permissible, the standard indicates a use of a non-financial asset need not be legal (or have legal approval) at the measurement date, but it must not be legally prohibited in the jurisdiction. [IFRS 13.BC69].
What is legally permissible is a matter of law. However, the IASB seems to be distinguishing between a use that is explicitly prohibited and a use that would be
permitted if the jurisdiction’s specific legal requirements were met. However, in some situations it may be difficult to determine whether a use is capable of being legally permitted when, at the measurement date, it is subject to legal restrictions that are not
easily overcome.
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Highest and best use - Highest and best use : determining what is legally permissible 2
The standard gives the example of a land development. Assume the government has prohibited building on or developing certain land (i.e. the land is a protected area). For the entity to develop the land, a change of law would be required. Since development of this land would be illegal, it cannot be the
highest and best use of the land.
Alternatively, assume the land has been zoned for commercial use, but nearby areas have recently been developed for residential use and, as such, market
participants would consider residential development as a potential use of the land. Since re-zoning the land for residential development would only require approval from an authority and that approval is usually given, this alternative use could be deemed to be legally permissible.
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Highest and best use - Highest and best use : determining what is legally permissible 4
The scenarios, of protected land and re-zoning of land, considered above illustrate either end of the spectrum; uses that are unlikely and likely to be legally permissible, respectively. However, consider the protected land example above. Assume the
government were expected to change the law in the near future to permit residential development, but there had not been any similar changes in law to date. An entity would need to consider the weight of evidence available and whether market participants would have similar expectations.
This may be more difficult without past history of similar changes in law. However, an entity might consider factors such as whether expectations are based on verbal assurances or written evidence; whether the process to change the law has begun; and the risk that the change in law will not be approved. It may also help to determine whether market participants
would pay for this potential. However, this fact, on its own, is unlikely to be sufficient to support a use being legally permissible.
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Highest and best use - Highest and best use : determining what is legally permissible 5
In our view, an entity would need to have sufficient evidence to support its assumption about the potential for an alternative use, particularly in light of
IFRS 13’s presumption that the highest and best use is an asset’s current use. In the example above of re-zoning land for residential development, the entity’s belief that re-zoning was possible (or even likely) is unlikely to be sufficient evidence that the re-zoning is legally permissible.
However, the fact that nearby areas had recently
been re-zoned for residential use may provide additional evidence as to the likelihood that the land being measured could similarly be re-zoned. If obtaining rezoning permission is not merely perfunctory, there may be a significant burden on the entity to prove that market participants would consider commercial use of the
land ‘legally permissible’.
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Highest and best use - Highest and best use versus current use 1
Although IFRS 13 presumes that an entity’s current use of an asset is its highest and best use, market or other factors may suggest that a different use by market
participants would maximise the value of that asset. [IFRS 13.29]. Because the highest and best use of an asset is determined based on market participants’ expectations, reporting entities may need to consider alternative uses of an asset (e.g. land) in their
analysis of fair value.
An entity’s current or intended use of a non-financial asset might not be the highest and best use of the asset, and thus would not determine its premise of value. Instead, the highest and best use of the asset (or asset group) should be determined based on how market participants would maximise the asset’s value.
For example, market participants may maximise the value of land, currently used as a site for a manufacturing facility, for residential housing instead.
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Highest and best use - Highest and best use versus current use 2
The consideration of alternative uses is not intended to be exhaustive. It is not necessary that all possible alternatives be considered. Instead, judgement is required in assessing those alternative uses that market participants would consider in pricing
the asset. As noted above, consideration of what is physically possible, legally permissible and financially feasible would be part of this assessment.
Example 14.11, based on an example in IFRS 13, illustrates this further. If an entity determines that the highest and best use of an asset is different from its current use, IFRS 13 requires that fact to be disclosed as well as the reason why the non-financial asset is being used in a manner that differs from its highest and best use (disclosures are discussed further at 20 below). [IFRS 13.93(i)]
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Highest and best use - Highest and best use versus current use 3
It is important to note that even if the current use of a non-financial asset is the same as its highest and best use, the underlying assumptions used to value the asset should not be entity-specific, but instead should be based on the assumptions that market participants would use when transacting for the asset in its current condition.
Entity specific synergies, if they would differ from market participant synergies, would not be considered in the determination of the highest and best use of the asset. This is illustrated in Example 14.11. [IFRS 13.IE7-8].
Example 14.11: Highest and best use versus current use
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Highest and best use - Highest and best use versus current use 3
It is important to note that even if the current use of a non-financial asset is the same as its highest and best use, the underlying assumptions used to value the asset should not be entity-specific, but instead should be based on the assumptions that market participants would use when transacting for the asset in its current condition.
Entity specific synergies, if they would differ from market participant synergies, would not be considered in the determination of the highest and best use of the asset. This is illustrated in Example 14.11. [IFRS 13.IE7-8].
Example 14.11: Highest and best use versus current use
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Highest and best use - Highest and best use versus intended use (including defensive value) 1
An entity’s intended use of an asset, at the time it is acquired, may not be the same as how market participants would use the asset. If the highest and best use and the entity’s intended use of an asset are not the same, it could result in differences between the price to acquire the asset and fair value measured in accordance with IFRS 13 (see FAIR VALUE AT INITIAL RECOGNITION below).
IFRS 13 requires that the highest and best use of an asset be determined from the perspective of market participants, even if management intends a different use,
[IFRS 13.29, 30], as is illustrated in Example 14.12.
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Highest and best use - Highest and best use versus intended use (including defensive value) 2
In certain instances, the highest and best use of an asset may be to not actively use it, but instead to lock it up or ‘shelve it’ (commonly referred to as a defensive asset). That is, the maximum value provided by an asset may be its defensive value.
IFRS 13 clarifies that the fair value of an asset used defensively is not assumed to be zero or a nominal amount.
Instead, an entity should consider the incremental value such a use provides to the assets being protected, such as the incremental value provided to an entity’s existing
brand name by acquiring and shelving a competing brand. Generally speaking, a nominal fair value is appropriate only when an asset is abandoned (i.e. when an entity would be willing to give the asset away for no consideration).
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Highest and best use - Highest and best use versus intended use (including defensive value) 3
Importantly, an entity’s decision to use an asset defensively does not mean that market participants would necessarily maximise the asset’s value in a similar manner. Likewise, an entity’s decision to actively use an asset does not preclude its highest
and best use to market participants as being defensive in nature.
The following example in IFRS 13 illustrates these points. [IFRS 13.IE9].
Example 14.12: Highest and best use versus intended use
The fair value of the in-process research and development project in Example 14.12 above depends on whether market participants would use the asset offensively, defensively or abandon it (as illustrated by points (a), (b) and (c) in the example, respectively).
As discussed at Highest and best use above, if there are multiple types of market participants who would use the asset differently, these alternative scenarios must be
considered before concluding on the asset’s highest and best use.
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Valuation premise for non-financial assets
Dependent on its highest and best use, the fair value of the non-financial asset will either be measured based on the value it would derive on a stand-alone basis or in combination with other assets or other assets and liabilities – i.e. the asset’s valuation premise.
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Valuation premise – stand-alone basis 1
If the highest and best use of the asset is to use it on a stand-alone basis, an entity measures the fair value of the asset individually. In other words, the asset is assumed to be sold to market participants for use on its own. Fair value is the price that would be received in a current transaction under those circumstances. [IFRS 13.31(b)]. For instance, alternative (c) of Example 14.12 above suggests the highest and best use of the research and development project could be to cease development.
Since its highest and best use is on a stand-alone basis, the fair value of the project would be the price that would be received in a current transaction to sell the project on its own and assuming a market participant would cease development of the project. In addition, the asset should be measured based only on its current characteristics, potentially requiring an adjustment for transformation costs. For example, if land that is used as a factory site is to be valued on a stand-alone basis, transformation costs (e.g. the cost of removing the factory) should be considered in the fair value measurement.
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Valuation premise for non-financial assets -
Valuation premise – stand-alone basis 2
When the valuation premise of one non-financial asset in an asset group is valued on a standalone basis, all of the other assets in the group should also be valued using a consistent valuation premise. For example, based on Example 14.11 at Highest and best use versus current use above, if the highest and best use of the land is determined to be on a stand-alone basis (i.e. as vacant land), the fair value of the equipment in the factory could be determined under two alternative valuation premises: (a) stand-alone (i.e. the value of the equipment sold on a stand-alone basis); or (b)
in conjunction with other equipment on the operating line, but in a different factory (i.e. not in combination with the land, since the land would be valued on a stand-alone basis).
Regardless of the valuation premise used to measure the equipment, market participant assumptions regarding the cost of redeployment, such as costs for disassembling, transporting and reinstalling the equipment should be considered in the fair value measurement.
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Valuation premise for non-financial assets -
Valuation premise – in combination with other
assets and/or liabilities 1
If the highest and best use of a non-financial asset is in combination with other assets as a group or in combination with other assets and liabilities, the fair value of the asset is the price that would be received in a current transaction to sell the asset and would assume that:
(i) market participants would use the asset together with other assets or with other assets and liabilities; and
(ii) those assets and liabilities (i.e. its complementary assets and the associated liabilities) would be available to market participants. [IFRS 13.31(a)(i)]. That is, the fair
value of the asset would be measured from the perspective of market participants who are presumed to hold the complementary assets and liabilities (see How should associated liabilities be considered when
measuring the fair value of a non-financial asset? below for further discussion regarding associated liabilities).
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Valuation premise for non-financial assets -
Valuation premise – in combination with other assets and/or liabilities 2
Once an entity determines that the valuation premise for a non-financial asset is its use in combination with a set of assets (or assets and liabilities), all of the complementary non-financial assets in that group should be valued using the same valuation premise
(i.e. assuming the same highest and best use), regardless of whether any individual asset within the group would have a higher value under another premise. [IFRS 13.31(a)(iii)].
Example 14.13 illustrates this further.
Example 14.13: Consistent assumptions about highest and best use in an asset group
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Valuation premise for non-financial assets -
Valuation premise – in combination with other assets and/or liabilities 3
When the asset’s highest and best use is in combination with other items, the effect of the valuation premise on the measurement of fair value will depend on the specific
circumstances.
IFRS 13 gives the following examples.
(a) The fair value of the asset might be the same whether it’s on a stand-alone basis or in an asset group.
This may occur if the asset is a business that market participants would continue to operate, for example, when a business is measured at fair value at initial recognition in accordance with IFRS 3. The transaction would involve valuing the business in its entirety. The use of the assets as a group in an ongoing business would generate synergies that would be available to market participants (i.e. market participant synergies that, therefore, should affect the fair value of the asset on either a standalone basis or in combination
with other assets or with other assets and liabilities).
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Valuation premise – in combination with other assets and/or liabilities 4
(b) An asset’s use in an asset group might be incorporated into the fair value measurement
through adjustments to the value of the asset used on a stand-alone basis.
For example, assume the asset to be measured at fair value is a machine that is installed and configured for use. If the fair value measurement is determined using an observed price for a similar machine that is not installed or otherwise configured for use, it would need to be adjusted for transport and installation costs so that the fair value measurement reflects the current condition and location of the machine.
c) An asset’s use in an asset group might be incorporated into the fair value measurement through the market participant assumptions used to measure the fair value of the asset.
For example, the asset might be work in progress inventory that is unique and market participants would convert the inventory into finished goods. In that situation, the fair value of the inventory would assume that market participants have acquired or would acquire any specialised machinery necessary to convert the inventory into finished goods.
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Valuation premise – in combination with other assets and/or liabilities 5
(d) An asset’s use in combination with other assets or with other assets and liabilities might be incorporated into the valuation technique used to measure the fair value of the asset.
That might be the case when using the multi-period excess earnings method to measure the fair value of an intangible asset because that valuation technique
specifically takes into account the contribution of any complementary assets and the associated liabilities in the group in which such an intangible asset would
be used.
(e) In more limited situations, when an entity uses an asset within a group of assets, the entity might measure the asset at an amount that approximates its fair value when allocating the fair value of the asset group to the individual assets of the group.
For example, this might be the case if the valuation involves real property and the fair value of improved property (i.e. an asset group) is allocated to its component assets (such as land and improvements). [IFRS 13.B3].
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Valuation premise for non-financial assets -
Valuation premise – in combination with other assets and/or liabilities 6
Although the approach used to incorporate the valuation premise into a fair value measurement may differ based on the facts and circumstances, the determination of a non-financial asset’s valuation premise (based on its highest and best use) and the inputs applied in the valuation technique used to estimate fair value should always be considered
from the perspective of market participants, not the reporting entity.
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Valuation premise for non-financial assets -
How should associated liabilities be considered when measuring the fair value of a non-financial asset?
As discussed at Valuation premise – in combination with other assets and/or liabilities above, an asset’s highest and best use might be in combination with associated liabilities and complementary assets in an asset group. IFRS 13.B3(d), for example, notes that an asset’s use in combination with other assets and liabilities might be incorporated when using the multi-period excess earnings method to measure the fair value of an intangible asset that has been acquired in a business acquisition. [IFRS 13.B3]. The multi-period excess earnings method specifically takes into account the contribution of any complementary assets and the associated liabilities in the group in which such an intangible asset would be used.
‘Associated liabilities’ is not defined and IFRS 13 provides limited guidance on the types of liabilities that could be considered associated to a non-financial asset. IFRS 13 provides some guidance, stating that associated liabilities can include those that fund working capital, but must exclude liabilities used to fund assets other than those within the group of assets. [IFRS 13.31(a)(ii)].
Management will need to exercise judgement in determining which liabilities to include or exclude from the group, based on the specific facts and circumstances. This assessment must reflect what market participants would consider when determining the non-financial asset’s highest and best use. Entities will need to be careful to exclude entity-specific
assumptions when valuing liabilities, particularly if valuation techniques are used that are based on their own data (valuation techniques are discussed further at VALUATION TECHNIQUES below).
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Valuation premise for non-financial assets -
Unit of account versus the valuation premise 1
Fair value measurement of a non-financial asset assumes the asset is sold consistently with its unit of account (as specified in other IFRSs), irrespective of its
valuation premise. This assumption applies even if the highest and best use of the asset is in combination with other assets and/or liabilities. This is because the fair value measurement contemplates the sale of the individual asset to market participants that already hold, or are able to obtain, the complementary assets and liabilities. [IFRS 13.32]
Only when the unit of account of the item being measured at fair value is an asset group (which may be the case when measuring non-financial assets for impairment as part of a cash-generating unit), can one consider the sale of an asset group. That is, the valuation premise for a non-financial asset does not override the unit of account as defined by the applicable IFRS. However, this can be confusing in practice as both concepts deal with determining the appropriate
level of aggregation or disaggregation for assets and liabilities.
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Valuation premise for non-financial assets -
Unit of account versus the valuation premise 2
Unit of account is an accounting concept. It identifies what is being measured for financial reporting purposes. When applying IFRS 13, this drives the level of aggregation (or disaggregation) for presentation and disclosure purposes, for example, whether the
information presented and disclosed in the financial statements is for an individual asset or for a group of assets.
The valuation premise is a valuation concept (sometimes referred to as the ‘unit of valuation’). It determines how the asset or liability is measured, i.e. based on the value it derives on a stand-alone basis or the value it derives in conjunction with other assets and liabilities. As discussed above, the unit of account established by an IFRS may be an individual item. However, that item may need to be grouped with others for the purpose of measuring fair value, i.e. the valuation premise may differ from the unit of account.
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Unit of account versus the valuation premise 3
For example, an entity may own an investment property that is attached to land and contains other assets, such as fixtures and fittings. The unit of account for the investment property would likely be the stand-alone asset in accordance with IAS 40. However, the value of this asset on a stand-alone basis may have little meaning since it is physically attached to the land and derives its benefit in combination with the fixtures and fittings in the building. Therefore, when determining fair value, the valuation premise would likely reflect its use in combination with other assets.
It is important to note that when the valuation premise for measuring the fair value of a non-financial asset (or group of assets and corresponding liabilities) differs from its unit of account, categorisation within IFRS 13’s fair value hierarchy (for disclosure purposes) must be determined at a level consistent with the unit of account for the asset or liability (see Categorisation within the fair value hierarchy below).
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FAIR VALUE AT INITIAL RECOGNITION
FAIR VALUE AT INITIAL RECOGNITION
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Exit price versus entry price
IFRS 13 defines fair value as the price that would be received to sell the asset or paid to transfer the liability; this is an exit price notion. When an entity acquires an asset, or assumes a liability, the price paid (or the transaction price) is an entry price. Conceptually, entry prices and exit prices are different. Entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not necessarily transfer liabilities at the prices received
to assume them.
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This distinction is significant and can have important implications on the initial recognition of assets and liabilities at fair value. However, IFRS 13 acknowledges that, in many cases, an entry price may equal an
exit price (e.g. when the transaction takes place in the entity’s principal market); since one party is selling an asset, that transaction is also an exit transaction.
[IFRS 13.57, 58].
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Exit price versus entry price - Assessing whether the transaction price equals fair value at initial
recognition 1
Prior to the issuance of IFRS 13, it was common for entities to use the transaction price as fair value of an asset or liability on its initial recognition. While IFRS 13 acknowledges that in many situations, an entry price may equal an exit price, it does not presume that
these prices are equal. Therefore, an entity must determine whether the transaction price represents the fair value of an asset or liability at initial recognition. [IFRS 13.59].
Paragraph B4 of IFRS 13 provides certain factors that an entity should consider in making this determination. For example, a transaction price may not represent fair value if the unit of account represented by the transaction price is different from the unit of account for the asset or liability measured at fair value. [IFRS 13.B4(c)]. This may be the case with a complex financial instrument where the transaction price includes a fee for structuring the transaction or when an entity acquires a block and the transaction price includes a block discount.
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Exit price versus entry price - Assessing whether the transaction price equals fair value at initial
recognition 2
Another factor to consider is whether the market in which an entity acquired the asset (or assumed the liability) is different from the principal (or most advantageous) market in which the entity will sell the asset (or transfer the liability). [IFRS 13.B4(d)]. For example, a securities dealer may acquire an asset in the retail market but sell it in the inter-dealer
market.
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However, the fair value measurement should consider the fact that, while the inter-dealer price (i.e. the exit price in a hypothetical transaction) may differ from the
retail price (i.e. transaction price), another dealer would also expect to earn a profit on the transaction. Accordingly, a pricing model’s value should incorporate assumptions regarding the appropriate profit margin that market participants (i.e. other dealers) would demand when estimating the instrument’s fair value at inception.
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Exit price versus entry price - Assessing whether the transaction price equals fair value at initial
recognition 3
Other examples identified by paragraph B4 of IFRS 13 include:
• the transaction is between related parties – although IFRS 13 does allow the price in a related party transaction to be used as an input into a fair value measurement if the entity has evidence that the transaction was entered into at market terms; and
• the transaction takes place under duress or the seller is forced to accept the price in the transaction – for example, if the seller is experiencing financial difficulty.
[IFRS 13.B4(a)-(b)].
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Exit price versus entry price - Assessing whether the transaction price equals fair value at initial
recognition 4
In addition, the measurement of fair value in accordance with IFRS 13 should take into
consideration market participant assumptions about risk. Adjustments for uncertainty associated with a valuation technique or certain inputs used to measure fair value are required if market participants would incorporate such risk adjustments when pricing
the asset or liability. A measurement (e.g. a ‘mark-to-model’ measurement) that ignores these market participant adjustments for risk is not representative
of fair value.
While helpful in identifying the factors entities should consider in assessing whether a transaction price would equal fair value, the examples provided in the standard are not intended to be exhaustive.
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Day one gains and losses
IFRS 13’s measurement framework applies to initial fair value measurements, if permitted or required by another IFRS. At initial recognition, if the measurement of fair
value in accordance with IFRS 13 and the transaction price differ, the entity recognises the resulting gain or loss in profit or loss unless the related IFRS (i.e. the IFRS that permits or requires the initial measurement at fair value) specifies otherwise. [IFRS 13.60].
As noted in Example 14.21 below, IFRS 9 has specific requirements with regard to the recognition of inception (or ‘day one’) gains and losses for financial instruments within the scope of the standard (see Chapter 45). In developing IFRS 13, the IASB did not
change the recognition threshold in those standards in relation to day one gains or losses. However, IFRS 9 was amended to clarify that an entity: (i) measures the fair value of financial instruments at initial recognition in accordance with IFRS 13, then; (ii) considers the requirements of IFRS 9 in determining whether (and when) the resulting difference (if any) between fair value at initial recognition and the transaction price is
recognised. [IFRS 13.BC138].
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Related party transactions
As discussed at MARKET PARTICIPANTS above, the definition of market participants makes it clear that buyers and sellers for the item being measured are not related parties (as defined in IAS 24). That is, the hypothetical transaction used to determine fair value in IFRS 13 is assumed to take place between market participants that are independent from one another.
However, IFRS 13 indicates that the price in a related party transaction may be used as an input into a fair value measurement if there is evidence the transaction was entered into at market terms.
The Boards believe such an approach is consistent with the requirements of IAS 24. As with disclosures made in accordance with IAS 24, evidence to support that a related party transaction was executed at market terms may be difficult to substantiate absent corroborating market data from transactions between independent parties.
