ACCA Strategic Professional · Strategic Business Reporting (International)

Fair value measurement: formula sheet

Full chapter guide

Key formulas

Fair value definition: Fair value = price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; This is an exit price. It is not what the entity paid, and it is not the entity's own value.
Fair value less costs of disposal: FVLCD = fair value − incremental costs directly attributable to disposal; Fair value itself is measured before transaction costs. Costs are deducted only where a standard such as IAS 36 or IFRS 5 asks for them.
Scope rule: IFRS 13 applies when another IFRS requires or permits fair value measurement or disclosure; Main exclusions: IFRS 2 share-based payments, IFRS 16 leases, and measures similar to but not fair value (NRV in IAS 2, value in use in IAS 36).
Transaction costs: Fair value excludes transaction costs; Transaction costs are not a feature of the asset or liability. They do not form part of the fair value price.
Fair value definition: Fair value = price received to sell an asset (or paid to transfer a liability) in an orderly transaction between market participants at the measurement date; An exit price, from the viewpoint of market participants, not the entity.
Market selection rule: Use the principal market; if none, use the most advantageous market; Principal = greatest volume and activity. Most advantageous = best net amount after transaction and transport costs.
Net amount for choosing the most advantageous market: Price in market − transaction costs − transport costs = net proceeds; Use this only to select the market.
Fair value in the chosen market: Fair value = price in the chosen market − transport costs (if location is a characteristic); Transaction costs are NOT deducted from fair value.
Highest and best use tests: Physically possible + legally permissible + financially feasible; Applies to non-financial assets. Assessed from a market participant's viewpoint.
Fair value definition: Fair value = price received to sell an asset (or paid to transfer a liability) in an orderly transaction between market participants at the measurement date; It is an exit price and market-based, not entity-specific.
Three valuation approaches: Market approach | Cost approach | Income approach; Use techniques that are appropriate and have sufficient data. More than one may be used.
Cost approach: Current replacement cost = cost to replace equivalent utility − physical, functional and economic obsolescence; Obsolescence is wider than depreciation in the accounting records.
Income approach (discounted cash flow): Fair value = Σ [Cash flow in year t ÷ (1 + r)^t]; Cash flows and discount rate must reflect market participant assumptions and be consistent in currency and risk.
Input priority: Level 1 (quoted, identical, active market) > Level 2 (other observable) > Level 3 (unobservable); Maximise observable inputs. The overall level equals the lowest significant input level.
Transaction costs: Fair value excludes transaction costs; Transaction costs are not a feature of the asset. Transport costs are deducted if location is a characteristic of the asset.
Level 1 inputs: Quoted price (unadjusted), identical item, active market, accessible at measurement date; Highest priority. Use it where available, subject to the exceptions in IFRS 13.
Level 2 inputs: Observable inputs other than Level 1 prices (direct or indirect); Includes similar items in active markets, identical items in inactive markets, yield curves, and market-corroborated inputs.
Level 3 inputs: Unobservable inputs; Used only when relevant observable inputs are not available. Reflect market participant assumptions.
Classification rule: Level of measurement = lowest level of any input that is significant to the whole measurement; Classify the measurement, not the individual inputs. Significance is a matter of judgement.
Priority rule: Maximise relevant observable inputs; minimise unobservable inputs; Applies when choosing and applying valuation techniques.
Fair value of a liability: Fair value = price paid to transfer the liability to a market participant at the measurement date; The liability continues after transfer. It is not the amount to settle with the counterparty.
Hierarchy for liabilities and own equity: 1) Quoted price for the identical item held as an asset → 2) Fair value from a holder's viewpoint as an asset → 3) Valuation technique from the issuer's viewpoint; Use the first approach that is available. Maximise observable inputs.
Non-performance risk: Non-performance risk = own credit risk + other factors affecting fulfilment (e.g. settlement terms); Assumed to be the same before and after the transfer. A lower credit standing reduces fair value.
Present value technique for a liability: Fair value = PV of expected cash outflows discounted at a rate reflecting non-performance risk; Either adjust the cash flows for the risk, or adjust the discount rate. Do not do both.
Restrictions on transfer: No separate adjustment for a restriction on transfer; The restriction is already reflected in the other inputs, so a further discount would double count.
Fair value definition: Fair value = price received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date; Exit price. Market participant view, not the entity's own intentions.
Hierarchy: Level 1 = quoted prices, identical items, active market; Level 2 = other observable inputs; Level 3 = unobservable inputs; The level of the whole measurement is that of the lowest-level input that is significant to it.
IAS 36 recoverable amount: Recoverable amount = higher of (fair value less costs of disposal) and value in use; Impairment loss = carrying amount − recoverable amount, if positive.
Fair value less costs of disposal: FVLCD = IFRS 13 fair value − incremental costs of disposal; Costs are deducted only because IAS 36 requires it.
IFRS 3 goodwill: Goodwill = consideration + non-controlling interest + fair value of previously held interest − fair value of net identifiable assets; Consideration is measured at acquisition-date fair value. NCI is measured at fair value or at the proportionate share of net assets.
IAS 40 fair value model: Gain or loss = closing fair value − opening carrying amount, in profit or loss; Adjusted for additions and disposals in the period. No depreciation under the fair value model.

Quick revision

Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
It is an exit price and a market-based measure, not an entity-specific one.
IFRS 13 sets how to measure fair value. Other standards decide when to use it.
The principal market is the one with the greatest volume and activity. If there is none, use the most advantageous market.
Transaction costs are not part of fair value. Transport costs are deducted if location is a characteristic of the asset.
Use the assumptions market participants would use, assuming they act in their economic best interest.
For non-financial assets, consider highest and best use: physically possible, legally permissible and financially feasible.
Three valuation approaches: market, cost (current replacement cost) and income (present value of future amounts).
Maximise relevant observable inputs and minimise unobservable inputs.
Level 1: unadjusted quoted prices in active markets for identical items. Level 2: other observable inputs. Level 3: unobservable inputs.
The hierarchy level of the whole measurement is the lowest level of any input that is significant to it.
For a liability, assume it is transferred and the counterparty stays in place. Non-performance risk, including your own credit risk, is reflected.

Common mistakes

Treating fair value as the price the entity paid. Fix: Say fair value is an exit price at the measurement date. Transaction price is only a starting point and may differ, for example in a related party deal or a forced sale.
Using the entity's own intentions or expected synergies in fair value. Fix: Use market participant assumptions. Value in use is entity-specific. Fair value is not.
Choosing the market with the highest price rather than the principal market. Fix: Principal market comes first. Use the most advantageous market only when there is no principal market.
Deducting transaction costs from fair value. Fix: Transaction costs are used only to pick the most advantageous market. The fair value itself is measured before them.
Treating the three approaches as a ranked list so the market approach must always be used. Fix: The hierarchy ranks inputs, not techniques. Choose the technique that is appropriate with sufficient data, then maximise observable inputs.
Using the entity's own budget cash flows and discount rate without adjustment. Fix: Use market participant assumptions. Include only synergies other participants would also pay for and say that internal data is Level 3 where it is adopted.
Classifying each input separately and giving several levels to one measurement. Fix: Give one level to the whole measurement, set by the lowest-level significant input.
Calling a measurement Level 2 because it uses a valuation model. Fix: Look at the inputs, not the technique. A model with only observable inputs is Level 2. A model with a significant unobservable input is Level 3.
Valuing the liability at the amount to settle it with the creditor Fix: Write the transfer assumption first. The liability remains outstanding and a participant takes it on.
Ignoring own credit risk Fix: Remember that non-performance risk is part of fair value. A weaker credit standing lowers the present value of the obligation, so the amount a participant would need to be paid to assume the debt is lower.

Exam tips

Quote the definition in your answer. Use the words exit price, orderly transaction, market participants and measurement date. Markers look for them.
In a scenario, find the figure that is wrong: entry price, entity-specific value, or one net of costs. Then say why.
When asked to contrast fair value and value in use, give three points: market-based versus entity-specific, exit price versus own cash flows, and what each is used for.
Link to the business. Say how a fair value change affects profit or OCI and what the board should disclose. This earns professional skills marks.
Do not spend time on detailed valuation techniques unless asked. For scope questions, keep to the definition and exclusions.
Write the market hierarchy in order: principal first, then most advantageous. Examiners reward the correct sequence.
In calculations, show that transaction costs are excluded from fair value. State it in a short line so the marker sees it.
For highest and best use, name all three tests and apply each to the scenario facts, especially any legal restriction.