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ACCA Strategic Professional · Strategic Business Reporting (International)

Fair Value Measurement for ACCA SBR (IFRS 13)

Fair value is the price you would receive to sell an asset, or pay to transfer a liability, in an orderly transaction between market participants at the measurement date. IFRS 13 tells you how to measure it: pick the unit of account, the principal market, then a valuation technique that maximises observable inputs.

What this chapter covers

This chapter covers IFRS 13 Fair Value Measurement. IFRS 13 does not tell you when to use fair value. Other standards do that. IFRS 13 only tells you how to measure it once another standard requires or permits it. It gives one definition, one measurement framework, a set of valuation techniques and a three-level hierarchy for the inputs.

You start with the definition and scope. Then you work through the framework: the particular asset or liability, the principal or most advantageous market, and the assumptions of market participants. After that you learn the three valuation approaches (market, cost and income) and the fair value hierarchy (Level 1, 2 and 3). Then you deal with liabilities and your own equity instruments, where the idea of transfer is harder. You finish with disclosures and how IFRS 13 links to other standards.

In SBR, fair value appears all over the paper. It underpins the group accounting question, where you fair value the subsidiary's net assets and any non-controlling interest at acquisition under IFRS 3. It also arises with investment property, IFRS 9 financial instruments, IAS 16 revaluation, IFRS 2 and impairment under IAS 36. So this chapter is a tool you will use in many other chapters.

Fair value is a thread through the whole of SBR. A question on a business combination, a financial instrument or a revalued asset will often need you to say how fair value is measured, and what level of the hierarchy the inputs fall into. Examiners reward answers that apply the IFRS 13 principles to the scenario, for example by choosing the correct market or explaining why an input is unobservable. The ideas are few and logical, so the effort is modest compared with the number of questions where they help. Written discussion marks and professional skills marks (analysis, evaluation, commercial awareness) are often earned here, such as when you advise on the reliability of a valuation.

Fair value measurement: topics in the order to study them

  1. 1IFRS 13 Scope and Fair Value DefinitionYou need the definition and the idea of an exit price first, and you need to know what IFRS 13 covers and what it leaves out.
  2. 2Fair Value Measurement Framework: Asset, Market, ParticipantsEvery measurement starts with the unit of account, the market and the participants, so learn this before the techniques.
  3. 3Valuation Techniques and InputsOnce the framework is clear you can see how the market, cost and income approaches produce a number from inputs.
  4. 4The Fair Value HierarchyThe hierarchy ranks the inputs you have just met, so it is easier to learn after the techniques.
  5. 5Fair Value of Liabilities and Own Equity InstrumentsThis applies the exit price and transfer ideas to a harder case, so study it once the asset basics are secure.
  6. 6IFRS 13 Disclosure and Application to Other StandardsDisclosures depend on the hierarchy, and linking to other standards is the final step that ties the chapter to the rest of SBR.

How to prepare Fair value measurement

Treat this chapter as a set of principles you must apply to a scenario, not a list of facts to recall. Aim to explain each idea in a sentence or two, then use it on a short case.

  1. Write the definition of fair value from memory and underline the key words: exit price, orderly transaction, market participants, measurement date.
  2. Learn the measurement sequence as a checklist: identify the asset or liability, the principal (or most advantageous) market, the market participants, then the valuation technique.
  3. Learn the three approaches (market, cost, income) and when each suits. Practise saying which one fits a given asset and why.
  4. Memorise the three levels of the hierarchy with an example for each, and note that the level is set by the lowest-level input that is significant to the whole measurement.
  5. Practise short numerical points, such as whether transaction costs are included in fair value (they are not) and how they affect the figure a standard would record.
  6. Do past SBR questions in which fair value is used for acquisitions, investment property or financial instruments. For each, write a short explanation of how IFRS 13 applies, then check your answer against the examiner's.
  7. Finish with a one-page summary of disclosures by level and a list of the other standards that rely on IFRS 13.

Common mistakes in Fair value measurement

  • Treating fair value as the price the entity paid or the value to the entity.

    Fix: Always say fair value is an exit price from the viewpoint of market participants. Use entity-specific figures only where another standard asks for them.

  • Adding transaction costs to or deducting them from fair value.

    Fix: Keep transaction costs outside the fair value figure. Deduct them separately only where the relevant standard requires, for example costs of disposal.

  • Choosing the wrong market, such as using the market the entity normally trades in without checking it is the principal market.

    Fix: State the principal market first, and the most advantageous market only if there is no principal market or the entity cannot access it.

  • Assigning the hierarchy level to the technique rather than to the inputs.

    Fix: Classify by the inputs. A discounted cash flow model can be Level 2 or Level 3 depending on whether its significant inputs are observable.

  • Ignoring non-performance risk when valuing a liability.

    Fix: Explain that the transfer price reflects the risk that the obligation will not be fulfilled, including the entity's own credit risk.

  • Writing generic descriptions of IFRS 13 without applying it to the scenario.

    Fix: Quote a fact from the scenario in each point, state which IFRS 13 principle applies and give a clear conclusion or recommendation.

Last-day revision: Fair value measurement

  • 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.

Fair value measurement practice questions

Fair value measurement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fair value measurement: frequently asked questions

Does IFRS 13 tell me when to measure at fair value?

No. IFRS 13 only sets out how to measure fair value and what to disclose. Other standards, such as IFRS 3, IFRS 9, IAS 40 and IAS 16, decide when fair value is required or allowed.

What are the three levels of the fair value hierarchy?

Level 1 inputs are unadjusted quoted prices in active markets for identical items that you can access. Level 2 inputs are other observable inputs. Level 3 inputs are unobservable and reflect your own assumptions about what market participants would use.

Is fair value the same as value in use?

No. Fair value is a market-based exit price. Value in use under IAS 36 is the present value of cash flows the entity expects from using the asset, so it is specific to the entity.

How is this chapter tested in SBR?

It is rarely tested alone. You are more likely to use it inside a group accounting, financial instruments or asset question. Expect to apply the principles to a scenario and explain or justify a valuation.