Strategic Business Reporting (International) · Fair value measurement

IFRS 13 Fair Value of Liabilities and Own Equity Instruments

Updated 11 October 2026 · Fact-checked

IFRS 13 measures a liability or own equity instrument at the price a market participant would pay to take it over (transfer), not the price to settle it with the counterparty. The value includes non-performance risk, which covers your own credit risk. Transfer restrictions are not adjusted for separately.

Understand Fair Value of Liabilities and Own Equity Instruments

IFRS 13 uses an exit price idea. For an asset, it is the price you would receive to sell it. For a liability, it is the price a market participant would need to be paid to take it over, which is the transfer price. The liability stays outstanding. The new party takes on the obligation.

This is the transfer assumption. The counterparty is not paid off. The liability continues, and the market participant who takes it over must meet it. So you value it from the viewpoint of that participant.

The same logic applies to your own equity instruments, such as shares issued as consideration in a business combination. You value them as if a market participant held them as an asset. You are not valuing what you would pay to buy them back.

When a quoted price exists for the identical item held by another party as an asset, use it. This is a Level 1 input. If there is no such price, but the item is held by another party as an asset, measure fair value from the viewpoint of a participant holding that asset. If neither is available, use a valuation technique from the viewpoint of the participant that owes the liability or issued the equity. Examples are a present value technique or a market approach.

Non-performance risk is the risk that the obligation will not be fulfilled. It includes the entity's own credit risk. It is assumed to be the same before and after the transfer. So a weaker credit standing lowers the fair value of a liability. A higher discount rate (or lower expected cash flows) reduces the present value of the obligation, so the amount a participant would need to be paid to assume it is lower. A gain can arise from this on a liability at fair value. For financial liabilities designated at fair value through profit or loss under IFRS 9, the part of the change due to own credit risk goes to other comprehensive income, not profit or loss, unless that creates an accounting mismatch.

A restriction on transfer of a liability or own equity instrument is not a separate adjustment. Its effect is already in the other inputs or in the price.

A third-party credit enhancement is different. Where it is inseparable from the liability, the issuer does not include the enhancement in the liability's fair value. If it is separate, it is accounted for separately.

Key rules to remember

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.

How to solve Fair Value of Liabilities and Own Equity Instruments questions

Use this order for any question on measuring a liability or own equity instrument under IFRS 13.

1Identify the item and the unit of account. Is it a liability or your own equity instrument, and is it financial or non-financial?
2State the transfer assumption. The item stays outstanding and a market participant takes it over at the measurement date.
3Look for an identical item with a quoted price, either as a liability or held by another party as an asset. If so, use it and say it is Level 1.
4If there is no quoted price, choose a technique from the issuer's viewpoint, usually a present value or market approach, and say which inputs are observable.
5Deal with non-performance risk. Include own credit risk in the discount rate or in the cash flows, but only once.
6Check restrictions on transfer and credit enhancements. Make no separate adjustment for a transfer restriction. Do not reflect an inseparable credit enhancement.
7Calculate, then state the result and any gain or loss, noting where it is recognised (profit or loss, or OCI for own credit on FVTPL liabilities).
8Link the answer to the scenario and give a brief judgement, such as the effect of credit deterioration on reported profit.

Quickest way: Four-question check for liabilities

When to use it: Use when time is short and the question asks for a short explanation or a simple calculation.

Ask: what would a participant pay to take this over? Write that as the definition.
Ask: is there a quoted price? If yes, use it and stop.
Ask: is own credit risk reflected? Use a discount rate that includes it, and do it once.
Ask: is there a transfer restriction? Say no separate adjustment is made.
Add one sentence on the effect, for example that falling credit standing reduces the liability's fair value.

Common mistakes in Fair Value of Liabilities and Own Equity Instruments

Valuing the liability at the amount to settle it with the creditor
Students think of how much they would have to pay to be released, which is a settlement idea.
Fix: Write the transfer assumption first. The liability remains outstanding and a participant takes it on.
Ignoring own credit risk
It feels odd that worse credit gives a lower liability, so students leave it out.
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.
Counting non-performance risk twice
Students raise the discount rate and also cut the cash flows for the same risk.
Fix: Choose one route. Adjust the discount rate or the expected cash flows, never both for the same risk.
Deducting a discount for a restriction on transfer
Students apply the idea of a marketability discount used for restricted assets.
Fix: State that IFRS 13 makes no separate adjustment for a restriction on transfer of a liability or own equity item.
Taking all own-credit gains to profit or loss
Students stop at IFRS 13 and forget the IFRS 9 presentation rule.
Fix: For financial liabilities designated at FVTPL, the own credit element goes to OCI unless this creates or enlarges an accounting mismatch.

Worked examples

Example 1

Alpha issued a liability whose expected single payment in 3 years is $1,000,000. A market participant would use a risk-free rate of 4% and add a 3% credit spread reflecting Alpha's non-performance risk. There is no quoted price. Calculate the fair value of the liability using a present value technique, to the nearest $.

Show the solution

The transfer assumption applies. A market participant taking over the liability would require a return that reflects Alpha's credit risk.
Discount rate = 4% + 3% = 7%. Non-performance risk is in the rate, so the cash flows are not adjusted again.
Discount factor for 3 years at 7% = 1 ÷ 1.07³. 1.07³ = 1.225043.
Fair value = $1,000,000 ÷ 1.225043 = $816,298.
This is not Level 1, as there is no quoted price. It is a Level 2 measurement if the credit spread is observable or corroborated by market data. It is Level 3 if the spread relies on unobservable inputs that are significant to the measurement.

Answer: The fair value of the liability is about $816,298.

Example 2

Beta issued a liability at fair value through profit or loss when its credit spread was 2%. The liability is a single payment of $500,000 due in 2 years. The risk-free rate is 5% throughout. At the year end, one year before payment, Beta's credit spread rises to 6%. Compute the fair value at the year end and the gain arising from the change in own credit risk. Assume the only change is the credit spread, and the liability's remaining term is 1 year. Initially the fair value at the start of the year was based on a 2-year term at 7%.

Show the solution

Start of year: discount rate = 5% + 2% = 7%, term 2 years. Fair value = 500,000 ÷ 1.07². 1.07² = 1.1449. Fair value = $436,719.
Year end: remaining term 1 year, rate = 5% + 6% = 11%. Fair value = 500,000 ÷ 1.11 = $450,450.
Total movement in the liability = 450,450 − 436,719 = +$13,731. The liability has increased, so overall there is a loss. This movement has two parts: time passing and the change in own credit risk.
Time passing: at the original 7% rate for 1 year the value would be 500,000 ÷ 1.07 = $467,290. The movement from time = 467,290 − 436,719 = $30,571, an increase in the liability, so a charge.
Own credit effect = 450,450 − 467,290 = −$16,840. The liability is $16,840 lower than it would have been, so this is a gain. Check: 30,571 − 16,840 = 13,731.
Under IFRS 9 for a liability designated at FVTPL, the $16,840 own-credit gain goes to OCI, but only where this does not create or enlarge an accounting mismatch. The $30,571 time-value charge goes to profit or loss.

Answer: Year-end fair value is $450,450. The liability rises by $13,731 in total: a $30,571 time-value charge to profit or loss, partly offset by a $16,840 own-credit gain taken to OCI (where IFRS 9 permits it, that is, no accounting mismatch).

Exam tips

Open with the transfer assumption in one sentence. Examiners reward this definition before any calculation.
When a scenario mentions the entity's credit rating falling, link it to non-performance risk and say the liability's fair value falls.
If a scenario mentions a restriction on transfer, state clearly that no separate adjustment is made. Do not discount for it.
Apply professional skills. Comment on whether a gain from worsening credit is meaningful to users and how you would explain it to the board.
Show the discount rate build-up (risk-free plus spread) so you earn method marks even if the arithmetic slips.

Practice questions from Fair value measurement

Fair Value of Liabilities and Own Equity Instruments 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 of Liabilities and Own Equity Instruments: frequently asked questions

What is the transfer assumption in IFRS 13?

It assumes the liability or own equity instrument is passed to a market participant and stays outstanding. The counterparty is not settled. Fair value is the price the participant would be paid or would pay to take it over.

Why does worse own credit risk reduce the fair value of a liability?

If the debt may not be repaid in full, its expected payments are less certain, so the present value of the obligation is lower. The amount a participant would need to be paid to assume it is therefore lower. Non-performance risk is part of fair value and is assumed to be the same before and after transfer. So a lower credit standing gives a lower value and can produce a gain.

How do you measure the fair value of your own equity instruments?

Use the quoted price of the identical instrument if there is one. If not, value it from the viewpoint of a participant who holds it as an asset. If that is also unavailable, use a valuation technique, such as an income or market approach, from the issuer's viewpoint.

Do restrictions on transfer reduce fair value?

Not as a separate adjustment. The effect of a restriction is already reflected in the other inputs or the price. A further discount would double count.