Strategic Business Reporting (International) · Fair value measurement

IFRS 13 Fair Value Framework: Asset, Market and Participants

Updated 11 October 2026 · Fact-checked

IFRS 13 fair value is the price to sell an asset in an orderly transaction between market participants at the measurement date. You identify the unit of account, the principal market (or most advantageous if none), the participants' assumptions, and for non-financial assets, highest and best use. Transaction costs are excluded.

Understand Fair Value Measurement Framework: Asset, Market, Participants

Fair value under IFRS 13 is an exit price. It 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. It is market-based, not entity-specific. Your own plans for the asset do not change it.

Before you measure, you must define what you are measuring. The unit of account is the level at which the asset or liability is aggregated or separated for recognition. The relevant standard decides it. For example, IAS 16 or IAS 40 may point to a single property, while IFRS 9 may point to an individual share. Fair value is then worked out for that unit.

Next, decide which market. The principal market is the market with the greatest volume and level of activity for the asset. If there is no principal market, use the most advantageous market. This is the market that maximises the amount received for the asset, after considering transaction costs and transport costs. Unless there is evidence otherwise, the market the entity normally uses is presumed to be the principal market. The entity must have access to the market at the measurement date.

Market participants are buyers and sellers in the principal (or most advantageous) market who are independent, knowledgeable, able and willing to transact. You use the assumptions they would use when pricing the asset, assuming they act in their economic best interest. You do not need to identify specific participants. You only need to understand their characteristics.

Transaction costs (such as broker fees) are not a feature of the asset, so they are not deducted from fair value. They are considered only when choosing the most advantageous market. Transport costs are different. If location is a characteristic of the asset, fair value is adjusted for the cost of transporting it to or from the main market.

For non-financial assets, fair value uses the highest and best use from a market participant's view. The use must be physically possible, legally permissible and financially feasible.

The entity's current use is presumed to be the highest and best use, unless market or other factors suggest that a different use would maximise value. Fair value also reflects the market participant's highest and best use even if the entity intends not to use the asset in that way, for example where it holds an acquired asset for defensive purposes.

Key rules to remember

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.

How to solve Fair Value Measurement Framework: Asset, Market, Participants questions

Use this order for any question on the IFRS 13 measurement framework. It keeps you in line with the standard and picks up the marks for application.

1Identify the asset or liability and the unit of account required by the relevant standard.
2Identify the principal market. If the entity has access to a market with the greatest volume, use it, even if another market gives a higher price.
3If there is no principal market, compare the net proceeds in each accessible market after transaction and transport costs, and pick the highest.
4Take the price in the chosen market. Do not deduct transaction costs. Deduct transport costs only if location is a characteristic of the asset.
5For a non-financial asset, test the highest and best use: physically possible, legally permissible, financially feasible, from a market participant's view.
6State the market participant assumptions you used and ignore entity-specific intentions.
7Conclude with the fair value figure and explain the reasoning briefly, tied to the scenario.

Quickest way: Market, price, participants

When to use it: Use this for short calculation questions where you are given prices in two markets with different costs.

Check whether a principal market is stated or implied by volume. If yes, use it and stop searching.
If not, compute net proceeds in each market (price less transaction and transport costs) and choose the higher.
Fair value = that market's price, less transport costs only. Transaction costs are ignored.
For non-financial assets, write one line on highest and best use before the number.

Common mistakes in Fair Value Measurement Framework: Asset, Market, Participants

Choosing the market with the highest price rather than the principal market.
Students assume fair value must be the best price available.
Fix: Principal market comes first. Use the most advantageous market only when there is no principal market.
Deducting transaction costs from fair value.
Students confuse fair value with fair value less costs of disposal under IAS 36 or IFRS 5.
Fix: Transaction costs are used only to pick the most advantageous market. The fair value itself is measured before them.
Ignoring transport costs when location matters.
Transport costs are lumped in with transaction costs.
Fix: Transport costs are deducted when location is a characteristic of the asset, as with a commodity that must be moved to market.
Using the entity's intended use for a non-financial asset.
Students follow what management plans to do.
Fix: Measure using the highest and best use from a market participant's view, even if the entity plans another use.
Treating highest and best use as only a financial test.
Students jump to the most profitable use.
Fix: Check all three: physically possible, legally permissible, and financially feasible, in that sense. A use banned by zoning law fails.
Applying the principal market test when the entity cannot access the market.
Students overlook the access condition.
Fix: The entity must be able to access the market at the measurement date. A market it cannot reach is not used.

Worked examples

Example 1

Ravi Ltd holds a commodity that trades in two markets it can access. Market A is the principal market. Price in A is $100 per unit, transaction costs $6 and transport costs $4. Market B has a price of $108, transaction costs $9 and transport costs $8. Location is a characteristic of the commodity. What is the fair value per unit?

Show the solution

Identify the market. Market A is the principal market, so it is used even though Market B may look better.
Take the price in Market A: $100.
Deduct transport costs because location is a characteristic: $100 − $4 = $96.
Do not deduct transaction costs of $6. They are not part of fair value.
For reference, Market A net proceeds are $100 − $6 − $4 = $90 and Market B net proceeds are $108 − $9 − $8 = $91. Market B's net proceeds are higher, yet this is irrelevant because Market A is the principal market.

Answer: Fair value is $96 per unit. The $6 transaction cost is excluded from fair value. It is treated under the applicable IFRS, for example expensed or included in cost at initial recognition, depending on the standard.

Example 2

Meru plc acquires a plot of land used as a car park. A market participant could demolish the car park and build flats, which is permitted by the local plan. The land is worth $2m as a car park. The value of the land to a market participant who redevelops it as flats is $3.5m. This $3.5m is already after deducting demolition and construction costs, so no further adjustment is needed. Meru plans to keep it as a car park. Discuss how Meru measures the fair value.

Show the solution

The land is a non-financial asset, so highest and best use applies from a market participant's view.
Test the alternative use. Flats are physically possible, legally permissible under the local plan, and financially feasible. The land is worth $3.5m to a participant who redevelops it, after the demolition and construction costs that participant would incur, and this exceeds the $2m value as a car park.
The $3.5m is the value of the land itself to a market participant who redevelops it. Do not deduct demolition or construction costs again.
Meru's own intention to keep the car park is entity-specific and is ignored.
Fair value therefore reflects the highest and best use, which is the $3.5m figure from the question.

Answer: Fair value of the land is $3.5m, based on redevelopment as flats. This is the value of the land to a market participant after the demolition and construction costs it would incur, and it exceeds the $2m car park value, so no further adjustment is made. Meru's intention to keep the car park does not change the measurement, though it may affect how the asset is used in its own accounts.

Exam tips

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.
Link to professional skills: if management proposes a favourable value, challenge it with scepticism and state which assumption market participants would not accept.
Do not get distracted by the entity's intentions. Say clearly that fair value uses market participant assumptions.

Practice questions from Fair value measurement

Fair Value Measurement Framework: Asset, Market, Participants 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 Framework: Asset, Market, Participants: frequently asked questions

What is the difference between principal market and most advantageous market in IFRS 13?

The principal market is the one with the greatest volume and activity for the asset. The most advantageous market gives the best net amount after transaction and transport costs. You use the principal market first, and fall back on the most advantageous only when there is no principal market.

Are transaction costs included in fair value under IFRS 13?

No. Transaction costs are not part of the fair value measurement. You consider them only when deciding which market is the most advantageous. Transport costs are deducted if location is a characteristic of the asset.

What is highest and best use under IFRS 13?

It is the use of a non-financial asset by market participants that would maximise its value. The use must be physically possible, legally permissible and financially feasible. It applies even if the entity plans to use the asset differently.

Who are market participants in IFRS 13?

They are buyers and sellers in the principal or most advantageous market who are independent of the entity, knowledgeable, able to transact and willing to transact. You use the assumptions they would use in pricing the asset. You do not need to name specific participants.