Strategic Business Reporting (International) · Fair value measurement

IFRS 13 Valuation Techniques and Inputs for ACCA SBR

Updated 11 October 2026 · Fact-checked

IFRS 13 requires you to use valuation techniques that suit the circumstances and have enough data. The three approaches are market, cost and income. You must maximise observable inputs and minimise unobservable ones. The result is a fair value, an exit price, from a market participant's view.

Understand Valuation Techniques and Inputs

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. When a quoted price exists, you use it. When it does not, you need a valuation technique.

IFRS 13 names three approaches. The market approach uses prices from transactions involving identical or comparable assets, such as quoted prices, market multiples or matrix pricing. The cost approach uses the current replacement cost: what a market participant would pay to build or buy an asset of equivalent utility, adjusted for obsolescence. The income approach converts future amounts, such as cash flows or earnings, into a single present value. Examples are discounted cash flow, option pricing models and the multi-period excess earnings method.

The standard does not rank the three approaches. It tells you to pick the technique or techniques that are appropriate and for which enough data is available. You may use more than one technique. If you do, you weigh the results and consider how reasonable the range is. You then choose the point in the range that is most representative of fair value in the circumstances. Once chosen, you apply the technique consistently. You change it only if the change gives an equally or more representative result, such as when new markets develop or better information becomes available.

Inputs matter as much as technique. Observable inputs come from market data that reflects the assumptions market participants would use. Unobservable inputs are the entity's own best information about those assumptions. You must maximise observable inputs and minimise unobservable ones. This links straight to the hierarchy. Level 1 inputs are quoted prices in active markets for identical items that you can access at the measurement date. Level 2 inputs are observable other than Level 1, such as quoted prices for similar assets, interest rates, yield curves and credit spreads. Level 3 inputs are unobservable, such as a discount rate built from your own data or internal cash flow forecasts. The level of the whole measurement is the level of the lowest-level input that is significant to it.

In the exam, you are usually asked to advise on which technique fits a scenario, classify inputs, or calculate a simple fair value. You must also comment on judgement and reliability. The weaker the observable data, the more subjective the number.

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; 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.

How to solve Valuation Techniques and Inputs questions

Use this order for any question on valuation techniques and inputs. It keeps you on the requirement and earns both technical and professional skills marks.

1Identify the item and the unit of account, and confirm the measurement is fair value under IFRS 13 (not value in use or net realisable value).
2Identify the principal market, or if none, the most advantageous market, and the market participants' viewpoint.
3Check whether a Level 1 quoted price for an identical item exists. If it does, use it without adjustment in most cases.
4If not, choose the approach: market if comparable transactions exist, income if the asset generates cash flows, cost if the asset is rarely sold separately, such as specialised equipment.
5List the inputs. Classify each as Level 1, 2 or 3 and explain why. Prefer observable inputs and adjust them only for real differences such as condition or location.
6Perform the calculation, keeping assumptions to those a market participant would use, and exclude transaction costs.
7State the hierarchy level of the whole measurement based on the lowest significant input, and note any disclosure consequences.
8Conclude with a clear recommendation and comment on judgement, reliability and ethical risk if management chooses favourable inputs.

Quickest way: Three-question shortcut

When to use it: Use this when you have little time and the question asks you to justify a technique or classify inputs.

Ask: is there a quoted price for an identical item in an active market? If yes, Level 1 market approach and stop.
If not, ask: does the scenario give comparable prices or rates I can observe? If yes, market approach with Level 2 inputs.
If not, ask: does the asset produce cash flows (income approach) or is it unique or specialised (cost approach)? Then tag any internal estimates as Level 3 and say the measurement is Level 3 if they are significant.

Common mistakes in Valuation Techniques and Inputs

Treating the three approaches as a ranked list so the market approach must always be used.
Students mix up the approach list with the input hierarchy.
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.
Students value from the owner's perspective, as in IAS 36 value in use.
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 the whole measurement by the highest-level input.
Students see one quoted price and call it Level 1.
Fix: The level is that of the lowest-level input that is significant to the whole measurement.
Deducting transaction costs from fair value.
Confusion with fair value less costs of disposal under IAS 36 or IFRS 5.
Fix: IFRS 13 fair value excludes transaction costs. Deduct transport costs only when location is a characteristic of the item.
Applying depreciated historical cost as the cost approach.
Students read cost approach as accounting cost.
Fix: Use current replacement cost of an asset with equivalent utility, less obsolescence, as a market participant would assess it.
Switching technique to get a higher value.
Students forget the consistency requirement and the ethical angle.
Fix: Techniques are applied consistently. A change needs a better or equally representative result and should be disclosed. Comment on bias risk.

Worked examples

Example 1

Delta holds an unquoted equity stake. A comparable listed company has an earnings multiple of 10. Delta's investee has maintainable earnings of $2 million. A market participant would apply a 20% discount for lack of marketability, and the stake is 100% of the investee. Calculate fair value and identify the technique and level.

Show the solution

Technique: market approach using a comparable multiple.
Unadjusted value = 10 × $2 million = $20 million.
Discount for marketability = 20% × $20 million = $4 million, if a market participant would apply it.
Fair value = $20 million − $4 million = $16 million.
Inputs: the multiple is observable, but it comes from a comparable company, so it is Level 2 at best. The marketability discount and the earnings estimate are unobservable.
If the discount is significant to the measurement, the whole fair value is Level 3.

Answer: Fair value is $16 million, using the market approach. The measurement is Level 3 if the marketability discount is significant, because the lowest significant input decides the level.

Example 2

Echo owns specialised machinery that is rarely sold on the open market. A new equivalent machine costs $500,000. The machine is 40% through its useful life and its design is also less efficient than modern models, which a market participant would value at a further $30,000 reduction. Calculate fair value using an appropriate technique and explain the input level.

Show the solution

Technique: cost approach, because the asset is specialised and there is little comparable market data.
Replacement cost new = $500,000.
Physical deterioration = 40% × $500,000 = $200,000.
Functional obsolescence = $30,000.
Fair value = $500,000 − $200,000 − $30,000 = $270,000.
Inputs: the new machine price may be observable, which is Level 2. The estimate of useful life and obsolescence uses the entity's own judgement, which is Level 3.

Answer: Fair value is $270,000 using the cost approach. The measurement is Level 3 if the obsolescence adjustments are significant to the result.

Exam tips

Always link the technique to the facts: quoted price, comparables, cash flows or a specialised asset. A generic list of the three approaches scores little.
Classify each input separately, then give the overall level. Examiners reward the 'lowest significant input' point.
Say whose view you take. Write 'a market participant would' in your answer to show you are not using entity-specific value.
Where management chooses assumptions, add a professional scepticism and ethics comment on bias, sensitivity and disclosure.
Show your calculation layout clearly, even if the numbers are simple, so you collect method marks.

Practice questions from Fair value measurement

Valuation Techniques and Inputs in other exams

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

Valuation Techniques and Inputs: frequently asked questions

Which valuation technique should I use under IFRS 13?

Use the technique that is appropriate in the circumstances and for which enough data exists. Market suits assets with comparables, income suits cash-generating items, and cost suits specialised assets. You may use more than one and weigh the results.

What is the difference between Level 2 and Level 3 inputs?

Level 2 inputs are observable other than quoted prices for identical items, such as yield curves or prices of similar assets. Level 3 inputs are unobservable and rely on the entity's own assumptions about what market participants would use.

Can I change my valuation technique from one year to the next?

Yes, but only if the change gives an equally or more representative fair value, for example when markets develop or better data becomes available. Otherwise you should apply the technique consistently.

Does IFRS 13 fair value include transaction costs?

No. Transaction costs are excluded because they relate to how you transact, not to the asset itself. Transport costs are deducted only when location is a characteristic of the asset.