Strategic Business Reporting (International) · Non-current assets

IFRS 13 Fair Value Measurement: Definition, Markets and Hierarchy

Updated 11 October 2026 · Fact-checked

IFRS 13 defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. You measure it from the market's view, using the principal or most advantageous market, a valuation technique, and inputs ranked in a three-level hierarchy.

Understand IFRS 13 Fair Value Measurement

IFRS 13 does not tell you when to use fair value. Other standards do that, such as IAS 16 revaluation, IAS 40, IFRS 3 and IFRS 9. IFRS 13 tells you how to measure it once another standard asks for it. It also sets disclosure rules.

Fair value is an exit price. It is what 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 a market-based measure, not an entity-specific one. Your own plans, your own intentions and your own view of risk do not change it.

You measure it in the principal market, which is the market with the greatest volume and level of activity for the asset or liability. If there is no principal market, you use the most advantageous market, which gives the best net amount after transaction costs and transport costs. Transaction costs are not part of fair value. They are deducted only to identify the most advantageous market. Transport costs, if location is a characteristic of the asset, are deducted from the price. Unless evidence suggests otherwise, the market the entity normally uses is assumed to be the principal market.

For non-financial assets, you use highest and best use. This is the use by market participants that is physically possible, legally permissible and financially feasible, and that maximises value. A site used as a car park may be worth more as housing land if planning allows it. The entity's current use is assumed to be the highest and best use unless the market suggests otherwise.

You then choose a valuation technique: the market approach, cost approach or income approach. Use techniques that maximise observable inputs. Inputs are ranked: Level 1 are quoted prices in active markets for identical items that you can access. Level 2 are other observable inputs. Level 3 are unobservable inputs. The whole measurement takes the level of the lowest-level input that is significant to it.

Key rules to remember

Definition of fair value: 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 from the market's view, not the entity's.
Fair value of an asset in its market: Fair value = market price − transport costs (if location is a characteristic); Transaction costs are not deducted from fair value itself.
Most advantageous market test: Net proceeds = price − transaction costs − transport costs; Used only to choose the market. Pick the highest net proceeds. Then fair value uses that market's price less transport costs only.
Hierarchy: Level 1: quoted prices, identical items, active market. Level 2: other observable inputs. Level 3: unobservable inputs; The whole measurement is classified by the lowest level input that is significant.
Valuation approaches: Market approach, cost approach, income approach; Maximise relevant observable inputs and minimise unobservable inputs.
Non-financial assets: Highest and best use: physically possible, legally permissible, financially feasible; Judged from the view of market participants.

How to solve IFRS 13 Fair Value Measurement questions

Use the same sequence for any IFRS 13 requirement, whether it is a calculation, a discussion or a disclosure point.

1Identify the item and the standard that requires fair value. State that IFRS 13 only gives the measurement rules.
2Define the unit of account and, for a non-financial asset, decide its highest and best use.
3Identify the principal market. If there is none, compare net proceeds in each accessible market and pick the most advantageous.
4Take the price in that market. Deduct transport costs if location matters. Do not deduct transaction costs from fair value.
5Choose a valuation technique (market, cost or income) and use observable inputs wherever you can.
6Classify the inputs into Level 1, 2 or 3, and give the overall level by the lowest significant input.
7Apply the result to the scenario: the carrying amount, revaluation gain or loss, and disclosures.
8Add a professional-skills point: challenge management assumptions, especially Level 3 inputs and possible bias.

Quickest way: Market, price, level

When to use it: Use this when a short numerical or MCQ-style requirement needs a fast fair value figure and its level.

Write the market prices and costs in a small list for each market.
If a principal market is stated or clearly the entity's usual market, use it. Do not compare markets.
If not, compute price less transaction and transport costs to choose the market only.
Fair value = chosen market price less transport costs only.
Level: identical item with a quoted price is Level 1. Adjusted or comparable data is Level 2. Own model assumptions is Level 3.

Common mistakes in IFRS 13 Fair Value Measurement

Deducting transaction costs from fair value.
Students link fair value with fair value less costs of disposal in IAS 36 and IFRS 5.
Fix: Under IFRS 13, transaction costs are not part of fair value. Use them only to pick the most advantageous market.
Choosing the most advantageous market when a principal market exists.
The highest price looks more attractive.
Fix: The principal market takes priority. Only move to the most advantageous market if there is no principal market.
Using the entity's own intended use or own assumptions.
Students think from the entity's perspective.
Fix: Think as a market participant. Highest and best use and assumptions must be those a market participant would use.
Classifying a measurement by the highest level input.
Students see one Level 1 input and stop.
Fix: The level is that of the lowest level input that is significant to the whole measurement.
Saying IFRS 13 decides when fair value must be used.
The standard's name suggests it covers everything on fair value.
Fix: Other standards require or permit fair value. IFRS 13 only gives the measurement and disclosure rules.
Ignoring professional skills marks in discussion parts.
Students list rules without applying them.
Fix: Link each point to the scenario, challenge Level 3 inputs, and give a clear recommendation.

Worked examples

Example 1

Entity A holds an asset traded in two markets, and it has no clear principal market. Market X: price ₹1,000, transaction costs ₹60, transport costs ₹40. Market Y: price ₹1,020, transaction costs ₹100, transport costs ₹30. Location is a characteristic of the asset. Determine the fair value.

Show the solution

No principal market exists, so test the most advantageous market using net proceeds.
Market X net = 1,000 − 60 − 40 = ₹900.
Market Y net = 1,020 − 100 − 30 = ₹890.
Market X gives the higher net amount, so it is the most advantageous market.
Fair value uses the price less transport costs only: 1,000 − 40 = ₹960.
Transaction costs of ₹60 are excluded from fair value. If a different standard measures the asset at fair value less costs to sell, they are deducted there separately.

Answer: Fair value is ₹960, measured in Market X.

Example 2

Entity B owns a building used as offices and measures the property (land and building) at fair value. The land has planning permission for residential use. Market participants would pay ₹6,50,00,000 for the property for continued office use. For housing use, the entity has built a valuation model using the assumptions market participants would use: their expected sales prices for the homes, and the demolition and development costs they would bear. The model gives a value of ₹8,00,00,000 for the property, meaning the land with the building demolished, after deducting those costs. There is no observable market data for the expected sales prices of the new homes or for the development costs, and these inputs drive the value. Explain the fair value to use and its hierarchy level.

Show the solution

IFRS 13 requires highest and best use from the view of market participants, even if the entity plans to keep the offices.
Housing use is legally permissible, as planning rules allow it. It is physically possible. It is financially feasible if the value after market participants' demolition and development costs is higher than the value in current use.
The ₹8,00,00,000 is the value of the property to market participants who would demolish the building and develop housing. It is built from their assumptions (their sales prices, demolition costs and development costs), not the entity's own plans, and it is stated after those costs. So it is the value of the property as a whole, not a land-only figure.
It is above the ₹6,50,00,000 value for continued office use, and both figures are values of the same property. So housing is the highest and best use, and the fair value of the property is ₹8,00,00,000.
The significant inputs, the expected sales prices and the development costs, have no observable market data. They are unobservable inputs, so the measurement is Level 3.
Disclosure should give the technique, the key unobservable inputs and the reason for the highest and best use being different from the current use.

Answer: Fair value of the property is ₹8,00,00,000 based on residential use, using market participant assumptions. The measurement is Level 3 because the significant inputs are unobservable.

Exam tips

Always state that IFRS 13 gives the measurement rules and another standard requires fair value. Examiners reward this link.
Show the market selection logic in a small table-like list. It makes marks easy to award, even if one figure is wrong.
When asked about reliability, discuss Level 3 inputs, management bias and the need for sensitivity analysis or valuer support.
Link IFRS 13 to the standard in the question, such as IAS 16 revaluation, IAS 40 or IFRS 3 acquisition fair values.
In discussion parts, tie each point to the scenario facts to earn professional skills marks.

Practice questions from Non-current assets

IFRS 13 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.

IFRS 13 Fair Value Measurement: frequently asked questions

What is the difference between principal market and most advantageous market?

The principal market has the greatest volume and level of activity for the asset. The most advantageous market gives the best net amount after transaction and transport costs. You use the principal market if one exists, and the most advantageous market only if it does not.

Are transaction costs part of fair value under IFRS 13?

No. Fair value is not adjusted for transaction costs. You use them only when you compare markets to find the most advantageous one. Transport costs are deducted if location is a characteristic of the asset.

How does the fair value hierarchy work?

Level 1 uses quoted prices in active markets for identical items. Level 2 uses other observable inputs, such as prices for similar items. Level 3 uses unobservable inputs. The whole measurement is placed at the lowest level of any input that is significant.

How is IFRS 13 examined in SBR?

It usually appears inside another topic, such as revaluation of property, investment property, acquisition fair values or financial instruments. You are asked to compute or explain fair value, classify inputs and discuss reliability or ethical pressure on valuations.