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ACCA Strategic Professional · Strategic Business Reporting (International) · Fair value measurement

Alpha Co holds a building and measures its fair value using the income approach, discounting expected rentals. Market participants would use a discount rate of 8%, but Alpha's internal hurdle rate is 11%. Under IFRS 13, which rate should Alpha use and why?

Alpha should use 8%. IFRS 13 requires fair value to be measured using the assumptions market participants would use when pricing the asset, so the entity's own 11% hurdle rate is irrelevant when market information on discount rates is available.

  1. A11%, because the entity's own assumptions about its cost of capital take priority
  2. BThe average of 8% and 11%, to reflect both market and entity views
  3. C8%, because fair value uses the assumptions market participants would use, not entity-specific onesCorrect
  4. D8%, but only if the building is classified as Level 1

Explanation

IFRS 13 defines fair value from a market participant perspective, so the discount rate must reflect market participants' assumptions. Entity-specific hurdle rates are used only if there is no contrary market information, which does not apply here. Averaging would mix in entity-specific data and is not permitted.

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