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

Zeta plc holds an investment property carried at fair value under IAS 40. Its fair value is determined using a discounted cash flow model based on Zeta's own estimates of future rentals, because no comparable market data exists. Which IFRS 13 fair value hierarchy level applies to this measurement?

The measurement is Level 3. IFRS 13 classifies a fair value by the lowest-level input that is significant to the whole measurement, and the entity's own rental estimates are unobservable. An observable discount rate or the use of a valuation model does not raise the level.

  1. ALevel 1, because the property is measured at fair value in the statement of financial position
  2. BLevel 2, because the discount rate is derived from observable market interest rates
  3. CLevel 3, because the valuation relies on significant unobservable inputsCorrect
  4. DLevel 2, because the entity is using a recognised valuation technique

Explanation

Under IFRS 13 the level of the hierarchy is set by the lowest-level input that is significant to the whole measurement. Rental estimates that have no market data behind them are unobservable inputs, so the measurement is Level 3. The use of an observable interest rate does not lift it to Level 2 because the unobservable inputs are significant.

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