FRS 102 Section 2A: fair value measurement

Section 2A is the new home of fair value guidance in FRS 102. From accounting periods beginning on or after 1 January 2026 it adopts the IFRS 13 definition of fair value, an exit price between market participants, and sets out a three step order for estimating it: quoted price, then recent transaction price, then another valuation technique. The Level 1, 2 and 3 disclosure hierarchy is not generally required; it applies only to financial institutions and retirement benefit plans.

Why did FRS 102 get a new Section 2A?

Until the Periodic Review 2024, FRS 102’s fair value guidance sat in an appendix to Section 2, having been moved there from Section 11 in the Triennial Review 2017. The FRC’s Basis for Conclusions (B2A.1 to B2A.3) explains that it had held back from adopting IFRS 13 in 2017 because preparers had only recently implemented the FRS 102 rules. Since then the IASB’s post implementation review found IFRS 13 working as intended and the IASB proposed aligning the IFRS for SMEs Standard with it. The FRC therefore aligned the FRS 102 definition of fair value and its measurement guidance with IFRS 13, and moved the guidance into its own section.

The Periodic Review amendments apply to accounting periods beginning on or after 1 January 2026 (paragraph 1.37(b)). The wider package is summarised in FRS 102 2026 amendments.

What does Section 2A apply to?

Paragraph 2A.1 applies the section whenever another section requires or permits fair value measurement or disclosure, except share based payments under Section 26 and leasing transactions under Section 20. The glossary adds that the Section 2A guidance is used in the absence of specific guidance in the relevant section. In practice it is relevant to:

• financial instruments measured at fair value under Sections 11 and 12 (paragraph 12.10 points to Section 2A);
• investment property at fair value under Section 16;
• revalued property, plant and equipment under Section 17;
• fair value less costs to sell in impairment testing (paragraph 27.14);
• biological assets under the fair value model (paragraph 34.6).

How does Section 2A define fair value?

The glossary now defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The key principles that follow are:

• Market based, not entity specific (2A.3). Use the assumptions market participants would use. The entity’s own intention to hold an asset or settle a liability is irrelevant.
• Characteristics of the item (2A.4). Condition, location and restrictions on sale or use are reflected if market participants would take them into account.
• Principal or most advantageous market (2A.5 to 2A.7). The price is taken in the principal market, or failing that the most advantageous market. No exhaustive search is needed, and the market the entity normally transacts in is presumed to be the right one unless there is evidence otherwise.
• Transaction costs excluded, transport costs included (2A.8). Selling costs are specific to a transaction and are not deducted. Costs of transporting the asset to the market are deducted, for example for a commodity.

How are non financial assets and liabilities treated?

For non financial assets, paragraphs 2A.9 to 2A.12 introduce highest and best use: the use by market participants that is physically possible, legally permissible and financially feasible. The current use is presumed to be the highest and best use unless factors suggest a different use would maximise value. Where the best use is in combination with other assets, the valuation assumes the market participant already holds those complementary assets.

For liabilities, paragraph 2A.13 requires fair value to reflect non performance risk, assumed to be the same before and after transfer. Paragraph 2A.14 says the fair value of a financial liability due on demand is not less than the amount payable on demand, discounted from the first date payment could be required.

Is there a fair value hierarchy in FRS 102?

There are two different things, and confusing them is common.

The measurement order in paragraph 2A.15

Entities must use valuation techniques appropriate to the circumstances, maximising the use of inputs from active market prices, and apply this order:

1. The best evidence is an unadjusted quoted price for an identical or comparable asset or liability in an active market at the measurement date.
2. Failing that, the price of a recent orderly transaction for an identical or comparable item, unless there has been a significant change in economic circumstances or a significant period of time since that transaction.
3. Failing both, another valuation technique, aiming at the price in an orderly transaction at the measurement date.

Paragraph 2A.16 lists three approaches: the market approach, the cost approach (current replacement cost) and the income approach, which includes present value techniques, option pricing models and the multi period excess earnings method. Techniques must be applied consistently; a change is allowed if it gives an equally or more representative measurement and is treated as a change in accounting estimate, without the paragraph 10.18 disclosures (2A.17). Within a bid ask spread the most representative price is used, and mid market pricing is not precluded (2A.18).

The Level 1, 2 and 3 disclosure hierarchy

The IFRS 13 style three level analysis appears in FRS 102 only in paragraph 34.22 for financial institutions and paragraph 34.42 for retirement benefit plans. A measurement is categorised in its entirety at the lowest level input significant to it: Level 1 is an unadjusted quoted price for identical items in an active market, Level 2 other observable inputs, and Level 3 unobservable inputs. Other entities do not have to give a levelled analysis. For the IFRS position see IFRS 13 fair value measurement.

What if fair value cannot be measured reliably?

Paragraph 2A.19 says a valuation technique is expected to give a reliable measure if it reasonably reflects how the market would price the asset and its inputs reasonably represent market expectations. Where techniques give a range, a value within it is reliable if the range is not significant or the probabilities across it can be reasonably assessed (2A.21). Paragraph 2A.22 notes it is normally possible to estimate the fair value of an asset bought from an outside party, but if the range is significant and probabilities cannot be assessed, fair value measurement is precluded. Under 2A.23, if a reliable measure stops being available, the last reliable carrying amount becomes the new cost, less impairment, until a reliable measure returns.

Where another section uses a measurement based on fair value, such as fair value less costs to sell, factors already reflected in fair value must not be adjusted for twice (2A.24). Transport costs are the standard example.

How does highest and best use change a valuation?

Illustration only. A company holds a warehouse as investment property at fair value. Valued as a warehouse it is worth £1.5 million. The site has planning permission for residential use, and local evidence suggests a developer would pay £2.1 million after allowing for conversion costs and risk. Residential use is physically possible, legally permissible because of the permission, and financially feasible on the evidence. Under 2A.10 and 2A.11 the presumption that current use is the highest and best use is rebutted, so fair value is £2.1 million even though the company intends to keep letting the warehouse. Its intention is irrelevant under 2A.3. The valuer’s methods and significant assumptions must be disclosed under paragraph 16.10(a).

How does the transition work, and what should be disclosed?

Paragraph 1.41 requires Section 2A to be applied prospectively from the date of initial application, which is the start of the first period in which the Periodic Review amendments apply. Comparatives are not restated, and any change in value from the new definition falls into the current year’s measurement.

Disclosure stays in the sections that require fair value. For financial instruments measured at fair value, paragraph 11.43 requires the basis for determining fair value and, where a technique is used, the assumptions for each class, such as discount rates. Section 16 and paragraph 34.7 require the methods and significant assumptions for investment property and biological assets.

What mistakes come up?

• Deducting selling costs from fair value. They are excluded under 2A.8; only measurements such as fair value less costs to sell deduct them.
• Ignoring alternative uses for property, such as development potential, where market participants would pay for them.
• Relying on an old transaction price without checking for a significant change in circumstances or passage of time.
• Adding Level 1 to 3 tables in a trading company’s accounts as if FRS 102 required them.
• Restating comparatives on transition, when paragraph 1.41 requires prospective application.

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Related Accountapedia entries

• Measuring unquoted equity investments
• FRS 102 Section 12: other financial instruments
• Accounting for listed shares held by a company
• FRS 102 explained
• Fair value adjustments on acquisition

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.