IFRS 13 does not decide when an item is measured at fair value; other standards do that. It defines fair value as an exit price between market participants, sets out the market, cost and income approaches that may be used to estimate it, and ranks the inputs in a three level hierarchy that drives how much the accounts must disclose. The less observable the inputs, the heavier the disclosure.
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What does IFRS 13 do, and what is outside it?
IFRS 13 was issued in May 2011 and applies to annual periods beginning on or after 1 January 2013 (paragraph C1). It gives one definition of fair value and one measurement framework for every other standard that requires or permits fair value, including IFRS 9 for financial instruments, IAS 40 for investment property, IAS 16 revaluations and the acquisition accounting in IFRS 3. In the UK it applies wherever accounts are prepared under UK adopted international accounting standards or FRS 101.
Paragraph 6 excludes share based payments under IFRS 2, leasing transactions under IFRS 16, and measures that resemble fair value but are not, such as net realisable value in IAS 2 and value in use in IAS 36. Paragraph 7 removes the disclosure requirements, but not the measurement rules, for pension plan assets measured under IAS 19.
How does IFRS 13 define fair value?
Paragraph 9 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. Paragraph 2 stresses that this is a market based measurement, not an entity specific one. Several rules follow:
- The asset’s characteristics count, the owner’s do not. Condition, location and legal restrictions on sale or use are reflected if market participants would price them (paragraph 11).
- Which market. The transaction is assumed to take place in the principal market for the item or, if there is none, the most advantageous market. An exhaustive search is not needed, and the market the entity normally uses is presumed to qualify (paragraphs 16 and 17).
- Whose assumptions. Those that market participants acting in their economic best interest would use (paragraph 22).
- No deduction for transaction costs. Paragraph 25 says the price is not adjusted for transaction costs, which are accounted for under other standards. Transport costs are different where location is a characteristic of the asset.
- Highest and best use for non financial assets. Paragraphs 27 and 28 value a non financial asset at the use that is physically possible, legally permissible and financially feasible. Current use is presumed to be highest and best use unless market or other factors suggest otherwise (paragraph 29), and paragraph 30 applies the rule even to an acquired brand the buyer plans to shelve.
- Own credit risk in liabilities. Paragraph 42 requires the fair value of a liability to reflect non performance risk, including the entity’s own credit risk.
Paragraph 48 allows a portfolio of financial assets and liabilities managed on the basis of net exposure to market or credit risk to be measured on that net basis, as an exception to the item by item approach.
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Which valuation techniques can be used?
Paragraph 61 requires techniques that suit the circumstances and have sufficient data, maximising relevant observable inputs and minimising unobservable ones. Paragraph 62 names three approaches:
- Market approach
- Prices and other information from transactions in identical or comparable items, often using multiples derived from a set of comparables, where choosing a point in the range needs judgement (paragraphs B5 and B6).
- Cost approach
- The amount currently needed to replace the service capacity of an asset, often called current replacement cost, adjusted for physical, functional and economic obsolescence (paragraphs B8 and B9).
- Income approach
- Converting future cash flows or income to a single discounted amount. Paragraph B11 lists present value techniques, option pricing models such as Black Scholes Merton, and the multi period excess earnings method used for some intangible assets.
Where several techniques are used, paragraph 63 requires the results to be weighed and fair value set at the point in the range most representative in the circumstances. Paragraph 69 allows premiums and discounts, such as a control premium or a discount for lack of control, only where consistent with the unit of account, and prohibits a blockage factor that reflects the size of the entity’s holding.
How does the fair value hierarchy work?
Paragraph 72 creates three levels of input, with the highest priority given to unadjusted quoted prices for identical items.
| Level | What it is | Typical example |
|---|---|---|
| Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date (paragraph 76) | Shares listed on a stock exchange |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar items, prices in inactive markets, interest rates, yield curves, implied volatilities and credit spreads (paragraphs 81 and 82) | An interest rate swap valued from observable yield curves |
| Level 3 | Unobservable inputs, used only to the extent observable inputs are not available, still reflecting market participant assumptions about risk (paragraphs 86 and 87) | An unquoted equity investment valued on forecast cash flows |
The hierarchy ranks inputs, not techniques. Paragraph 73 places the whole measurement in the level of the lowest level input that is significant to it, which is a judgement. A Level 2 input must be observable for substantially the full term of an item with a contractual term (paragraph 82), and a quoted price in an active market must be used without adjustment whenever it is available, subject to the narrow exceptions in paragraph 79.
What does IFRS 13 require the notes to disclose?
Paragraph 91 sets two objectives: to show the techniques and inputs behind measurements after initial recognition, and the effect of recurring Level 3 measurements on profit or loss and other comprehensive income. Paragraph 93 then sets minimum disclosures for each class of asset and liability, which in summary are:
- the fair value at the reporting date and, for non recurring measurements such as an asset held for sale, the reason for the measurement;
- the level in which each measurement falls;
- transfers between Level 1 and Level 2, with reasons and the entity’s policy on when transfers are deemed to occur, which paragraph 95 says must be applied consistently;
- for Level 2 and Level 3, a description of techniques and inputs and any change of technique, plus quantitative information about significant unobservable inputs for Level 3;
- for recurring Level 3 measurements, a reconciliation of opening to closing balances, the unrealised gains or losses in profit or loss, a description of valuation processes and a narrative on sensitivity to changes in unobservable inputs; for financial instruments, the effect of reasonably possible alternative assumptions where significant;
- where the highest and best use of a non financial asset differs from its current use, that fact and why.
Items carried at amortised cost but whose fair value is disclosed, such as fixed rate borrowings, need only the level, the technique and inputs, and the highest and best use point (paragraph 97).
What does a Level 3 reconciliation look like?
Illustration only. A group holds an unquoted stake in a private company, valued on discounted cash flows.
| Movement | £000 |
|---|---|
| Opening fair value | 4,000 |
| Gain recognised in profit or loss (line item named) | 350 |
| Purchases | 500 |
| Sales | (200) |
| Transfers into Level 3 | 0 |
| Closing fair value | 4,650 |
Alongside this the group would state the discount rate and growth assumptions used, describe who performs and reviews the valuation, and explain in words how a higher discount rate would lower the value.
What if the transaction price differs from fair value?
Paragraph 57 notes that a purchase price is an entry price while fair value is an exit price, although paragraph 58 accepts they will often be the same. Where another standard requires initial measurement at fair value and the two differ, paragraph 60 requires the difference to be recognised in profit or loss unless that standard says otherwise. Paragraph 64 requires a Level 3 technique to be calibrated so that it reproduces the transaction price at initial recognition when that price is fair value.
Where do preparers go wrong?
- Using an entity specific value, such as the price the business would pay to replace an asset for its own planned use, instead of a market participant exit price.
- Deducting selling costs from fair value when the relevant standard asks for fair value, not fair value less costs to sell.
- Labelling a measurement Level 2 because some inputs are observable, when an unobservable input is significant.
- Giving boilerplate sensitivity narrative without naming the unobservable inputs disclosed under paragraph 93(d).
- Assuming the UK GAAP fair value guidance is identical; for the wider differences see IFRS vs FRS 102.
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Related Accountapedia entries
- FRS 102 Section 2A: fair value measurement
- FRS 102 Section 12: other financial instruments
- Accounting for listed shares held by a company
- Fair value adjustments on acquisition
- FRS 101: the reduced disclosure framework
- IAS 40 investment property: cost or fair value model
- Historical cost vs fair value accounting
Sources
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.