IFRS 13 Made Simple | Fair Value Measurement Guide

IFRS 13:

Defines fair value;
Sets out in a Single IFRS a framework for ‘Measuring‘ fair value; and
Requires disclosures about fair value measurements.

What is IFRS 13?

IFRS 13 Fair Value Measurement is an International Financial Reporting Standard issued by the International Accounting Standards Board (IASB) that establishes a single, unified framework for measuring fair value across all IFRS standards that require or permit fair value measurement or disclosure.

Prior to IFRS 13, fair value guidance was scattered across numerous individual standards, each with its own definition and measurement approach. IFRS 13 consolidated these into one coherent standard, bringing consistency, clarity, and comparability to financial statements worldwide.

The standard 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, commonly referred to as an “exit price” concept.

Core Purpose

Objective of IFRS 13

IFRS 13 serves three interconnected objectives that together elevate the quality and consistency of fair value reporting in global Financial Markets:

Fair value is 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.

IFRS 13, paragraph 9 — Core Definition

The standard aims to define fair value in a way that is precise, market-based, and entity-neutral. It provides a framework for measuring fair value through the three-level input hierarchy, ensuring measurements reflect observable market data wherever possible. Finally, it requires disclosures that give users of financial statements insight into the techniques and inputs used, enabling informed judgment about measurement quality and reliability.

By unifying these elements, IFRS 13 reduces information asymmetry between entities and investors, supports cross-entity comparisons, and strengthens confidence in reported figures.

Levels 1 · 2 · 3

The Fair Value Hierarchy

The cornerstone of IFRS 13 is its three-level hierarchy, which prioritises the inputs used in fair value measurement. Entities must use the highest priority (most observable) inputs available. The hierarchy does not classify assets or liabilities, it classifies the inputs to the measurement.

1
Level 1
Quoted Prices in Active MarketsUnadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. These are the most reliable, objective inputs.
  
 
Listed equity shares (e.g., FTSE 100 stocks)
Exchange-traded derivatives
Government bonds quoted on active markets
ETFs with daily market prices
2
Level 2
Observable Inputs Other Than Level 1Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar (not identical) assets, or market-corroborated inputs.
Interest rate swap valuations using yield curves
Corporate bonds using matrix pricing
Investment property using comparable sales
Foreign currency forward contracts
3
Level 3
Unobservable InputsInputs for which little or no market activity exists. Entities must use their own assumptions about what market participants would use, developed using the best available information.
Private equity investments (DCF models)
Complex structured credit products
Biological assets with no active market
Early-stage technology company valuations

When an asset or liability is measured using inputs from multiple levels, it is categorised at the lowest level input that is significant to the entire measurement. A single Level 3 assumption can push an otherwise Level 2 instrument into Level 3 classification.

Foundations

Key Principles of Fair Value Measurement

IFRS 13 establishes several foundational principles that govern how fair value must be determined. These principles ensure measurements are both theoretically sound and practically consistent.

Exit Price Notion

Fair value is an exit price, the price received to sell an asset or paid to transfer a liability. This is distinct from an entry price (the cost to acquire). It reflects market conditions at the measurement date, not historical acquisition cost.

Market Participant Perspective

The measurement assumes a hypothetical transaction between knowledgeable, willing, independent market participants. Entity-specific synergies or restrictions that other market participants would not consider are excluded.

Principal (or Most Advantageous) Market

Fair value is measured in the principal market i.e. the market with the greatest volume and level of activity. If no principal market exists, the most advantageous market (maximising the exit price) is used instead.

Highest and Best Use (Non-Financial Assets)

For non-financial assets, fair value assumes the highest and best use from a market participant’s perspective; physically possible, legally permissible, and financially feasible even if the entity currently uses the asset differently.

Orderly Transaction Assumption

The standard assumes an orderly transaction, not a forced sale or liquidation. This is critical in stressed markets, where distressed transaction prices may need to be adjusted or discounted.

Own Credit Risk for Liabilities

When measuring a liability at fair value, an entity must consider its own non-performance risk including its own credit risk. The fair value of a liability reflects the price to transfer it to a market participant who would assume the obligation.

Step-by-Step

How to Apply the Measurement Process

Applying IFRS 13 in practice involves a structured, sequential approach. While the standard does not mandate a rigid process, the following steps represent best practice for ensuring compliant and defensible fair value measurements.

Identify the Asset or Liability Being Measured

Define the unit of account, the level at which the asset or liability is aggregated or disaggregated for recognition. Consider whether the item is a standalone asset, a group of assets, or a cash-generating unit.

Determine the Principal (or Most Advantageous) Market

Identify the market with the greatest volume and level of activity for the asset or liability. Transaction costs are considered in determining the most advantageous market but are not included in the fair value measurement itself.

Identify the Appropriate Valuation Technique

Select from the market approach (comparable transactions), income approach (discounted cash flows, option pricing), or cost approach (current replacement cost). Use the technique that maximises observable inputs and is appropriate for the asset type.

Gather and Classify Inputs

Collect all inputs needed for the chosen valuation technique and classify each input within the Level 1, 2, or 3 hierarchy. Document the sources, assumptions, and any adjustments made to observable data.

Calculate the Fair Value

Apply the valuation technique to the gathered inputs to produce the fair value. Ensure the measurement reflects the exit price from the perspective of a market participant, not the entity itself.

Classify Within the Fair Value Hierarchy & Prepare Disclosures

Determine the overall hierarchy classification based on the lowest-level significant input. Prepare the required qualitative and quantitative disclosures outlined in IFRS 13, paragraphs 91–99.

Transparency Requirements

Disclosure Requirements Under IFRS 13

IFRS 13 imposes extensive disclosure requirements designed to enable users of financial statements to assess the valuation techniques and inputs used, and the effect of fair value measurements on profit or loss and other comprehensive income. Disclosure requirements differ depending on whether the measurement is recurring or non-recurring.

Disclosure Item	Recurring	Non-Recurring	Notes
Fair value hierarchy classification (Level 1/2/3)	Required	Required	For each class of asset and liability
Valuation techniques and inputs used	Required	Required	Qualitative description required
Quantitative information about Level 3 inputs	Required	Required	Range and weighted average if relevant
Reconciliation of Level 3 opening to closing balance	Required	Not Required	Including gains/losses, transfers in/out
Transfers between Level 1 and Level 2	Required	Not Required	Reasons for transfers must be disclosed
Sensitivity analysis for Level 3 measurements	Required	Not Required	Narrative description of sensitivity to input changes
Highest and best use (non-financial assets)	If Different	If Different	Disclose if HABU differs from current use
Day 1 gains or losses (deferred)	If Applicable	If Applicable	Unrecognised amounts and accounting policy

The disclosure requirements apply to all assets and liabilities measured at fair value in the statement of financial position, as well as those where fair value is disclosed (but not recognised) in the notes. The level of detail should be proportionate to the significance of the measurements to the entity’s financial position.

Applicability

Scope of IFRS 13

IFRS 13 applies when another IFRS standard requires or permits fair value measurement or disclosure. It is not a standard that independently mandates fair value measurement, that obligation arises from other standards such as IFRS 9, IAS 16, IAS 40, and IFRS 3.

Standards that commonly trigger IFRS 13

IFRS 9 Financial Instruments requires many financial assets and liabilities to be measured at fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVOCI). IAS 40 Investment Property permits the fair value model for investment properties. IFRS 3 Business Combinations requires identifiable assets and liabilities acquired in a business combination to be measured at fair value at the acquisition date. IAS 16 Property, Plant and Equipment allows the revaluation model, measured at fair value.

What IFRS 13 does not cover

Despite its broad reach, IFRS 13 explicitly excludes share-based payment transactions within the scope of IFRS 2, leasing transactions within the scope of IFRS 16, and measurements that are similar to but not identical with fair value, such as net realisable value under IAS 2 or value-in-use under IAS 36.

IFRS 13 tells you how to measure fair value. Other standards tell you when fair value measurement is required.

Fundamental distinction — scope vs. requirement

Common Questions

Frequently Asked Questions

What is the difference between fair value and market value under IFRS 13?

Fair value and market value are closely related but not identical. Fair value under IFRS 13 is a standardised, hypothetical exit price that assumes a transaction between market participants even in the absence of an actual market. Market value typically refers to the observable price in an actual, active market. For assets traded in active markets (Level 1), fair value and market value will often be the same. For Level 2 and Level 3 assets, fair value may differ significantly from any observable market price, as it incorporates valuation models and unobservable inputs.

Can transaction costs be included in fair value under IFRS 13?

No. IFRS 13 explicitly excludes transaction costs from the fair value measurement. Transaction costs are costs incurred to complete the transaction (e.g. brokerage fees, legal fees) and are not a characteristic of the asset or liability i.e. they reflect the entity’s transaction, not the market. However, transport costs are different: if location is a characteristic of the asset (e.g., a commodity), the fair value includes the cost of transporting the asset to the principal market.

How does IFRS 13 handle illiquid or inactive markets?

When market activity declines significantly as experienced during the 2008 financial crisis, IFRS 13 requires entities to assess whether observed transaction prices represent orderly transactions. If a market is not active, observed prices may not represent fair value and may need to be adjusted or discounted. Entities may need to move from a market approach to an income or cost approach, likely resulting in a Level 3 classification. Disclosures must clearly communicate the change in technique and the reasoning behind it.

What is the “day one” gain or loss issue under IFRS 13?

A “day one” gain or loss arises when the transaction price (entry price) differs from the fair value (exit price) on initial recognition. IFRS 13 requires this difference to be deferred and recognised in profit or loss only when inputs become observable or when the instrument matures i.e. not immediately on day one, unless fair value is evidenced by a Level 1 price or other observable data. Entities must disclose the aggregate of deferred day one differences and the accounting policy for recognising them.

How does IFRS 13 relate to US GAAP ASC Topic 820?

IFRS 13 and ASC Topic 820 were developed as a joint convergence project between the IASB and FASB, resulting in highly similar though not identical standards. Both share the same definition of fair value, the same three-level input hierarchy, and broadly similar disclosure requirements. Key differences include: IFRS 13 applies to non-financial assets using the highest and best use concept more explicitly; US GAAP contains additional guidance for certain instrument types; and disclosure formats may differ. Despite these nuances, the conceptual alignment greatly facilitates cross-border financial statement comparison.

Is IFRS 13 applicable to small and medium-sized entities?

IFRS 13 applies to entities that prepare financial statements in accordance with full IFRS. The IFRS for SMEs (Small and Medium-sized Entities) standard has its own, simplified fair value guidance which is less comprehensive than IFRS 13. Entities reporting under IFRS for SMEs are not required to apply IFRS 13 in full. However, jurisdictions may require or permit full IFRS for certain SMEs, in which case IFRS 13 would apply in its entirety.

Jhanzayb (ACA)

(Qualified) Chartered Accountant – ICAP

Master of Commerce – HEC, Pakistan

Bachelor of Accounting (Honours) – AeU, Malaysia