IFRS 13 Fair Value Measurement defines fair value, sets out in a single Standard a framework for measuring it, and requires disclosures about fair value measurements (IFRS 13.1). It does not decide when fair value is used. It applies when another Standard requires or permits fair value measurements or disclosures about them, including measurements based on fair value such as fair value less costs to sell (IFRS 13.5). That makes it the measurement reference for Standards such as IFRS 9, IFRS 3, IAS 40 and IAS 41.
What is fair value? An exit price, not an entry price
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 13.9). Three features shape it:
- Market-based, not entity-specific. The objective is to estimate the price of an orderly transaction between market participants under current market conditions — an exit price from the perspective of a market participant that holds the asset or owes the liability (IFRS 13.2). The entity's intention to hold an asset, or to settle or otherwise fulfil a liability, is therefore not relevant (IFRS 13.3).
- The characteristics of the item. The measurement reflects the asset's condition and location and any restrictions on its sale or use, if market participants would take them into account when pricing it (IFRS 13.11).
- An orderly transaction. It assumes exposure to the market for a period before the measurement date that allows the usual and customary marketing activities; it is not a forced transaction such as a forced liquidation or distress sale (IFRS 13, Appendix A).
The transaction price is an entry price; fair value is an exit price. In many cases the two are equal (IFRS 13.57–58). If another Standard requires or permits initial measurement at fair value and the transaction price differs, the entity recognises the resulting gain or loss in profit or loss unless that Standard specifies otherwise (IFRS 13.60).
Scope
The measurement and disclosure requirements of IFRS 13 do not apply to (IFRS 13.6):
- share-based payment transactions within the scope of IFRS 2;
- leasing transactions accounted for under IFRS 16; and
- measurements that resemble fair value but are not fair value, such as net realisable value in IAS 2 and value in use in IAS 36.
Its disclosures are also not required in certain cases, including plan assets measured at fair value under IAS 19 and assets whose recoverable amount is fair value less costs of disposal under IAS 36 (IFRS 13.7).
The principal market and the most advantageous market
A fair value measurement assumes the transaction takes place in the principal market for the asset or liability or, if there is none, in the most advantageous market (IFRS 13.16). The principal market is the one with the greatest volume and level of activity for the item. The most advantageous market maximises the amount received to sell the asset, or minimises the amount paid to transfer the liability, after transaction and transport costs (IFRS 13, Appendix A).
- No exhaustive search is required, but all reasonably available information is taken into account. Absent evidence to the contrary, the market in which the entity normally transacts is presumed to be the principal (or most advantageous) market (IFRS 13.17).
- If there is a principal market, its price is fair value, even if another market offers a better price (IFRS 13.18).
- The entity must have access to the market, and the market is identified from the entity's own perspective (IFRS 13.19).
- The price is not adjusted for transaction costs, which belong to the transaction rather than to the asset (IFRS 13.25). Transport costs, however, are deducted when location is a characteristic of the asset, as with a commodity (IFRS 13.26).
Illustrative example
An asset whose location is one of its characteristics, such as a commodity, trades in two markets (hypothetical figures):
| Item | Market A | Market B |
|---|---|---|
| Price | 100 | 97 |
| Transaction costs | (6) | (2) |
| Transport costs | (4) | (4) |
| Net amount received | 90 | 91 |
- If Market A is the principal market: fair value = 100 − 4 = 96. Transaction costs are not deducted.
- If there is no principal market: Market B is the most advantageous because its net amount is higher, so fair value = 97 − 4 = 93. Transaction costs help select the market; they do not enter the measurement.
Market participants
Fair value uses the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interest (IFRS 13.22). The entity need not identify specific participants. It identifies the characteristics that distinguish market participants generally, considering the item, the market and the parties it would deal with in that market (IFRS 13.23).
Non-financial assets: highest and best use
Measuring a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use, or by selling it to another participant that would do so (IFRS 13.27). That use must be (IFRS 13.28):
- Physically possible — given the asset's physical characteristics, such as a property's location or size.
- Legally permissible — given legal restrictions such as zoning regulations.
- Financially feasible — producing adequate income or cash flows, after the costs of converting the asset to that use, to give the investment return market participants would require.
Highest and best use is determined from the market participants' perspective even if the entity intends a different use. The current use is presumed to be the highest and best use unless market or other factors suggest otherwise (IFRS 13.29). For example, a factory site in an area zoned for housing, which market participants would value more highly as residential land after conversion costs, is measured on a residential basis even if the entity keeps running the factory. Even an asset acquired to keep it away from competitors is measured at its highest and best use (IFRS 13.30). That use also sets the valuation premise: in combination with other assets as a group, or on a stand-alone basis (IFRS 13.31).
Liabilities and an entity's own equity instruments
The measurement assumes that a liability is transferred at the measurement date to a market participant, who would then have to fulfil it; it is not settled with the counterparty. The same assumption applies to an entity's own equity instruments, such as equity interests issued as consideration in a business combination (IFRS 13.34).
Without a quoted price for the transfer, the entity measures fair value from the perspective of a market participant that holds the identical item as an asset, if there is one (IFRS 13.37). Otherwise it uses a valuation technique from the perspective of a market participant that owes the liability or has issued the equity claim (IFRS 13.40). The fair value of a liability reflects non-performance risk, which includes the entity's own credit risk (IFRS 13.42).
Three valuation approaches
An entity uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available, maximising relevant observable inputs and minimising unobservable ones (IFRS 13.61). The techniques must be consistent with one or more of three approaches (IFRS 13.62):
| Approach | Idea | Examples |
|---|---|---|
| Market approach | Prices and other information from market transactions in identical or comparable items (IFRS 13.B5) | Market multiples derived from a set of comparables (IFRS 13.B6) |
| Cost approach | The amount currently required to replace the asset's service capacity — current replacement cost (IFRS 13.B8) | Cost of a substitute asset of comparable utility, adjusted for physical, functional and economic obsolescence (IFRS 13.B9) |
| Income approach | Converts future amounts, such as cash flows, to a single current (discounted) amount (IFRS 13.B10) | Present value techniques, option pricing models, and the multi-period excess earnings method for some intangible assets (IFRS 13.B11) |
A single technique may be enough; sometimes several are needed, and their results are evaluated by the reasonableness of the range they indicate (IFRS 13.63). Techniques are applied consistently. A change is appropriate if it gives an equally or more representative measurement (IFRS 13.65), and it is accounted for as a change in accounting estimate without the related IAS 8 disclosures (IFRS 13.66).
Inputs and the fair value hierarchy
Inputs are categorised into three levels. Quoted prices (unadjusted) in active markets for identical items have the highest priority, and unobservable inputs the lowest (IFRS 13.72):
| Level | Inputs | Notes |
|---|---|---|
| Level 1 | Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date (IFRS 13.76) | The most reliable evidence; used without adjustment except in specified cases (IFRS 13.77) |
| Level 2 | Inputs other than Level 1 prices that are observable, directly or indirectly (IFRS 13.81) | Prices for similar items, prices in inactive markets, interest rates, yield curves and credit spreads (IFRS 13.82) |
| Level 3 | Unobservable inputs (IFRS 13.86) | Reflect market participants' assumptions; the entity may start from its own data, adjusting them if other market participants would use different data (IFRS 13.87, 89) |
Two classification rules:
- The whole measurement is categorised at the level of the lowest-level input that is significant to it (IFRS 13.73).
- The hierarchy ranks inputs, not techniques: a present value measurement can be Level 2 or Level 3 depending on its inputs (IFRS 13.74).
Key disclosures
An entity shall disclose information that helps users assess the valuation techniques and inputs used for items measured at fair value after initial recognition, and the effect of recurring Level 3 measurements on profit or loss or other comprehensive income (IFRS 13.91). At a minimum, for each class of assets and liabilities measured at fair value in the statement of financial position after initial recognition, paragraph 93 requires nine groups of information, (a) to (i) (IFRS 13.93). The main ones are:
- the fair value at the end of the period, and the reasons for any non-recurring measurement;
- the level within which the measurement is categorised in its entirety;
- for recurring measurements, the amounts of transfers between Level 1 and Level 2, with the reasons;
- a description of the techniques and inputs for Levels 2 and 3, and quantitative information about significant unobservable inputs for Level 3;
- for Level 3 measurements, a description of the entity's valuation processes; and
- for recurring Level 3 measurements, a reconciliation from opening to closing balances and a narrative description of the sensitivity to changes in unobservable inputs.
The entity discloses, and consistently follows, its policy for when transfers between levels are deemed to occur (IFRS 13.95), and presents quantitative disclosures in a table unless another format is more appropriate (IFRS 13.99). Items not measured at fair value but whose fair value is disclosed need lighter disclosures (IFRS 13.97).
What has changed in IFRS 13?
- Origin. The International Accounting Standards Board (IASB) issued IFRS 13 in May 2011. It defines fair value and replaces the requirements previously contained in individual Standards (IFRS Foundation: IFRS 13).
- Post-implementation review. On 14 December 2018 the Board published its Project Report and Feedback Statement, concluding that IFRS 13 is working as intended and that the information it requires is useful to users of financial statements (IFRS Foundation: PIR of IFRS 13).
- Disclosures. On completing its Targeted Standards-level Review of Disclosures, the IASB decided not to proceed with further work on the disclosure requirements in IFRS 13 and IAS 19; the Project Summary and Feedback Statement was published in March 2023 (IFRS Foundation: project page).
- IFRS 18 and IFRS 19. IFRS 18 Presentation and Disclosure in Financial Statements (April 2024) and IFRS 19 Subsidiaries without Public Accountability: Disclosures (May 2024) make consequential amendments to IFRS 13 for annual reporting periods beginning on or after 1 January 2027 (IFRS Foundation: changes in the 2026 edition).
How it fits with other Standards
Apart from the scope exclusions, every Standard that measures at fair value relies on IFRS 13, including IFRS 3 Business Combinations for the assets acquired, IFRS 9 Financial Instruments and IAS 41 Agriculture. Transactions under IFRS 2 Share-based Payment, and leasing transactions accounted for under IFRS 16 Leases, are excluded from its measurement and disclosure requirements. For business valuation methods more broadly, see Company valuation: DCF and multiples.
A practical tool
The Full IFRS Bundle brings together practical models for leases under IFRS 16, expected credit losses under IFRS 9, actuarial valuation under IAS 19, and consolidation of financial statements.
Sources
- IFRS Foundation: IFRS 13 Fair Value Measurement. References in brackets are to paragraphs of the Standard and its appendices.
- IFRS Foundation: Changes in this edition (2026).
- IFRS Foundation project pages: Post-implementation Review of IFRS 13 and Targeted Standards-level Review of Disclosures.