IFRS 13 Fair Value Measurement lays down the principles of fair value accounting concerning assets and liabilities. The fair value can be interpreted as the cash received for the sale of an asset or the amount paid for its transfer by the measuring user in an orderly transaction with other market participants on the measurement date. In this sense, the standard guarantees consistency and transparency of financial reporting as it defines fair value measurement. IFRS builds a fair value hierarchy IFRS 13 and specifies detailed IFRS 13 disclosure requirements. IFRS 13 applies to a wide range of financial instruments and non-financial assets. It also ensures that fair value estimates are reliable, based on a market benchmark, and comparable across industries.
IFRS 13 Fair Value Measurement
This fair value measurement under IFRS 13 establishes a single definition for determining fair value in many accounting standards. The standard guides measuring fair value through observable market data and non-observable inputs. Thus, this standard guarantees that the financial statements report the actual economic value of assets and liabilities instead of historical costs or subjective valuations. The entities must adopt the IFRS 13 fair value measurement framework in assessing the assets and liabilities deemed as necessitating fair value reporting under IFRS.
Fair Value Hierarchy IFRS 13
The fair value hierarchy IFRS 13 classified the reliability of valuation inputs into three levels:
- IFRS 13 Level 1: Quoted price in an active market for identical assets or liabilities; prices are directly observable and the most reliable source of fair value measurement.
- IFRS 13 Level 2: Inputs other than quoted prices in Level 1, such as prices for similar assets in inactive markets or observable interest rates.
- IFRS 13 Level 3: Unobservable input assumptions or internal company data to be used when observable market data is unavailable.
The fair value hierarchy IFRS 13 provides transparency in financial reporting by differentiating market-driven and management-estimated values.
Valuation Techniques of IFRS 13
The IFRS 13 fair value measurement recognises three techniques for valuing the fair value.
IFRS 13 Market Approach
The market approach assesses fair value considering other similar assets or liabilities in the active market. It usually depends on observable inputs such as prices quoted in exchanges, transactions in a specific real estate market, or prices from commodities. It is appropriate for measuring publicly traded securities and other market-based assets.
IFRS 13 Cost Approach
The cost approach determines the fair value based on the value it takes to replace the asset. It reflects the value currently required to acquire or construct an asset with a similar utility. It is the most common approach because it is widely used to value tangible assets such as machinery, buildings, and infrastructure.
Income Approach under IFRS 13
The income approach estimates fair value based on future expected cash flows. It returns future expected income to present value using the appropriate discount rate for the expected form. This method is the most familiar for valuing businesses in intangible assets and financial instruments.
IFRS 13 Disclosure Requirements
Entities are required by IFRS 13 disclosure requirements to be transparent in that such entities must provide data about the fair value measures in the financial statements. Investors and stakeholders will consider these disclosures to understand price determination concerning market data or internal estimates. Counsel means:
- The fair value measurement at the reporting date.
- The level of the fair value hierarchy in IFRS 13concernsg each asset or liability.
- The valuation techniques used: IFRS 13 market approach, IFRS 13 cost approach, or IFRS 13 income approach are measures.
- The inputs are observable and unobservable.
- The change in valuation techniques from earlier to new methods with the reasons for such changes.
An Overview OnIFRS 13 Financial Instruments
Only IFRS 13 can be applied for financial assets such as share, bonds, derivative, loan, etc. Disclosures about fair value measurement usually state how the financial institutions measure their balance at fair value and then what class of its instruments in the fair value hierarchy IFRS 13. Such classification does, in fact, determine how financial institutions assess the reliability of fair value in their reports, as well as how investors assess their risk exposure.
IFRS 13 Practical Examples
Some practical examples of the applicable IFRS 13 are the measurement of the fair value:
IFRS 13 Level 1 Fair Value Measurement
Shares exist of a publicly traded company. Since the stock is actively traded on the stock market each day, the values used in determining fair value will be Level 1 inputs.
IFRS 13 Level 2 Fair Value Measurement
This is a bank that holds a corporate bond that is not actively traded, but interest rates and credit spreads are observable on similar bonds. Its fair value is based on such Level 2 inputs.
IFRS 13 : Fair Value Measurement Level 3
[1] The company and its subsidiaries are private organizations hence there are no prices at market hence a DCF valuation was used. That makes it a Level 3 measurement, he said.
IFRS 13 vs ASC 820
Differences Between IFRS vs US GAAP – IFRS 13 vs ASC 820 Although both standards might apply the same definition of fair value, the disclosure requirements differ. ASC 820 requires many disclosures before valuation adjustments and risk factors. The two standards, however, are limited to market-based fair value measures.
Relevance to ACCA Syllabus
This framework is provided under IFRS 13 out of hours information in respect of fair value measurement under ACCA syllabus,727 highlighting how to measure fair value as well as the disclosure requirements to fair value measurement standards. It guarantees that students are taught valuation techniques, the fair value hierarchy, and assumptions in financial reporting. Understanding fair value is also important for ACCA’s Financial Reporting (FR) and Strategic Business Reporting (SBR) papers, and in applying fair value in audits, financial statements, and corporate finance.
IFRS 13 Fair Value Measurement ACCA Questions
Q1: What does IFRS 13 Fair Value Measurement seek to achieve?
A) To set standards on when to recognize revenues
B) And often needed to bring uniform, fair value measuring and reporting
C) Control over recording of monetary instruments
D) Prescribe principles of lease accounting
Ans. B) To ensure all fair value measurements and disclosures agree
Q2: In the fair value hierarchy under IFRS 13, what are considered inputs as Level 1 inputs?
A) Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access;
B) Not marked-to-market inputs and inputs that are based on entity assumptions
C) Comparable transactions adjusted for market
D) Valuations under a discounted cash flow
Ans: A) Quoted prices in active markets for identical assets or liabilities
Q3: Which Valuation Technique would be the most appropriate when market prices cannot be relied on under IFRS 13?
A) Income Approach
B) Market Approach
C) Cost Approach
D) Equity Method
Ans: A) Income Approach
Q4: IFRS 13 includes a three tier hierarchy for determining fair value, as follows:
a) By the intentions and contexts of specifics of the entity
B) The asset’s highest and best-use
C) Using only historical cost
D) Considering only the sale price
Ans: B) The asset’s highest and best-use
Q5: A Level 3 input in the fair value hierarchy represents which of the following?
A) Observable Transaction Prices Processed
B) Quoted prices that are not adjusted in an active market
C) Inferences based on the information of the entity
D) National adjusted from other prices.
Ans: C) Assumptions as per the entity’s data
Relevance to US CMA Syllabus
Under the domain of Financial Decision Making and Performance Management, Fair value measurement is highly contributing to the syllabus of us cma. IFRS 13 principles are used in investment valuation,economic analysis, and risk assessment. An understanding of fair value measurement, enhances financial reporting and provides the CMA ability to evaluate assets and liabilities using appropriate valuation techniques.
IFRS 13 Fair Value Measurement US CMA Questions
Q1: For which of these scenarios would it be most appropriate to use the market approach for fair value measurement?
A) Where there are no comparable market transactions
B) where the market prices for similar assets are observable
C) If the value of the asset is mainly determined by future cash flows
D) Where historical cost provides a more faithful representation
Ans: B) In case observable market prices are available for similar assets
Q2: Which is the main valuation convention under IFRS 13 for assets that do not have transactions in an active market?
A) Cost Approach
B) Market Approach
C) Income Approach
D) Amortized Cost
Ans: C) Income Approach
Q3: One key requirement in IFRS 13, when using Level 3 inputs to measure assets or liabilities?
A) Should only be based on historical data
B) It should be based on unobservable inputs that reflect entity-specific assumptions
C) These must be adjusted to market expectation
D) They will always have to rely on outside professionals
Ans: B) Unobservable inputs reflecting the entity-specific assumptions
Q4: What are the disclosures required for fair value measurement in accordance with IFRS 13?
A) The entity used historical cost estimates
B) The valuation techniques employed and the significant inputs to the valuation
C) The income statement illustrates
D)Table tax effect fair value adjustment
Ans: B) Valuation techniques and assumptions used
Q5: Which is an example of a Level 2 input in the fair value hierarchy?
A) Unadjusted quoted prices in active markets
B) Interest rates which have been sourced from public data
C) Company-specific unobservables in inputs
D) Internal company estimates
Ans: B) The interest rate from public data source
Relevance to US CPA Syllabus
Fair value measurement is an important part of the US CPA syllabus when it comes to financial accounting and reporting (FAR). The principles outlined in IFRS 13, according to CPAs, are relied upon when forming processes for analyzing financial instruments, expense recording, impairment analysis and fair value basis for recording tangible and intangible assets. It offers a clear perspective about global financial reporting regulation, which is important for both auditors and corporate valuation professionals.
IFRS 13 Fair Value Measurement US CPA Questions
Q1: When measuring the fair value of an asset in accordance with IFRS 13, what assumptions should be used?
A) Price the entity is willing to sell the asset
B) The value that would be lost in an orderly industry transaction between constituent parties
C) The value assessed by the taxing authority
D) The price at which the asset was historically acquired
Ans: B) Price that will be received in an orderly transaction between market participants
Q2: What does the fair value hierarchy in IFRS 13 seeks to do?
A) Minimize dependence on professional judgement
B) Placing more emphasis on inputs utilized in a fair value measurement that have a high degree of reliability
C) Towards valuations based on historical cost
D) Re-scale all assets to same scale
Ans:B) Placing more emphasis on inputs utilized in a fair value measurement that have a high degree of reliability
Q3: Which of the following would NOT be considered a Level 1 input according to IFRS 13?
A) The prices of publicly-traded stocks
B) Information about interest rates from an active bond market
D) Latent parameters for pricing assets
D) Commodities eligible for trading on a regulated market
Ans: C) Hidden assumptions about asset valuation
Q4Under fair value accounting (e.g., as per IFRS 13 or US GAAP), what is the basis for determining the fair value of an asset or liability?
A) The market where most of the trading of the asset or liability occurs
C) Entity’s internal price expectations
C) The initial cost of purchasing the asset
D) Liquidation value in distress
Ans: A) The most advantageous market for the asset or liability
Q5: Which is NOT a key aspect(s) of IFRS 13?
A) Fair Value is defined as [exit price].
B) Fair value for all non-financial asset
C) Proposed disclosure requirement on assumptions used to determine fair value
Ans: B) All non-financial assets measured at fair value
Relevance to CFA Syllabus
Understanding fair value measurement is very important for CFA aspirants in terms of investment valuation, portfolio management and many financial analysis facets. IFRS 13 provides guidance on the definition of fair value to equities, derivatives, and alternative investments. We study how very hard and tough it is to make an efficient market and do intelligent investing. What is fair value and how does it work
IFRS 13 Fair Value Measurement CFA Questions
Q1 IFRS 13 Statement of Fair Value
A) The amount that would be received by market participants in an orderly transaction
B) The highest price an agent is willing to accept for a good
C) Changes in book value evidenced in the financial statements
D) Cost incurred in acquiring an asset
Ans: A) The amount that would be received by market participants in an orderly transaction
Q2: Under IFRS 13, which of the following would most likely represent a Level 2 input?
A) Prices for identical assets in active markets
B) Internal company data discounted cash flow projections
C) Interest rate swap rates derived from the market
D) Assumptions used by management in valuing its financial statements
Ans: C) Interest rate swap rates as quoted in the money markets
Q3: Why is fair value measurement so important for financial analysts?
A) Because all assets must be recorded at their cost basis
B) To show the risk of investment and real pricing
C) It reduces the volume of financial statements
D) It eliminates subjective assessment in the asset valuation
Ans: B) Risk Assessment and Pricing Accuracy
Q4. What IFRS 13 method should be applied for the valuation of a unique asset, where there is no data from an active market?
A) Market Approach
B) Income Approach
C) Cost Approach
D) Amortized Valuation
Ans: B) Income Approach
Q5: What must be one of the item in the financial statement disclosures under IFRS 13?
A) Historic purchase flow data
(b) Valuation techniques and inputs used in fair value measurement
C) The number of amino acids in the protein
D) Fair value adjustment taxation treatment
Ans: C) The valuation techniques and inputs used in fair value measurement
