Need To Know IFRS 13 Fair Value Measurement (Print)

NEED TO KNOW
IFRS 13 Fair Value Measurement

2 IFRS 13 FAIR VALUE MEASUREMENT
TABLE OF CONTENTS
1. Introduction 4
2. Scope, effective date and transition 5
2.1. When to apply fair value measurement 5
2.2. Scope exclusion – measurement and disclosures 5
2.3. Scope exclusions – disclosures only 5
2.4. Examples of the scope of IFRS 13 6
2.5. Effective date and transition 6
3. Rationale for a fair value standard 7
4. Main definitions 8
4.1. Fair value 8
4.2. Market participant 9
4.3. Orderly transaction 10
4.4. Principal market and most advantageous market 10
4.5. Highest and best use 11
4.6. Unit of account 12
4.7. Transport costs 12
5. Measurement – key factors and considerations 13
5.1. The asset or liability 13
5.2. Exit price vs. entry price 15
5.3. The market concept 16
5.4. Market participant 20
5.5. The price 21
5.6. Fair value at initial recognition 22
5.7. Non-financial assets 24
5.8. Liabilities and own credit risk (including equity issued by the entity) 29
5.9. Bid and ask prices 39
5.10. Premium and discount 41
6. Valuation techniques 46
7. Fair value hierarchy 50
7.1. Level 1 inputs 51
IFRS 13 FAIR VALUE MEASUREMENT 3
8. Disclosures 56
9. Convergence with US GAAP 58
10. IASB Educational material 59
10.1. Unquoted equity instruments within the scope of IFRS 9 59
11. Definitions 67
11.1. Definitions IFRS 13 67
Appendix A – Example IFRS 13 disclosures for 31 December 2013 69
1. INTRODUCTION
IFRS 13 Fair Value Measurement was issued by the International Accounting Standards Board (IASB) on 12 May 2011.
The objectives of IFRS 13 (IFRS 13.1) are to:
–– Define fair value
–– Provide a single set of requirements for measuring fair value (for scope exclusions, see section 2.2 below)
–– Specify the disclosure requirements for fair value measurement.
IFRS 13 does not specify when items are to be measured at fair value measurements. Those requirements are included in
other IFRSs.
Certain IFRSs require or permit specific items to be measured at fair value:
–– At each reporting date (fair value on a recurring basis)
–– In other certain instances, e.g. impairment (fair value on a non-recurring basis) or at initial recognition.
IFRS 13 applies to all financial and non-financial items with limited scope exclusions. Some IFRSs require fair value disclosures
for items measured at (amortised) cost, and IFRS 13 provides the specific disclosure guidance for each of these.
The fair value measurement project started as part of the convergence project between the IASB and the US Financial
Accounting Standards Board (FASB). The outcome is that IFRS 13 is by and large comparable to the fair value measurement
standard in US GAAP (Accounting Standard Codification topic 820).
2. SCOPE, EFFECTIVE DATE AND TRANSITION

2.1. When to apply fair value measurement
IFRS 13 Fair Value Measurement applies when another IFRS requires or permits either (IFRS 13.5):
–– Fair value measurements, and/or
–– Disclosures about fair value measurements.
In developing IFRS 13, the International Accounting Standards Board (IASB) reviewed all pre-existing requirements
regarding fair value measurements and disclosures contained within other IFRSs. As a result, almost all of these pre-existing
requirements are now included within the scope of IFRS 13 (see below).
2.2. Scope exclusion – measurement and disclosures

The measurement and disclosure requirements of IFRS 13 do not apply (IFRS 13.6) to:
–– Share-based payment transactions within the scope of IFRS 2 Share-based Payment
–– Leasing transactions within the scope of IAS 17 Leases
–– Measurements that appear similar to fair value, but which are not the same, such as:
–– Net realisable value in IAS 2 Inventories
–– Value in use in IAS 36 Impairment of Assets.
BDO comment
IFRS 2 and IAS 17 both use the term ‘fair value’ in a way that differs in certain respects from the definition of fair value in IFRS 13.
Therefore, when applying the fair value measurement in respect of transactions within the scope of IFRS 2 and IAS 17, an entity
must apply the requirements of those standards and not the requirements of IFRS 13.
2.3. Scope exclusions – disclosures only

The disclosure requirements of IFRS 13 do not apply (IFRS 13.7) to:
–– Plan assets measured at fair value in accordance with IAS 19 Employee Benefits
–– Retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and Reporting by
Retirement Benefit
–– Assets for which recoverable amount is fair value less costs of disposal in accordance with IAS 36.
BDO comment
As a consequence of the introduction of IFRS 13, the disclosure requirements of IAS 36 in respect of fair value less cost of
disposal have been enhanced.
2.4. Examples of the scope of IFRS 13

As noted above, IFRS 13 does not establish which items are to be measured and/or disclosed at fair value, with these
requirements being included in other IFRSs. Examples are:
–– Loans and receivables: Although these are measured after initial recognition at amortised cost, they are within the scope
of IFRS 13. This is because IAS 39 Financial Instruments: Recognition and Measurement requires them to be recognised
initially at fair value, as well as disclosure of fair value being required at each subsequent reporting date (if this is
materially different from the amortised cost carrying amount)
–– Fixed assets which are subsequently measured in accordance with the revaluation model in IAS 16 Property, Plant and
Equipment are within the scope of IFRS 13 in terms of both measurement and disclosure
–– Revenue is within the scope of IFRS 13 regarding measurement (as IAS 18 Revenue paragraph 9 requires revenue to be
measured at the fair value of the consideration received or receivable), but not regarding disclosures
–– Investment property, regardless of whether this is measured in accordance with the fair value model or the cost model
under IAS 40 Investment Property. Even when the cost model is followed, investment property is within the scope of
IFRS 13, as IAS 40.79(e) requires fair value to be disclosed (therefore requiring measurement).
2.5. Effective date and transition

IFRS 13 applies for annual periods beginning on or after 1 January 2013 with early adoption permitted (IFRS 13.C1). It is
applied prospectively as of the beginning of the annual period of the initial application. Prior period comparative information
is not restated (IFRS 13.C2).
The disclosure requirements of IFRS 13 do not need to be applied to the comparative information provided for periods
beginning before the date of the initial application IFRS 13 (IFRS 13.C3).
3. RATIONALE FOR A FAIR VALUE STANDARD

In its early days, IFRS often required historical cost as the basis for the measurement of items recognised in the financial
statements, in some cases with an option of fair value measurement. The Conceptual Framework for Financial Reporting (and
the former Framework for the Preparation and Presentation of Financial Statements) did not support fair value as the sole
measurement attribute.
Through the years, many published IFRSs have included a requirement, or option, for entities to measure or disclose the fair
value of assets, liabilities or their own equity instruments. Because these requirements were included in each individual IFRS,
they became dispersed and in many cases did not articulate a clear and consistent measurement or disclosure objective.
Some IFRSs contained limited guidance about how to measure fair value, while others contained extensive guidance.
These inconsistencies contributed to diversity in practice resulting in reduced comparability among different entities’
financial statements. The introduction of IFRS 13 Fair Value Measurement, while not interfering with the scope of fair value
measurement, aims to reduce the extent of this diversity and inconsistency.
4. MAIN DEFINITIONS
4.1. Fair value
Fair value is (IFRS 13.9):
‘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.’
This definition of fair value is sometimes referred to as an ‘exit price’.
BDO comment
The IFRS 13 Fair Value Measurement definition of fair value is somewhat different to the definition that existed in previous
individual IFRSs. However, it does have some similarities with standards that have been published in the last few years, such as
IFRS 3 Business Combinations which includes the following definition (IFRS 3 Appendix A):
‘The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an
arm’s length transaction’.
However, one key difference between the IFRS 13 and IFRS 3 definitions relates to liabilities:
–– IFRS 13: refers to the ‘transfer’ of a liability
–– IFRS 3: refers to the ‘settlement’ of a liability.
This could lead to difference in the measurement of fair value (see below).
Other differences exist between the two definitions, but they are unlikely to cause significant measurement differences, for
example:
–– IFRS 13 specifies an ‘orderly transaction’ (see below), which in practice is usually how liabilities would be ‘settled’
–– The IFRS 3 definition relates to the transaction and to the parties, but this is merely part of the term ‘market participants’ in
the IFRS 13 definition (see below).
4.2. Market participant

IFRS 13 Appendix A notes that market participants are buyers and sellers in the principal (or most advantageous) market for
the asset or liability that have all of the following characteristics:
(a) They are independent of each other, i.e. they are not related parties as defined in IAS 24 Related Party Disclosures,
although the price in a related party transaction may be used as an input to a fair value measurement if the entity
has evidence that the transaction was entered into at market terms
(b) They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all
available information, including information that might be obtained through due diligence efforts that are usual and
customary
(c) They are able to enter into a transaction for the asset or liability
(d) They are willing to enter into a transaction for the asset or liability (i.e. they are motivated, but not forced or
otherwise compelled, to do so).
BDO comment
The characteristics within the definition of a market participant clarify certain aspects of the previous definition, such as:
–– The expression ‘knowledgeable’ parties is clarified by characteristic (b)
–– The expression ‘willing parties’ is clarified by (d)
–– The expression ‘in an arm’s length transaction’ is clarified by (a) in the definition above.
4.3. Orderly transaction

IFRS 13 Appendix A notes that an orderly transaction is:
‘A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities
that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced
liquidation or distress sale).’
BDO comment
IFRS 13 assumes that the transaction price reflects the price that would apply in the normal course of business, and therefore in
an ‘orderly transaction’:
–– The seller is engaged in marketing activities that are usual and customary for such a transaction (i.e. it is not a forced
liquidation or distressed sale). Therefore the subsequent price agreed is the maximum price receivable in consideration for
the asset
–– The buyer, having made efforts to understand the value from his perspective (such as performing due diligence),
subsequently determines the maximum price they are willing to pay.
The following therefore would not be considered ‘orderly transactions’ under IFRS 13:
–– A transaction that was entered and performed in a relatively short time, which is not sufficient to carry on marketing
activities and due diligence efforts that are usual and customary for transactions involving such items
–– There is only one potential buyer for the item
–– The seller is compelled to enter into and complete the transaction (for example, due to financial requirements or regulatory
instruction).
4.4. Principal market and most advantageous

‘Principal market’ (IFRS 13 Appendix A):
‘The market with the greatest volume and level of activity for the asset or liability.’
‘Most advantageous market’ (IFRS 13 Appendix A):
‘The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to
transfer the liability, after taking into account transaction costs and transport costs’ (IFRS 13.A).
BDO comment
The principal (or most advantageous) market is specific to each entity.
It is possible that two different entities will establish two different markets as their principal (or most advantageous) market
for the same item. This is because one entity will have access to a different principal (or most advantageous) market for the
same item. For example, two subsidiaries in the same group might sell the same item, but the principal market for each of them
might be their own domestic market.
4.5. Highest and best use

IFRS 13 Appendix A notes that highest and best use (HBU) is:
‘The use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and
liabilities (e.g. a business) within which the asset would be used.’
BDO comment
HBU relates to non-financial assets only. This is because, unlike other items (such as liabilities and financial assets), non-
financial assets can be used or exploited within several different models, for example:
–– Held for own use
–– Leased to others
–– Sold.
If held for use, it can be used either:
–– On its own
–– Used together with other assets or other assets and liabilities.
For example, a specialised item of property, plant and equipment might have little value on its own, but have significant value
when used with other assets.
4.6. Unit of account

IFRS 13 Appendix A notes that unit of account is:
‘The level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes.’
BDO comment
IFRS 13 does not establish the unit of account to be used, and instead requires inputs to valuation techniques to be consistent
with the characteristics of the asset or liability that market participants would take into account when setting a price. The unit
of account may be established in the applicable IFRSs that require or permit fair value measurement, but this is not always the
case.
For example, when determining the fair value of an entity’s investment in equity instruments (e.g. shares held in another
entity), the unit of account may be either:
–– Each individual instrument (i.e. the total fair value would be equal to the fair value of each share (P) multiplied by the
number of shares held (Q) (i.e. P x Q))
–– The holding as a whole (i.e. the total fair value may be determined by including a control premium).
At its March 2013 meeting, the board of the IASB discussed the unit of account issue due to a number of questions which had
been raised by constituents.
The IASB tentatively decided that the unit of account for investments in subsidiaries, joint ventures and associates is the
investment as a whole. However, the majority of board members (but not all) also tentatively agreed that the fair value
measurement of an investment composed of quoted financial instruments should be equal to (P x Q). This was on the basis that
quoted prices in an active market provide the most reliable evidence of fair value.
Those board members that did not agree indicated their tentative intention to present an alternative view on the issue in the
forthcoming Exposure Draft. The IASB’s discussions have continuing during the remainder of 2013.
In its November 2013 public statement on European common enforcement priorities for 2013 financial statements, the
European Securities and Markets Authority noted that:
‘The standard [IFRS 13] recognises that, in some cases, an adjustment (premium or discount) will be made to inputs
observable in the market (e.g. a control premium when measuring the fair value of a controlling interest). However, the
same paragraph states that fair value measurement shall not incorporate a premium or discount that is inconsistent with the
unit of account relevant for that item. As the IASB is currently discussing the matter, ESMA expects issuers to disclose clearly
their analysis regarding unit of account, until the standard is clarified.’
4.7. Transport costs

IFRS 13 Appendix A notes that transport costs are:
‘the costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market.’
5. MEASUREMENT –
KEY FACTORS AND CONSIDERATIONS
5.1. The asset or liability
Fair value measurement is specific to each asset or liability. Consequently, fair value measurement needs to take into account
the specific characteristics of the asset or liability if market participants would take those characteristics into account when
pricing the asset or liability at the measurement date, for example (IFRS 13.11):
–– The condition, location and restrictions (if any) on the sale or use of the asset.
IFRS 13 Fair Value Measurement illustrative examples IE28 and IE29 provide examples relating to the impact of restrictions
imposed on assets, and the effect of those restrictions should market participants take them into consideration when pricing
(i.e. fair valuing) the asset. A key point is that, if they are to affect the fair value measurement, any restrictions must apply
to the asset itself. Restrictions that apply to the entity that holds the asset are not taken into account, because a potential
purchaser would not be subject to those restrictions.
The following examples are based on IFRS 13.IE28 and 29:
Example 5.1(a): restriction on the sale of an equity instrument (of another entity)

An entity holds an equity instrument of another entity (a financial asset) for which sale is restricted (legally or contractually)
for a specified period. Such a restriction could, for example, limit a sale to only qualifying investors.
The restriction is a characteristic of the instrument and, therefore, would be transferred to market participants (who will
purchase it).
In this case, the fair value of the instrument would be measured on the basis of the quoted price for an otherwise identical
unrestricted equity instrument of the same issuer that trades in a public market, adjusted to reflect the effect of the
restriction.
The adjustment would reflect the amount which market participants would demand due to the risk relating to the inability
to access a public market for the instrument for the specified period. The adjustment will vary depending on all the following:
a) The nature and duration of the restriction
b) The extent to which buyers are actually limited by the restriction (e.g. there might be a large number of qualifying
investors)
c) Qualitative and quantitative factors specific to both the instrument and the issuer.
Example 5.1(b): Restrictions on the use of an asset

A local government contributes land in an otherwise developed residential area to a commercial entity, which is constructing
a hotel on the land. The local government specifies that a hotel must continue to be located on the land in perpetuity, as
long as the commercial entity owns the land and hotel.
Upon review of relevant documentation, the commercial entity determines that the responsibility to meet the restriction
would not be transferred to market participants who might purchase the land and hotel. Consequently, the restriction on the
use of the land is specific to the entity. Furthermore, the entity is not restricted from selling the land and hotel. Without the
restriction on the use of the land, it could be used as a site for residential development.
In addition, the land is subject to an easement (a legal right that enables a utility entity to run power lines across the land).
An analysis of the effect on the fair value measurement of the land arising from the restriction and the easement is as
follows:
a) Government’s restriction on use of land: as the restriction on the use of the land is specific to the entity, because the
restriction would not be transferred to market participants. Therefore, the fair value of the land would be the higher
of its fair value used in conjunction with a hotel and its fair value as a site for an alternative use such as residential
development, regardless of the restriction on the use of the land by the commercial entity. For further discussion
regarding the concept of highest and best use (HBU) see below
b) Easement for utility lines: as the easement for utility lines is specific to (a characteristic of) the land, it would be transferred
to market participants with the land. Therefore, the fair value measurement of the land would take into account the
effect of the easement, regardless of whether the HBU is as a hotel or as a site for an alternative use.
5.2. Exit price vs. entry price

IFRS 13 Appendix A makes a distinction between an entry price and an exit price.
When an asset is acquired or a liability is assumed in an exchange transaction, the transaction price is the amount:
–– Paid to acquire the asset, or
–– Received to assume the liability.
This amount is the entry price.
In contrast, the fair value of the asset or liability (under IFRS 13) is the amount that would be:
–– Received to sell the asset, or
–– Paid to transfer the liability.
This amount is the exit price.
Entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not necessarily transfer
liabilities at the prices received to assume them.
The difference between the two values may (or may not, depending on the applicable guidance) lead to the recognition of a
day one gain or loss (see below).
5.3. The market concept

One of the major principles of IFRS 13 is the market concept (i.e. reference in IFRS 13 to ‘market participants’, ‘market
conditions’, ‘market transactions’, ‘market information’, ‘principal market’, ‘most advantageous market’).
Also, IFRS 13.2 notes that:

‘Fair value is a market-based measurement, not an entity-specific measurement…’.
Fair value is the price obtained from selling an asset (or paid for transferring a liability) in transaction that takes place in either
(IFRS 13.16):
–– The principal market, or
–– The most advantageous market (where no principal market exists).
In order to establish the principal (or the most advantageous) market, an entity needs to evaluate potential markets.
IFRS 13.17 states that an entity does not have to undertake an exhaustive search to find the principal (or the most
advantageous) market. Nevertheless, all information that is available must be considered. Where there is no information
to the contrary, the market in which the entity usually transacts for the item is presumed to be the principal (or the most
advantageous) market.
Once an entity identifies the principal market, the fair value must be measured in that market, even if another market (or
markets) exist that are more advantageous (IFRS 13.18).
Only in the absence of a principal market (i.e. all potential markets have the same volume and level of activity for the item,
or the volume and level of activity cannot be established) is the entity required to identify the most advantageous market.
In addition, the potential market must be accessible as at measurement date (IFRS 13.19).
Markets that are not accessible as at measurement date must not be considered in determining the principal (or the most
advantageous) market. It should be noted, that the entity does not have to demonstrate an ability to sell a particular asset
(or transfer a particular liability) at the measurement date to illustrate accessibility (IFRS 13.20).
The process of identifying the most advantageous market takes into account transaction costs and transportation costs. For
non-financial assets, where the asset’s location/proximity to market participants is a relevant consideration, the associated
transport costs are likely to be reflect in the market price set by market participants.
However (in terms of fair value measurement) they are not a characteristic of the item, because transaction costs:
–– Do not affect the determination of fair value
–– Are accounted for under other applicable IFRSs.
Example 5.3(a): Identifying the principal (or the most advantageous) market

Assume that two markets exist for commodity A, where location is one of the characteristics of the item. Entity B normally
transacts commodity A in market X. Nevertheless, Entity B also gathered available information regarding the volume and
level of activity of market Y.
Market X Market Y
Volume (annual, in millions CU) 20 100
Transactions (per day) 15 55
Price (at period end, CU) 100 97

Transport costs (CU) (6) (2)
Potential fair value (CU) 94 95
Transaction costs (CU) (2) (4)
Net proceeds (CU) 92 91
Figure 1: Example 5.3(a) – Market data
Entity B takes into account all reasonable available information regarding markets X and Y. Accordingly, because it has been
able to obtain the information, it establishes that market Y is the principal market as this market has the highest volume and
level of activity. As a result, the fair value of commodity A is CU95 (transaction costs are not incorporated in deriving fair
value in a principal market).
It should be noted that:

–– Once a principal market is established, the fact that other markets may be more advantageous is ignored
–– The presumption that the principal market is the one in which the entity normally transacts is not always appropriate
–– Transaction costs in the principal market are accounted for in accordance with other applicable IFRSs and do not form
part of the fair value calculation (see also example 5.3(d)).
Example 5.3(b): Identifying the principal (or the most advantageous) market

The facts are the same as in example 5.3(a), except that the information regarding the volume and level of activity in
markets X and Y is not available, and therefore Entity B is unable to determine which market is the principal market. Consider
the following scenarios:
a) Assume no change to transaction costs per example 5(a)
b) Assume that the transaction costs in market X have risen by CU2 to CU4 (there is no change to the transaction costs in
market Y).
Scenario a) – Assume no change to transaction costs in example 5(a)
The most advantageous market is the market that maximises the net proceeds, after incorporating transaction costs. In this
scenario market X has net proceeds totalling CU92, while market Y has net proceeds totalling CU91.
Therefore market X is the most advantageous market, and the fair value is therefore CU94 (although transaction costs have
been taken into account in establishing the most advantageous market, fair value still excludes transaction costs).
Scenario b) – Assume transaction costs have risen to CU4 in market X
The most advantageous market is the market that maximises the net proceeds, after incorporating transaction costs. In this
scenario market X will have net proceeds totalling CU90 (after accounting for a CU2 increase in transaction costs), while
market Y has net proceeds totalling CU91.
Therefore market Y is now the most advantageous market, and the fair value is therefore CU95.
Example 5.3(c): Market accessibility

A commodity trader entity has a 31 December year end. The entity also issues quarterly interim financial reports. One of the
interim period end dates (30 June) traditionally falls on holiday. The entity is transacting in the marketplace whenever it is
open for trade. Due to the public holiday the marketplace is closed at the measurement date (i.e. 30 June), and therefore no
transactions take place at that date.
However, the fact that the market is not active at the reporting date, does not, in itself, preclude the market for being
including when the commodity trader entity is considering which is its principal (or the most advantageous) market.
BDO comment
It can be demonstrated that due to accessibility (or lack thereof), different entities will have different principal (or the most
advantageous) market. Consider a commercial entity, engaging with a bank for a derivative. While the bank can trade the
specific derivative on the dealer market (inter-bank market), that market is not accessible to the commercial entity. Another
example may arise where an importer may sell large proportion of its imported goods (such as cars) to several large leasing
entities at a substantial discount in comparison with prices charged to others. The leasing entities are contractually required to
use the importer as their sole supplier and, consequently, the market available to the importer is not accessible by others.
Example 5.3(d): Interest rate swap at initial recognition (based on IFRS 13.IE24-26)

Entity A (a retailer) enters into an interest rate swap in a retail market with Entity B (a bank) for no initial consideration
(i.e. transaction price is zero). Entity A can access only the retail market. Entity B can access both the retail market (as it did
with Entity A) and the interbank market (i.e. with bank counterparties).
From the perspective of Entity A, the retail market is the principal market for the swap. If Entity A were to transfer its rights
and obligations under the swap, it would do so with a dealer counterparty in that retail market. In that case the transaction
price (zero) would represent the fair value of the swap to Entity A at initial recognition, i.e. the price that Entity A would
receive to sell or pay to transfer the swap in a transaction with bank counterparty in the principal market. That price would
not be adjusted for any incremental (transaction) costs that would be charged by that bank counterparty.
From the perspective of Entity B, the interbank market is the principal market for the swap. If Entity B was to transfer its
rights and obligations under the swap, it would do so with a bank in that market. Because the market in which Entity B
initially entered into the swap is different from the principal market, the transaction price (zero) would not necessarily
represent the fair value of the swap to Entity B at initial recognition. If the fair value differs from zero, Entity B has a
day 1 gain or loss (for the recognition of day 1 gains or losses, see the discussion below).
5.4. Market participant

The above discussion regarding the market in which an entity may transact is sometimes theoretical as many items are rarely
bought or sold on a standalone basis. Moreover, many liabilities include restrictions that prevent their transfer. Even then, fair
value measurement is still made from the perspective of market participant.
For example, when measuring the fair value of customer-related intangible assets acquired in a business combination that is
accounted for in accordance with IFRS 3 Business Combinations, the acquirer considers types of potential market participants
(e.g. a financial investor, or a competitor). As there may be no apparent exit market for a customer relationship intangible
asset, management may consider whether there are strategic buyers that would benefit from the customer relationships.
It is common for entities to build up their customer base in correlation with efforts made to expand their business. Hence,
the entity can identify potential participants in its industry, assuming that the market participant is acting to enhance its
business activities, and from there determine hypothetical market participants. An entity should make assumptions that are
consistent with a market participant’s (economic) perspective. That is, a market participants’ interest is to maximise the price
received on selling assets and to minimise the price paid to transfer liabilities.
IFRS 13.23 notes that the process of considering potential market participants need not relate to specific market participants.
Instead an entity should develop a profile of potential market participants. The profile should consider factors specific to the
asset or liability, the principal (or most advantageous) market for the asset or liability, and market participants with whom
the entity would transact with in that market.
In accordance with the definition in IFRS 13.A, market participants are considered to be knowledgeable regarding the asset or
liability being valued. For this to be the case, market participants will usually perform various procedures (e.g. due diligence)
within a reasonable period allowed by the seller. The seller itself is a market participant, and in order to achieve an orderly
transaction (refer section 4.3) must allow for marketing activities that are usual and customary for transactions involving
such item.
BDO comment
The completion of due diligence by a potential buyer is also essential to the seller, as the seller will not accept a price deduction
due to potential buyer not receiving all relevant information.
5.5. The price

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the
principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price)
regardless of whether that price is directly observable or estimated using another valuation technique (IFRS 13.24). Therefore
under IFRS 13, fair value is reflective of a market-based measurement, taken from a market participant’s perspective.
Consequently, fair value cannot be specific to the entity measuring the asset or liability, as the intention of the entity itself is
irrelevant. For example, an entity may for instance intend to:
–– Use or sell an asset
–– Extinguish or transfer a liability.
These intentions are entity specific, and therefore irrelevant in determining market participant’s perspectives and
assumptions.
Under IFRS 13, fair value is based on the exit price (see above), and not the transaction price or entry price (the price that
was paid for the asset or that was received to assume the liability). Conceptually, entry and exit prices are different. The exit
price concept is based on the current (i.e. as at measurement date) expectations about the sale or transfer price from the
perspective of market participants.
There are arguments against the use of exit prices, including that exit prices are irrelevant when an entity intends to use
the asset. However, even in these instances, exit prices are still appropriate, as the exit price reflects expectations about
future cash flows by selling the asset to a market participant who would then also use the asset. This is because a market
participant will not pay an amount which is greater than it expects to generate from the use or sale of the asset
(IFRS 13.BC39).
A similar logic applies to liabilities, in that the price determined by a market participant would reflect expectations about
cash outflows necessary to fulfil the obligations of the liability (IFRS 13.BC40).
5.6. Fair value at initial recognition

Generally, the transaction price (entry price) will equal the fair value (exit price), although (as per above) there is a conceptual
difference between the two.
It is therefore important to understand that transaction costs will not cause a difference between entry price and exit price.
For example, consider a transaction in which two market participants participate in an orderly transaction for an asset.
The price paid by the buyer to the seller is CU40. The buyer and the seller pay their personal broker a commission of 2.5%
(i.e. CU1), and 5% (i.e. CU2), respectively:
–– From the perspective of the buyer, the entry price is CU40, as the commission paid totalling CU1 is not part of the
entry price
–– From the perspective of the seller, the exit price is also CU40, as again, the commission paid totalling CU2 is not part of
the exit price.
When determining whether fair value at initial recognition equals the transaction price, an entity must take into account
factors specific to the transaction and to the asset or liability. IFRS 13.B4 describes situations in which the transaction price
may not represent the fair value of an asset or a liability at initial recognition. These situations and others may include:
–– Transactions between related parties
–– Transactions that take place under duress or under a forced sale (e.g. the seller is experiencing financial difficulty or the
acquirer is obliged to purchase the asset or assume the liability because of law or a court decision)
–– The unit of account represented by the transaction price is different from the unit of account for the asset or liability
measured at fair value (the asset or liability measured at fair value is only one of the elements in the transaction such as
in a business combination)
–– The market in which the transaction takes place is different from the principal market (or most advantageous market).
The existence of any of the factors above does not constitute conclusive evidence of a difference between fair value and the
transaction price. For instance, the definition of fair value (see above) regarding a transaction between related parties can
permit the use of the transaction price as an input to the calculation.
Any difference between the transaction price and fair value is commonly known as a day one gain or loss. The International
Accounting Standards Board (IASB) decided that determining whether or not to recognise a day one gain or loss was beyond
the scope of the fair value measurement project.
As a result, if another IFRS requires or permits an entity to measure an asset or a liability initially at fair value, and the
transaction price differs from fair value, the entity either will or may recognise the resulting gain or loss in profit or loss unless
that IFRS specifies otherwise (e.g. financial instruments not subject to Level 1 fair value measurement, and profit from a
transaction with a controlling entity which is not at fair value might be recognised directly in equity).
Example 5.6(a): Accounting for differences between the transaction price and fair value
Entity B is a wholly owned subsidiary of Entity A. Entity A is engaging in constructing and marketing of office buildings.
Entity B is in the investment property sector. Entity A has just finished marketing 29 out of 30 floors of an office building,
each of which has been sold for CU5 million. The last floor is then purchased by Entity B for CU4 million. Assuming that
the fair value of each floor is CU5 million, in accordance with paragraph 4.25 of the Framework For Financial Reporting (the
‘Conceptual Framework’), the difference between transaction price and fair value (i.e. CU1 million) is accounted for by Entity B
as capital contribution from Entity A, and is recognised directly in equity.
Financial instruments are measured at fair value at initial recognition. Both IFRS 9 Financial Instruments and IAS 39 Financial
Instruments: Recognition and Measurement address the issue of day one gains or losses. Prior to the publication of IFRS 13,
IFRS 9 and IAS 39 required that day one gains or losses were not to be recognised in profit or loss, unless:
a) The fair value is evidenced by a quoted price in an active market for identical asset or liability, or
b) The fair value is based on a valuation technique whose variables include only observable data.
IFRS 13 did not change these requirements, but amendments were made to IAS 39 and IFRS 9 to clarify that the fair value
of financial instruments at initial recognition should be measured in accordance with IFRS 13 and that any deferred amounts
arising from the application of the recognition threshold in IAS 39 and IFRS 9 (i.e. an unrecognised day one gain or loss)
are separate from the fair value measurement. The effect of this is that a valuations model would be calibrated to arrive
at the transaction price, with inputs to the valuations model only being adjusted for changes to valuation inputs that arise
subsequent to the date of initial recognition (IFRS 13.64).
Other IFRSs under which a day one gain or loss might be recognised are:
a) IFRS 3 Business Combinations (gain on bargain purchase)
b) IAS 41 Agriculture.
5.7. Non-financial assets

IFRS 13 requires the fair value of a non-financial asset to be measured based on its highest and best use (HBU) from a market
participant’s perspective. This requirement does not apply to financial instruments, liabilities or equity.
The concept of HBU is not new, although it has not explicitly been part of IFRS (the basis for conclusions to IAS 40
Investment Property, prior to the issue of IFRS 13, made reference to International Valuation Standards which include HBU
as a general valuation concept). The specific inclusion of HBU has resulted in a convergence of IFRS with valuation standards
and practices.
IFRS 13.28 states that HBU of a non-financial asset takes into account the use of the asset that is physically possible, legally
permissible, and financially feasible, as follows:
(a) A use that is physically possible takes into account the physical characteristics of the asset that market participants
would take into account when pricing the asset (e.g. the location or size of a property)
(b) A use that is legally permissible takes into account any legal restrictions on the use of the asset that market
participants would take into account when pricing the asset (e.g. the zoning regulations applicable to a property)
(c) A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally
permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that
use) to produce an investment return that market participants would require from an investment in that asset put to
that use.
HBU is determined from the perspective of market participants (IFRS 13.29). Therefore, the intentions and the use of the
non-financial asset by the reporting entity are irrelevant in determining fair value. However, IFRS 13.29 also states that
an entity need not perform an exhaustive search for other potential uses of a non-financial asset if there is no evidence to
suggest that the entity’s current use of an asset is not its HBU.
Example 5.7(a): Entity vs. market participant considerations (alternative use)

Entity A currently owns an office building that is accounted for as an investment property in accordance with IAS 40. Due
to a shortage of residential buildings in the area (reflected by increased rental rates able to be charged by lessors), it is
possible that the fair value of the building would be maximised by changing its use to that of a residential building. However,
in order for the type of use to be changed, local regulatory approval would be required as well as significant subsequent
redevelopment of the building. The alternative use (i.e. as a residential building) is required to be considered in Entity A’s fair
value measurement if, and only if, market participants would also consider that alternative use when pricing the asset.
In such cases, in determining the fair value consideration needs to be given to the level of uncertainty associated with
obtaining regulatory approval for the change in use, as well as the related future capital expenditure and future cash flows to
be derived from the building. Prior to the introduction of IFRS 13, IAS 40.51 did not permit such cash flows to be considered
in determining the fair value of an investment property.
Example 5.7(b): Entity vs. market participant considerations (financial feasibility)

Entity A owns vacant land, which is measured at fair value, and is unable to secure funding to finance development of the
vacant land. This inability is forecast to continue for the foreseeable future. While Entity A may be (financially) unable to
carry out development of the vacant land, other market participants might be able to do so and therefore would consider the
future development of the vacant land in pricing the asset. In this situation, the future capital expenditure and future cash
flows from developing the vacant land would be considered in determining the fair value of the vacant land for the purposes
of Entity A’s financial statements (as these factors would be considered by market participants).
Example 5.7(c): Entity vs. market participant considerations (defensive values)

Entity A purchases an intangible asset for its ‘defensive value’ (e.g. a competitor’s brand purchased in a business combination).
The rationale for the purchase is that the acquirer wishes to acquire the asset to prevent it from being used by competitors.
The defensive value of the intangible asset would not be relevant to the calculation of the asset’s fair value (other than in the
relatively rare circumstances that other market participants would also use the asset in a defensive manner).
In circumstances where assets are held for defensive purposes, it will often be the case that:
–– The value in use of the defensively held asset is lower than its fair value (as the asset is not currently being used), and
–– The benefit (which is indirect) from defensively holding the asset is equal to or higher than its fair value (this is implicit, as
otherwise the entity would not have purchased it).
These two amounts are often irrelevant in determining fair value, as a market participant’s intention would typically be to
use the asset in the ordinary course of business.
As noted above, an entity will often use non-financial assets in a manner which reflects their HBU and this is presumed by
IFRS 13 (IFRS 13.29). Therefore, it is only necessary to consider alternative uses of those assets where there is evidence that
their current use is not consistent with their HBU. Common examples of non-financial assets are described below.
Example 5.7(d): Land
An entity acquires land as part of a transaction that meets the definition in IFRS 3 of a business combination. The land
is currently developed for industrial use as a site for a factory. The current use of land is presumed to be its HBU unless
market or other factors suggest a different use. In this case, nearby sites have recently been developed for residential use
as sites for high-rise apartment buildings. On the basis of that development, recent zoning and other changes to facilitate
that development, the entity determines that the land currently used as a site for a factory could be developed as a site for
residential use (i.e. for high-rise apartment buildings) because market participants would take into account the potential to
develop the site for residential use when pricing the land.
The HBU of the land would be determined by comparing both of the following:
(a) The fair value of the land as currently developed for industrial use (i.e. the land as used in combination with other
assets, such as the factory, or with other assets and liabilities)
(b) The value of the land as a vacant site for residential use, taking into account the costs of demolishing the factory and
other costs (including the uncertainty about whether the entity would be able to convert the asset to the alternative
use, including obtaining any necessary permission from the authorities) that would be incurred in converting the land
to a vacant site (i.e. the land as used on a stand-alone basis).
The fair value of the land would be determined on the basis of the HBU. In situations involving real estate appraisal, the
determination of HBU might take into account factors relating to the factory operations, including its assets and liabilities.
BDO comment
The HBU concept is relevant not only for the current use of the non-financial asset (e.g. lock up, use, lease, or held for sale).
When using the asset, the entity will evaluate whether the HBU is achieved alone or in combination with other assets/liabilities
(see also below).
If the fair value of the land is maximised on the basis of it being a vacant site, this implies that the value of the factory itself
is zero (other than scrap value).
Example 5.7(e): Research and development project

An entity acquires a research and development (R&D) project in a business combination. The entity does not intend to
complete the project. If completed, the project would compete with one of its own projects (to provide the next generation
of the entity’s commercialised technology). Instead, the entity intends to hold (i.e. lock up) the project to prevent its
competitors from obtaining access to the technology. In doing this, the acquired project is expected to provide defensive
value, principally by improving the prospects for the entity’s own competing technology. To measure the fair value of the
project at initial recognition, the HBU of the project would be determined on the basis of its use by market participants.
For example:
(a) Continue development: The HBU of the R&D project would be to continue development if market participants
would continue to develop the project and that use would maximise the value of the group of assets or of assets
and liabilities in which the project would be used (because the asset would be used in combination with other assets
or with other assets and liabilities). That might be the case if market participants do not have similar technology,
either in development or commercialised. The fair value of the project would be measured on the basis of the price
that would be received in a current transaction to sell the project, assuming that the R&D would be used with any
associated assets and liabilities and that those assets and liabilities would be available to market participants.
(b) Cease development (‘lock up’): The HBU of the R&D project would be to cease development if, for competitive
reasons, other market participants would lock up the project and that use would maximise the value of the group of
assets or of assets and liabilities in which the project would be used. That might be the case if market participants
have technology in a more advanced stage of development that would compete with the project, if it was completed,
and the project would be expected to improve the prospects for their own competing technology if locked up. The
fair value of the project would be measured on the basis of the price that would be received in a current transaction
to sell the project, assuming that the R&D would be used (i.e. locked up) with its complementary assets and the
associated liabilities and that those assets and liabilities would be available to market participants.
(c) Cease development (not economically viable): The HBU of the R&D project would be to cease development if market
participants would discontinue its development. That might be the case if the project is not expected to provide a
market rate of return if completed and would not otherwise provide (defensive or other) value if locked up. The fair
value of the project would be measured on the basis of the price that would be received in a current transaction to
sell the project on its own (which might be zero).
When determining HBU, an entity should include all costs that market participants would incur. For example, land may
currently be being utilised for farming purposes, however other alternative uses may currently be under consideration
(e.g. commercial or residential property). In such a situation, two different values should be estimated to derive the HBU of
the land:
1. Value through continuing current use: Value should reflect the benefits of continuing to operate the land for farming, and
2. Value through an alternative use for the land : Value should include all costs (e.g. legal costs, viability analysis, traffic
studies), associated with re-zoning the land to the alternative use.
In addition, demolition and other costs associated with preparing the land for alternative use should be included in the
estimate of fair value. An effort to re-zone land contains an element of uncertainty related to whether the proposed re-
zoning obtains approval. The fair value of the land should reflect the uncertainty. Therefore associated re-zoning costs
should not be considered if approval for re-zoning is unlikely to succeed.
HBU in combination with other assets/liabilities

The HBU of a non-financial asset might be achieved in combination with a group of other assets or with a group of other
assets and liabilities (IFRS 13.31). In such cases:
–– Fair value is based on the use of the asset in such an asset/liability group. It is assumed that the asset would be used
within such a group and that the other assets and liabilities would be available to market participants
–– The asset/liability group cannot include liabilities that are used to fund assets outside that group
–– Assumptions about HBU should be consistent for all non-financial assets in such a group
–– Such an asset/liability grouping does not have to be consistent with the level of aggregation or disaggregation specified in
other IFRSs.
Example 5.7(f): Asset group

An entity acquires assets and assumes liabilities in a business combination, including assets A, B and C. Asset C is billing
software integral to the business developed by the acquired entity for its own use along with Assets A and B (i.e. the related
assets). The entity measures the fair value of each of the assets individually, consistently with the specified unit of account
for the assets. The entity determines that the HBU of the assets is their current use and that each asset would provide
maximum value to market participants principally through its use in combination with other assets (or with other assets and
liabilities).
In this situation, the entity would assess the assets in the context of the market in which they were initially acquired
(i.e. the entry and exit markets from the perspective of the entity are the same). Market participant buyers with whom the
entity would enter into a transaction in that market have characteristics that are generally representative of both strategic
buyers (e.g. competitors) and financial buyers (investors that do not have complementary investments) and include those
buyers that initially bid for the assets.
Differences between the indicated fair values of the individual assets relate principally to the use of the assets by those
market participants within different asset groups:
a) Strategic buyer: The entity determines that strategic buyers have related assets that would enhance the value of the
group within which the assets would be used. Those assets include a substitute for Asset C, which would be used for
only a limited transition period and could not be sold on its own at the end of that period. Because strategic buyers have
substitute assets, Asset C would not be used for its full remaining economic life. The fair values of Assets A, B and C
within the strategic buyer asset group which reflecting the synergies from the use of the assets within that group
are CU360, CU260 and CU30, respectively. The indicated fair value of the assets as a group is therefore CU650.
b) Financial buyer: The entity determines that financial buyers do not have substitute assets that would enhance the value
of the group within which the assets would be used. As financial buyers do not have substitute assets, Asset C would
be used for its full remaining economic life. The fair values of Assets A, B and C within the financial buyer asset group
are CU300, CU200 and CU100, respectively. The indicated fair value of the assets as a group is therefore CU600.
The fair values of Assets A, B and C would be determined on the basis of the use of the assets as a group within the strategic
buyer group (CU360, CU260 and CU30), as this is their HBU. Although the use of the assets within the strategic buyer
group does not maximise the fair value of each of the assets individually, it maximises the fair value of the assets as a group
(CU650 vs. CU600).
5.8. Liabilities and own credit risk (including equity issued by the entity)
The general principle for measuring the fair value of liabilities (and an entity’s own equity instruments) in accordance with
IFRS 13.34 is that fair value assumes that a financial or non-financial liability or an entity’s own equity instrument (e.g. equity
interests issued as consideration in a business combination) is transferred to a market participant at the measurement date.
The transfer (leading to an exit price) of a liability or an entity’s own equity instrument assumes the following:
(a) A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation.
The liability would not be settled with the counterparty or otherwise extinguished on the measurement date
(b) An entity’s own equity instrument would remain outstanding and the market participant transferee would take on
the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise
extinguished on the measurement date.
The concept of a transfer of liabilities (i.e. that subsequently the liability will ‘belong’ to the counterparty) is essential to the
previously discussed exit price concept of IFRS 13. The notion of transfer price is coherent with the fair value of liabilities,
as this is the price which one market participant is willing to pay another market participant to relieve them from fulfilling
the liability. Naturally, the market participant transferee will settle only for a price that, which in their perspective, is
representative of the expected cash outflows to fulfil the obligation, or the cash outflows to subsequently transfer the
liability on to another market participant.
Prior to IFRS 13, the fair value of a liability was defined as the amount for which a liability could be settled, between
knowledgeable, willing parties in an arms-length transaction (IFRS 3 Appendix A).
The Conceptual Framework paragraph 4.17 also notes that:
‘The settlement of a present obligation usually involves the entity giving up resources embodying economic benefits in order
to satisfy the claim of the other party. Settlement of a present obligation may occur in a number of ways, for example, by:
(a) Payment of cash
(b) Transfer of other assets
(c) Provision of services
(d) Replacement of that obligation with another obligation, or
(e) Conversion of the obligation to equity.
An obligation may also be extinguished by other means, such as a creditor waiving or forfeiting its rights.’
As the notion of transferring a liability is not mentioned among the above alternate examples of settlement in the
Conceptual Framework, it was not clear whether settlement value referred to transfer value or the extinguishment value.
IFRS 13 now clarifies that the definition of fair value (IFRS 13.9) is made with reference to the transfer value rather than the
extinguishment value.
BDO comment
It should be noted that extinguishment value is not necessarily the transfer value. In some cases, an additional risk premium
above the expected pay-out may be required due to the uncertainty regarding the ultimate amount of the liability. The risk
premium paid to a third-party may differ from the settlement value that the direct counterparty would be willing to accept. In
addition, the party assuming a liability may have to incur certain costs to manage the liability or may require a profit margin.
It is worth noting that it may be cheaper for an entity to serve or fulfil an obligation rather than just transfer it to a market
participant. This is because the entity may have an efficiency advantage over a market participant regarding its own obligation
and the margin that the counterparty would demand for assuming the liability. This advantage is not recognised in profit or loss
at measurement date, but will instead be recognised through lower costs or lower payments during execution/settlement of
the obligation.
In practice, there may be significant differences between settlement value and transfer value. Among the differences is the
impact of credit risk, which is often not considered in the settlement of a liability.
The potential difference between settlement value and transfer value can be illustrated with the following example:
Example 5.8(a): Interest rate swap at initial recognition (based on IFRS 13.IE24-26)

Entity A has a bank loan, with a face value of CU500, which attracts a market rate of interest. Nevertheless, due to market
concern regarding non-performance risk of entity A, that market value of the loan is lower than its face value (i.e. CU480). As
the Bank will not agree (at least not in normal course of business) to discount the amount paid by entity A for extinguishing
the loan, entity A will pay CU500 (the full face value), which is the settlement value.
The transfer value is the price of a hypothetical transaction between entity A and market participant (B) that is seeking
financing similar to the bank loan, with a similar credit profile (as noted in IFRS 13.42). Market participant B is indifferent
about whether finance is obtained through a new bank loan (similar to entity A’s loan) or assuming entity A’s loan. Market
participant B has the same credit profile as entity A.
Due to the non-performance risk of entity A, the market value of the loan is only CU480. Because B has the same credit
profile as A, if B were to take out a loan, the bank would only lend only the lower amount of CU480 in return for the same
cash flows as are due in respect of entity A’s existing loan. This is because the bank would require a higher interest rate to
compensate it for the increased credit risk. Therefore, the transfer value is CU480.
This price is also the fair value for a market participant holding the identical liability as an asset, consistent with the guidance
of measuring such liabilities in IFRS 13.37 (see below).
IFRS 13 assumes that non-performance risk is the same before and after the transfer of a liability. This assumes that the
hypothetical transaction for the transfer of the liability is executed between equivalent entities, with the same credit status.
The basis for conclusions (IFRS 13.BC94) notes that:
‘In a fair value measurement, the non-performance risk related to a liability is the same before and after its transfer. Although
the IASB acknowledges that such an assumption is unlikely to be realistic for an actual transaction (because in most cases
the reporting entity transferor and the market participant transferee are unlikely to have the same credit standing), the IASB
concluded that such an assumption was necessary when measuring fair value for the following reasons:
(a) A market participant taking on the obligation would not enter into a transaction that changes the non-performance risk
associated with the liability without reflecting that change in the price (e.g. a creditor would not generally permit a debtor
to transfer its obligation to another party of lower credit standing, nor would a transferee of higher credit standing be
willing to assume the obligation using the same terms negotiated by the transferor if those terms reflect the transferor’s
lower credit standing)
(b) Without specifying the credit standing of the entity taking on the obligation, there could be fundamentally different fair
values for a liability depending on an entity’s assumptions about the characteristics of the market participant transferee
(c) Those who might hold the entity’s obligations as assets would consider the effect of the entity’s credit risk and other risk
factors when pricing those assets (see paragraphs BC83–BC89).’
IFRS 13 provides a hierarchy of methods for establishing the fair value of a liability. IFRS 13.37 notes that:
‘When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and
the identical item is held by another party as an asset, an entity shall measure the fair value of the liability or equity instrument
from the perspective of a market participant that holds the identical item as an asset at the measurement date.’
In comparison with assets, observable active markets for an entity’s liabilities and equity instruments issued are much less
likely to exist in practice. This is due to contractual and legal restrictions on liability and equity transfers.
Even for quoted debt or equity securities, the market serves as an exit mechanism for the investor, rather than for the
issuer. As a result, the quoted price reflects the exit price from the investor’s perspective only. IFRS 13 distinguishes such
situations from the situation in which an exit market exists directly for the liability (or equity) instrument. When a quoted
transfer price is not available from the issuer’s perspective, but the instrument is held by an investor as an asset, the fair value
measurement should be from the investor perspective.
IFRS 13.BC89 explains that the fair value from the perspectives of investor and issuer must be the same in an efficient
market, as any arbitrage situation would be eliminated. For example:
Assuming that the fair value of transferring a liability is lower than the fair value of the corresponding asset:
–– In this instance, by transferring of the liability (for lower price) the entity would then issue more instruments as
investors are willing to pay more for the corresponding asset. Therefore, the price for the liability and the price for the
asset would adjust until the arbitrage opportunity was eliminated.
Assuming that the fair value of transferring a liability is higher than the fair value of the corresponding asset:
–– In this instance, a market participant would acquire the liabilities from other parties (for a higher price received) and
use the funds to purchase the corresponding asset (for a lower price paid). Therefore, the price for the liability and the
price for the asset would adjust until the arbitrage opportunity was eliminated.
The IASB also considered whether measuring the fair value of the asset rather than the fair value of the liability would result
in different fair values because, for example, the asset is liquid whereas the liability may not be. In practice, it is typically
easier for an asset holder to sell to market participants, than for the issuer of the liability to transfer the liability to market
participants. The IASB eventually decided that no conceptual reason exists to explain the difference in the fair values.
When the fair value of a liability (or equity instrument) is measured by reference to the corresponding asset price,
consideration will be needed of whether there are factors relevant only to the asset (i.e. the factors are not applicable to the
liability or equity instrument). In such cases, it may be appropriate to adjust the value of the asset in arriving at the fair value
of the corresponding liability (or equity instrument). IAS 39 includes guidance for such instances:
–– A quoted debt security may be secured by a guarantee from a third party (e.g. the controlling party of the issuer). The
quoted asset price of such a security would be increased due to the guarantee, as it decreases the non-performance
risk from the holder’s perspective. From the issuer’s perspective, it is necessary to give careful consideration to whether
the unit of account of its own liability includes or excludes the guarantee. If the unit of account of the liability does not
include the guarantee (which will be derived from the requirements of the applicable IFRSs), then the credit enhancement
in the value of the quoted debt security asset (i.e. the enhancement in value attributable to the third party guarantee)
must be eliminated by the issuer in calculating the fair value of its own liability (IFRS 13.39(b)). For example, when
the guarantee is provided by a controlling shareholder, the amount attributable to the guarantee is accounted for as
shareholder’s contribution
–– When an entity uses the quoted price of a similar (but not identical) debt or equity instrument (asset) to value its
own debt (liability), it would have to adjust for any differences between the debt or equity instruments and its own debt
(IFRS 13.39(a))
–– The price of the asset used to measure the fair value of a corresponding liability (or equity instrument) may sometimes
reflect the effect of a restriction which temporarily prevents the sale of the asset. Such a restriction may lead to a
decrease in the fair value of the asset. As this restriction is not relevant to the fair value of the corresponding liability (or
equity instrument), the restriction’s effect on the asset’s fair value must be eliminated (IFRS 13.39).
IFRS 13 requires the fair value of a liability to include the effect of non-performance risk (IFRS 13.42), being:
‘The risk that an entity will not fulfil an obligation. Non-performance risk includes, but may not be limited to, the entity’s own
credit risk.’ (IFRS 13 Appendix A).
Prior to the issue of IFRS 13, there were different interpretations regarding how an entity’s own credit risk should be reflected
in the fair value of a liability – due to liabilities being settled rather than transferred. In practice, it would be very unlikely that
the counterparty would accept a settlement amount that was different from the contractual amount in instances where the
entity’s credit risk changed. Entities using the counterparty-settlement interpretation of fair value will not, in this respect,
find a significant effect from changes in their own credit risk when measuring their liabilities at fair value.
However, the initial application of IFRS 13 may result in a change in accounting policy for entities that have not previously
included own credit risk in the fair value of their financial liabilities.
The level of non-performance risk imputed into fair value should be consistent with the unit of account. For example,
in determining the fair value of a liability, the effect of third-party credit enhancements should be excluded if the credit
enhancement is accounted for separately from the liability (IFRS 13.44).
Ultimately, the credit enhancement is not relevant to the creditor – the creditor is unable simply to decide not to pay the
debt and take advantage of the credit enhancement. The only scenario in which the creditor would not settle the liability in
full would be in instances of financial distress, such as bankruptcy. It is the counterparty that has the benefit of the credit
enhancement as potentially the credit enhancement improves the counterparty’s overall credit position. IFRS 13 does not
specify whether the counterparty should or should not be accounted for the credit enhancement separately from the asset –
this determination is based on other applicable IFRSs.
The following examples are based on IFRS 13 Illustrative Examples:

Example 5.8(b)(i): Structured note
On 1 January 20X7 Entity A, an investment bank with a AA credit rating, issues a five-year fixed rate note to Entity B. The
contractual principal amount to be paid by Entity A at maturity is linked to an equity index. No credit enhancements are
issued in conjunction with the contract. Entity A designates the note as at fair value through profit or loss. The fair value of
the fixed rate note (liability) during 20X7 is measured using an expected present value technique. Changes in fair value are as
follows:
a) Fair value at 1 January 20X7: The expected cash flows used in the expected present value technique are discounted at
the risk-free rate using the government bond curve at 1 January 20X7, plus the current market observable AA corporate
bond spread to government bonds, if non-performance risk is not already reflected in the cash flows, adjusted (either up
or down) for Entity A’s specific credit risk. Therefore, the fair value of Entity A’s obligation at initial recognition takes into
account non-performance risk, including that entity’s credit risk, which presumably is reflected in the proceeds.
b) Fair value at 31 March 20X7: During March 20X7 the credit spread for AA corporate bonds widens, with no changes to
the specific credit risk of Entity A. The expected cash flows used in the expected present value technique are discounted
at the risk-free rate using the government bond curve at 31 March 20X7, plus the current market observable AA corporate
bond spread to government bonds, if non-performance risk is not already reflected in the cash flows, adjusted for
Entity A’s specific credit risk. Entity A’s specific credit risk is unchanged from initial recognition. Therefore, the fair value
of Entity A’s obligation changes as a result of changes in credit spreads generally. Changes in credit spreads reflect current
market participant assumptions about changes in non-performance risk generally, changes in liquidity risk and the
compensation required for assuming those risks.
c) Fair value at 30 June 20X7: As of 30 June 20X7 there have been no further changes to the AA corporate bond spreads.
However, on the basis of structured note issues corroborated with other qualitative information, Entity A determines that
its own specific creditworthiness has improved within the AA credit spread. The expected cash flows used in the expected
present value technique are discounted at the risk-free rate using the government bond yield curve at 30 June 20X7, plus
the current market observable AA corporate bond spread to government bonds (unchanged from 31 March 20X7), if non-
performance risk is not already reflected in the cash flows, adjusted for Entity A’s specific credit risk. Therefore, the fair
value of the obligation of Entity A changes as a result of the change in its own specific credit risk within the AA corporate
bond spread.
BDO comment
–– There is a derivative embedded in the note, in the form of linkage to an equity index; this allows entity A to choose the
designation of fair value through profit or loss (IAS 39.11 and IFRS 9.4.3.5).
–– The example above does not deal directly with the cash flows estimation, which is influenced by changes to the equity
index.
Example 5.8(b)(ii): Decommissioning liability

On 1 January 20X1 Entity A assumes a decommissioning liability in a business combination (i.e. the acquired entity is legally
required to dismantle and remove an offshore oil platform at the end of its useful life, which is estimated to be in 10 years).
Entity A uses the expected present value technique to measure the fair value of the decommissioning liability. On the basis
that Entity A is contractually and legally permitted to transfer its decommissioning liability to a market participant, Entity A
concludes that a market participant would use the following inputs, probability-weighted as appropriate, when estimating
the price it would expect Entity A to pay for the transfer:
–– Labour costs
–– Allocation of overhead costs
–– Compensation that a market participant would require for undertaking the activity and for assuming the risk associated
with the obligation to dismantle and remove the asset. Such compensation includes both of the following:
–– Profit on labour and overhead costs, and
–– The risk that the actual cash outflows might differ from those expected, excluding inflation.
–– Effect of inflation on estimated costs and profits
–– Time value of money, represented by the risk-free rate
–– Non-performance risk relating to the risk that Entity A will not fulfil the obligation, including Entity A’s own credit risk.
The significant assumptions used by Entity A to measure fair value are as follows:
a) Labour costs are determined on the basis of current marketplace wages, adjusted for expectations of future wage
increases associated with the hire of contractors to dismantle and remove offshore oil platforms. Entity A assigns
probability assessments to a range of cash flow estimates as follows:
Cash flow estimate (CU) Probability assessment Expected cash flows (CU)

100,000 25% 25,000
125,000 50% 62,500
175,000 25% 43,750
131,250
Figure 2: Example 5.8(b)(ii) – Labour costs estimates

The probability assessments are developed on the basis of Entity A’s experience with fulfilling obligations of this type and its
knowledge of the market:
b) Entity A estimates allocated overhead and equipment operating costs by using the same rate it applies to labour costs
(80% of expected labour costs) – this is consistent with the cost structure of market participants
c) Entity A estimates the compensation that a market participant would require for undertaking the activity and for
assuming the risk associated with the obligation as follows:
–– A third-party contractor typically adds a mark-up on labour and allocated internal costs to provide a profit margin
on the job. The profit margin used (20%) represents Entity A’s understanding of the operating profit that contractors
in the industry generally earn to dismantle and remove offshore oil platforms. Entity A concludes that this rate is
consistent with the rate that a market participant would require as compensation for undertaking the activity
–– A contractor would typically require compensation for the risk that the actual cash outflows might differ from those
expected because of the uncertainty inherent in locking in today’s price for a project that will not be undertaken for
10 years. Entity A estimates the amount of that premium to be 5% of the expected cash flows, including the effect of
inflation.
d) Entity A assumes a rate of inflation of 4% per annum over the 10-year period on the basis of available market data
e) The risk-free rate of interest for an instrument with a 10 year maturity on 1 January 20X1 is 5%. Entity A adjusts that rate
by 3.5% to reflect its risk of non-performance (i.e. the risk that it will not fulfil the obligation), including an adjustment for
its own credit risk. Therefore, the discount rate used to compute the present value of the cash flows is 8.5%.
Entity A concludes that its assumptions would be used by market participants. In addition, Entity A does not adjust its fair
value measurement for the existence of a restriction preventing it from transferring the liability. Entity A measures the fair
value of its decommissioning liability as follows:
Expected labour costs 131,250

Allocated overhead and equipment costs (0.80 x CU131,250) 105,000
Contractor’s profit mark-up [0.20 x (CU131,250 + CU105,000)] 47,250
Expected cash flows before inflation adjustment 283,500
Inflation factor (4% for 10 years) 1.4802
Expected cash flows adjusted for inflation 419,637

Market risk premium (5% x CU419,637) 20,982
Expected cash flows adjusted for market risk 440,619
Expected present value using discount rate of 8.5% for 10 years 194,879
Figure 3: Example 5.8(b)(ii) – Table illustrating measurement of the obligation’s fair value

Example 5.8(b)(iii): Debt obligation: quoted price

On 1 January 20X1 Entity B issues at par a CU2 million BBB-rated exchange-traded, five-year fixed rate debt with an annual
10% coupon. Entity B designates this financial liability as at fair value through profit or loss.
On 31 December 20X1 the instrument is trading as an asset in an active market at CU0.929 per CU1 of par value after
interest payment. Entity B uses the quoted price of the asset in an active market as its initial input into the fair value
measurement of its liability (0.929 x CU2 million = CU1.858 million).
In determining whether the quoted price of the asset in an active market represents the fair value of the liability, Entity B
evaluates whether the quoted price of the asset includes the effect of factors not applicable to the liability, for example,
whether the quoted price of the asset includes the effect of a third-party credit enhancement if that credit enhancement
would be separately accounted for from the perspective of the issuer.
Entity B determines that no adjustments are required to the quoted price of the asset. Accordingly, Entity B concludes that
the fair value of its debt instrument at 31 December 20X1 is CU1.858 million.
Entity B categorises and discloses the fair value measurement of its debt instrument within Level 1 of the fair value hierarchy.
BDO comment
A financial liability may be designated for measurement at fair value through profit or loss, if the designation eliminates or
significantly reduces a measurement or recognition inconsistency (‘an accounting mismatch’) that would otherwise arise from
measuring assets or liabilities or recognising the gains and losses on them on different bases (IAS 39.9 and IFRS.9.4.2.2). This
may be the case where the proceeds of CU2 million were used to purchase financial assets with similar characteristics to the
financial liability when those financial assets are also designated as at fair value through profit or loss. However, if the proceeds
of the loan were used to acquire an investment property, even if the entity used the fair value model in accounting for its
investment property this would not result in the financial liability qualifying for the fair value option. This is because the cash
flows arising from the investment property would not be subject to the same risks as those attaching to the financial liability.
In contrast, if the cash flows (coupons and other amounts) payable in respect of the financial liability were contractually linked
to cash flows received or receivable in respect of an investment property, then the financial liability would qualify for the fair
value option.
Example 5.8(b)(iv): Debt obligation: present value technique

On 1 January 20X1 Entity C issues at par in a private placement a CU2 million BBB-rated five-year fixed rate debt with an
annual 10% coupon. Entity C designates this financial liability as at fair value through profit or loss.
At 31 December 20X1 Entity C still carries a BBB credit rating. Market conditions, including available interest rates, credit
spreads for a BBB-quality credit rating and liquidity, remain unchanged from the date the debt instrument was issued.
However, Entity C’s credit spread has deteriorated by 0.5% because of a change in its risk of non-performance. After taking
into account all market conditions, Entity C concludes that if it was to issue the instrument at the measurement date, the
instrument would bear a rate of interest of 10.5% or Entity C would receive less than par in proceeds from the issue of the
instrument.
In this example, the fair value of Entity C’s liability is calculated using a present value technique. Entity C concludes that a
market participant would use all the following inputs when estimating the price the market participant would expect to
receive to assume Entity C’s obligation: the terms of the debt instrument (including coupon of 10%, principal amount of
CU2 million and term of four years) and the adjustment to reflect the change in Entity C’s risk of non-performance from
the date of issue).
On the basis of its present value technique, Entity C concludes that the fair value of its liability at 31 December 20X1
is CU1,968,641.
Entity C does not include any additional input into its present value technique for risk or profit that a market participant
might require for compensation for assuming the liability. Because Entity C’s obligation is a financial liability, Entity C
concludes that the interest rate already captures the risk or profit that a market participant would require as compensation
for assuming the liability.
5.9. Bid and ask prices

Bid and ask prices are common within markets for securities, financial instruments and commodities. In these markets,
dealers stand ready to buy at the bid price and sell at the ask price. A bid price reflects the highest price a potential buyer is
willing to pay for an asset, and an ask price reflects the lowest price a potential seller will accept. The difference is the bid-ask
spread. In some markets (e.g. dealer markets), both bid and ask prices are quoted. The related question which then arises is, if
bid and ask prices are used to measure fair value, which point in the bid-ask spread is relevant?
IFRS 13 states that the entity should use the price within the bid-ask spread that is most representative of fair value. The use
of bid prices for asset positions and ask prices for liability positions is permitted, but is not required (IFRS 13.70). Furthermore,
the use of mid-market pricing or other pricing conventions that are used by market participants is not precluded as a
practical expedient for fair value measurements within a bid-ask spread (IFRS 13.71). In practice, however, we would expect
that for stand-alone financial assets and financial liabilities, bid and ask prices would be used for valuation purposes.
IFRS 13 allows an exception under which, if an entity manages a group of financial assets and financial liabilities on the
basis of its net exposure to either market risks or counterparty risks (as defined in IFRS 7 Financial Instruments: Disclosures),
it can select to measure the fair value of that group on the basis of the net long (asset) or net short (liability) position. This
means that the net risk exposure will be measured at fair value, rather than all the individual financial assets and liabilities
(IFRS 13.48).
Prior to the introduction of IFRS 13, a similar exception was included in IAS 39 (IAS 39.AG72). Although the criteria in
IAS 39 were not as specific as those in IFRS 13, in many cases IFRS 13 will not have a significant effect on existing valuation
practices.
Under the requirements of IFRS 13, this exception is available only where all of the following terms are fulfilled (IFRS 13.49):
–– The entity manages the financial assets and liabilities group based on its net exposure to market or credit risk in
accordance with its documented risk management or investment strategy
–– The entity provides information about the financial assets and liabilities group on a net basis to key management
personnel as defined in IAS 24 Related Party Disclosures, and
–– The entity measures those financial assets and liabilities at fair value in the statement of financial position on a recurring
basis.
Other limitations on the use of the exception are that it applies:
–– Only to financial assets and liabilities within the scope of IAS 39 and IFRS 9 (IFRS 13.52)
–– Only to financial assets and liabilities that are exposed to substantially similar market risk(s). If the risk(s) are not
substantially similar, the differences need to be considered when measuring the fair value of the financial assets and
liabilities within the group (IFRS 13.54)
–– Only to exposures of a similar duration. IFRS 13.55 notes that:
‘For example, an entity that uses a 12-month futures contract against the cash flows associated with 12 months’ worth of
interest rate risk exposure on a five-year financial instrument within a group made up of only those financial assets and
financial liabilities measures the fair value of the exposure to 12-month interest rate risk on a net basis and the remaining
interest rate risk exposure (i.e. years 2–5) on a gross basis’.
The above exception relates only to the fair value measurement of the net position, not to the presentation of the related
financial assets and liabilities in the statement of financial position (i.e. offsetting). Presentation is prescribed by other IFRSs
(in particular, IAS 32 Financial Instruments: Presentation).
Where gross presentation is required (i.e. offsetting is not permitted), the fair value of the group of financial assets and
financial liabilities should be allocated to those assets and liabilities within the group on a reasonable and consistent basis
(e.g. the relative fair value approach) (IFRS 13.50).
The use of the exception is regarded as an accounting policy decision that should be applied consistently from period to
period for a given portfolio (IFRS 13.51). This policy needs to include the way in which bid/ask spreads and credit adjustments
are dealt with.
BDO comment
On 20 November 2012 the IASB published Exposure Draft ED/2012/2 Annual Improvements to IFRSs 2011 – 2013 Cycle which
sets out proposed amendments to four IFRSs, under the annual improvements project. One of the proposed amendments is
a clarification that the portfolio exception above applies to all contracts within the scope of IAS 39 (or IFRS 9 if this standard
has been adopted early), regardless of whether they meet the definition of financial assets or financial liabilities in IAS 32. This
clarifies that the scope includes contracts that are within the scope of IAS 39 and are accounted for as if they are financial
instruments, such as certain contracts to buy or sell a non-financial item that can be settled net in cash or another financial
instrument, or by exchanging financial instruments, as the contracts themselves were financial instruments. In practice, these
are contracts to buy or sell non-financial items that fail the ‘own use exemption’ in IAS 39.
5.10. Premium and discount

IFRS 13 requires that fair value measurement takes into account characteristics which market participants would consider in
determining fair value.
In certain instances this will result in the application of a premium or a discount when this is necessary to reflect the
characteristics of the asset or liability.
However, when a quoted price in an active market exists for an item (a Level 1 input), the quoted price is used without
adjustment (except in three limited instances as noted in IFRS 13.79 – see section 7.1 below).
However, for certain financial and non-financial assets and liabilities, quoted prices in an active market typically will not exist
(such as for shares in unlisted entities, debt instruments not listed on a public market, investment properties, and items of
property plant and equipment). For those assets and liabilities, the fair value measurement should incorporate premiums or
discounts if market participants would consider them in determining fair value for the purposes of their acquisition or sale.
A common example in practice would be the incorporation of a control premium for the fair value of equity instruments in
an unlisted entity that in aggregate give the holder a controlling interest. The ability to control the entity through purchasing
a controlling block of shares has (additional) intrinsic value above the value of each individual share multiplied by the number
of shares.
Where a premium or discount is reflecting the size of an entity’s holding rather than the characteristic of the holding, then
the premium or discount is not included in the fair value measurement. For example:
–– Size: A discount that reflects a blockage factor. An example is where there is an adjustment to reflect that the market’s
normal daily trading volume is not sufficient to absorb the quantity of shares held by the entity
–– Characteristic: A premium to reflect holding a controlling interest (as described above).
Consideration of the unit of account

IFRS 13.69 notes that a premium or discount is not included in a fair value measurement if it is inconsistent with the unit of
account. The unit of account is not specified by IFRS 13, with the requirements for determining the unit of account resulting
from the application of other IFRSs. For example, for financial instruments recognised in accordance with IAS 39, the unit of
account will (in almost all cases) be the individual financial instrument (each share or note separately) although the guidance
is not clear when considering whether (for example) a control premium should be included in the valuation of a subsidiary
that is measured at fair value (see section 4.6 above). In contrast, the unit of account may be a group of assets or assets
and liabilities where another IFRS applies, such as where recoverable amount of a cash generating unit is determined with
reference to fair value less costs of disposal under IAS 36. Issues can arise when a particular IFRS is not clear on the unit of
account.
Example 5.10(a): Unit of account and unit of valuation: Large holding

Entity A is a listed entity that holds 120,000 shares that equal in a 12% investment in Entity B. The shares are traded on a
public stock exchange in an active market with a daily trading volume of approximately 1.5% of the floated share volume.
Entity B’s quoted price per share is CU5.50 at the measurement date on 31 December 20X3. Entity A considers that it would
be able to sell its holding for CU580,000 in a single transaction (i.e. equating to CU4.83 per share).
Question 1: What is the reason that Entity A assumes that it will not be able to sell the shares at CU5.50 per share?
Answer 1: The expected lower sale price per share of Entity A’s ‘block’ of 120,000 shares, in a single transaction, is the result
of a blockage factor. The blockage factor exists because the daily trading volumes of Entity B’s shares (i.e. 1.5% of the floated
share volume) is not sufficient to absorb Entity A’s 120,000 shares (which represent 12% of Entity B’s floated share volume).
Question 2: What is the fair value of the 12% interest in Entity B in accordance with IFRS 13?
Answer 2: The fair value of Entity A’s holding in Entity B is CU660,000 (i.e. 120,000 x CU5.5). The blockage factor
(described above) is not taken into account. The unit of account and the unit of valuation are the individual shares held, not
the 12% shareholding (IFRS 13.14).
Further, IFRS 13 requires the use of Level 1 inputs (i.e. quoted prices that are unadjusted) if they are available, because
a quoted price on an active market represents the most reliable available information. Therefore, where Level 1 inputs
are available, the fair value is equal to price x quantity (IFRS 13.69,77, and 88). The blockage factor equal to CU80,000
(i.e. CU660,000-CU580,000) results as a specific attribute of Entity A’s overall 12% holding, rather than the nature of
each individual share. Therefore, the blockage factor should not be incorporated as a discount in determining the fair value
measurement.
Question 3: Would the answer change if the market where Entity B is traded was considered to be inactive?
Answer 3: No, the assessment does not change. The blockage factor still remains a specific attribute of Entity A’s overall
12% holding, rather than the nature of each individual share However, other adjustments might be needed in this situation in
order to reflect the market’s inactivity (refer to the example below).
Example 5.10(b): Investment in a private entity

Entity C holds a 10% investment in private Entity D. The investment is classified as an available for sale financial asset in
accordance with IAS 39. Entity C intends to measure the fair value of that investment using a market multiple of comparable
listed Entity E. Entity C considers whether to adjust the valuation because of the illiquidity of Entity D’s shares in comparison
with Entity E’s shares, and for the blockage factor inherent to such relatively large holdings.
Question: What would be appropriate approach under IFRS 13?
Answer: Entity C should adjust the fair value measurement of its shareholding to reflect the illiquidity of Entity D’s shares.
This is because the illiquidity is a characteristic of Entity D’s individual shares (i.e. a characteristic of the asset being valued),
rather than a specific attribute of Entity C’s overall 10% holding.
However, Entity C should not adjust the valuation to reflect the likely outcome that, if it sold all of Entity D’s shares in
a single transaction, it might receive a lower price. This is because a blockage factor is not a characteristic of the shares
themselves, but instead a characteristic of the size of Entity C’s holding. Therefore no blockage discount is permitted.
Example 5.10(c): Fair value of cash-generating unit (CGU)

Entity F holds 100% of the shares in an unlisted Entity G, and has recorded associated goodwill in its consolidated financial
statements. Entity G is a single CGU which is tested annually for impairment in accordance with IAS 36 Impairment of
Assets. In determining the recoverable amount, Entity F estimates the fair value less costs of disposal (FVLCD) using a market
multiple of a comparable listed entity. Entity F assumes that the sale of unlisted Entity G’s shares in a single transaction is
likely to receive a different price due to the size of the sale compared to selling the shares in smaller portions.
Question: For the purposes of determining FVLCD, should Entity F assume the sale of entity G’s shares in a single or
multiple transactions?
Answer: As the unit of account being measured at fair value is the CGU under IAS 36 and Entity G’s shares are not listed on
an active market, the determination of fair value is based on the CGU in aggregate. Entity F should therefore assume the sale
of Entity G’s shares in aggregate.
One of the outcomes associated with this approach may be the recognition of a control premium attached to the
shareholding.
Therefore, this approach (of incorporating a control premium into the fair value measurement) is considered consistent with
the unit of account being measured (i.e. the CGU in aggregate, rather than the individual shares).
BDO comment
There is some uncertainty about the appropriate unit of account for investments in subsidiaries, associates and joint ventures
that are quoted on an active market. This is because under IAS 36 the unit of account is typically each CGU, while under IAS 39
it is typically each separate financial instrument. Conflicts arise for investments in subsidiaries, associates and joint ventures
when are accounted for in accordance with IAS 39 in an entity’s separate financial statements, and (as in the example above)
when a listed subsidiary constitutes a single CGU for the purposes of impairment testing in accordance with IAS 36. In our view,
when a cash generating unit is comprised of a subsidiary, whose shares are traded on an active market, an entity can choose an
accounting policy, to be applied consistently, under which the unit of account is either the entire holding in the subsidiary or
each individual share.
However, the IASB has discussed the question of the appropriate unit of account when an entity’s shares are traded on an active
market. It appears that in future the approach may be changed to be more restrictive, such that the unit of account for entities
which are quoted on an active market will be each individual share. This would have important implications for entities such as
investment property companies, which typically trade on an active market at an amount which is less than net asset value and
often use FVLCD for the purposes of testing assets (including goodwill) for impairment in accordance with IAS 36.
Example 5.10(d): Fair value of cash-generating unit (CGU)

Entity H holds 100% of the shares of an unlisted Entity I, which is a CGU in Entity H’s consolidate financial statements.
Entity I is tested annually for impairment under IAS 36. In determining the recoverable amount of the CGU, Entity H
measures the FVLCD using a discounted cash flow method based on Entity I’s underlying cash inflows and outflows, and the
industry cost of capital.
Question: Should Entity H adjust the result of the discounted cash flow valuation model performed for a control premium?
Answer: No, Entity H should not make an adjustment to reflect a control premium.
This is not because the control premium should be eliminated, but is instead because the control premium has already been
taken into account by the use of the business cash flows discounted at the weighted average cost of capital.
This method of valuation (i.e. discounted cash flow) implicitly assumes control, as it is based on the expected cash flows
received as a direct result of the entity’s overall holding. Therefore, no adjustment in relation to any control premium that
may exist is required.
Example 5.10(e): Fair value of a forward contract on publicly traded shares

Entity J enters into a forward contract to purchase 60% of the shares of Entity K, which is a publicly traded entity. There is a
quoted price for the shares, but not for a forward contract to purchase those shares.
In this instance the forward contract to purchase the shares is the unit of account, rather than the individual shares.
Therefore the fair value of the forward contract will need to incorporate adjustments to reflect any control premium that
may exist.
The following chart demonstrates the relationship between the unit of account and the possible application of premiums or
discounts, in accordance with IFRS 13. Premiums or discounts may be permitted only where they are consistent with the unit
of account and there is no Level 1 input available for the measurement of the item:
No
Is the premium or discount consistent with unit of account?
Premium or discount is
Yes
NOT permitted
Is the unit of account aggregation of identical item measured?
Yes No Yes
Are observable (i.e. Level 1) inputs available Are observable (i.e. Level 1) inputs available
for individual item? for the unit of account?
Yes No No
Application issue – Premium or discount

see above may be permitted
Figure 4: Relationship between the unit of account and application of premiums or discounts under IFRS 13
6. VALUATION TECHNIQUES
IFRS 13 Fair Value Measurement paragraphs 61 and 62 require the valuation technique used for fair value measurement to:
–– Be appropriate based on the circumstances
–– Be a technique for which sufficient data is available
–– Maximise the use of relevant observable inputs and minimise the use of unobservable inputs
–– Be consistent with the objective of estimating the price at which an orderly transaction to sell an asset or to transfer a
liability would take place between market participants at the measurement date under current market conditions.
In minimising the use of unobservable data the reliability of the fair value measurement is maximised. However, for some
assets and liabilities unobservable inputs are required, provided that a market participant would consider them.
For example, the fair value of an unquoted equity instrument may be based primarily upon observable market multiples of
a factor such as earnings before interest, tax, depreciation and amortisation (EBITDA). In such cases, if a market participant
would consider a discount for a lack of marketability, then the fair value measurement would therefore also need to consider
such discount (despite the fact that it is not directly observable).
The use of only a single (and appropriate) valuation technique can result in a fair value measurement that complies with
IFRS 13. This would be the case for an asset or liability, when prices are quoted in active markets for identical assets or
liabilities. However, in other cases IFRS 13 indicates that the use of multiple valuation techniques will be appropriate in
determining fair value. Where multiple valuation techniques are used, IFRS 13.63 requires that:
‘…the results (i.e. respective indications of fair value) shall be evaluated considering the reasonableness of the range of values
indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in
the circumstances.’
Valuation techniques should be applied consistently from one period to the next unless alternative techniques provide
an equal or more representative indication of fair value (see below for potential events which may lead to such a change).
This applies also to the weightings given to individual valuation techniques when multiple techniques are used. Revisions
resulting from a change in the valuation technique or its application are accounted for as a change in accounting estimate in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, the IAS 8 disclosures are not
required for such revisions (IFRS 13.66).
The following events may trigger changes to valuation techniques used and the weights attributed to individual values when
multiple valuation techniques are utilised (IFRS 13.65):
–– New markets develop
–– New information becomes available
–– Information previously used is no longer available
–– Valuation techniques improve
–– Market conditions change.
IFRS 13 Appendix A includes definitions for three valuation techniques that are commonly utilised in practice:
1. Market approach
A valuation technique that uses prices and other relevant information generated by market transactions involving
identical or comparable (i.e. similar) assets, liabilities, or a group of assets and liabilities, such as a business.
2. Income approach
A valuation technique that converts future amounts (e.g. cash flows or income and expenses) to a single current
(i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market
expectations about those future amounts.
3. Cost approach
A valuation technique that reflects the amount that would be required currently to replace the service capacity of an
asset (often referred to as current replacement cost).
This cost approach definition assumes that fair value is the cost to acquire or construct a substitute asset of comparable
utility, adjusted for obsolescence (including physical deterioration, functional (technological) obsolescence and economic
(external) obsolescence) (IFRS 13.B9).
The following examples are based on IFRS 13 Illustrative Examples.
Example 6(a): Machine held for use

Entity A acquires a machine in a business combination. The machine will be held for use in its operations. The machine was
originally purchased by the acquiree (Entity B) from an outside vendor Entity X and was customised for use in Entity B’s
operations. The customisation of the machine was not extensive. Entity A determines that the asset would provide
maximum value to market participants through its use in combination with other assets or with other assets and liabilities.
The current use of the machine is considered its highest and best use (HBU).
Entity A determines that sufficient data is available to apply the cost approach and (because the customisation of the
machine was not extensive) the market approach. The income approach is not used because the machine does not have a
separately identifiable income stream from which to develop reliable estimates of future cash flows, and information about
lease rates for similar used machinery that otherwise could be used to project an income leasing stream is not available.
The market approach and cost approach are applied as follows:
a) The market approach is applied using quoted prices for similar machines adjusted for differences between the machine
(as customised) and similar machines. The measurement reflects the price that would be received for the machine in its
current condition and location. The fair value indicated by that approach ranges from CU40 to CU48
b) The cost approach is applied by estimating the amount that would be required currently to construct a substitute
(customised) machine of comparable utility. The estimate takes into account the condition of the machine and the
environment in which it operates, including physical wear and tear, improvements in technology, external conditions such
as a decline in the market demand for similar machines and installation costs. The fair value indicated by that approach
ranges from CU40 to CU52.
Entity A determines that the higher end of the range indicated by the market approach is most representative of fair value
and, therefore, applies a higher weighting to the results of the market approach. That determination is made on the basis
of the relative subjectivity of the inputs, taking into account the degree of comparability between the machine and other
similar machines. In particular:
–– The inputs used in the market approach (quoted prices for similar machines) require fewer and less subjective adjustments
than the inputs used in the cost approach
–– The range indicated by the market approach overlaps with, but is narrower than, the range indicated by the cost
approach.
Accordingly, the entity determines that the fair value of the machine is CU48.
Example 6(b): Software asset

Entity C acquires a group of assets, including an income producing software asset internally developed for licensing to
customers and its complementary assets (including a database with which the software asset is used) and the associated
liabilities. To allocate the cost of the group to the individual assets acquired, the entity measures the fair value of the
software asset. The entity determines that the software asset would provide maximum value to market participants through
its use in combination with other assets and liabilities. The HBU of the software asset is its current use.
The entity determines that, in addition to the income approach, sufficient data might be available to apply the cost
approach, but not the market approach (as information about market transactions for comparable software assets is not
available). The income approach and cost approach are applied as follows:
a) The income approach is applied using a present value technique. The cash flows used in that technique reflect the income
stream expected to result from the software asset (licence fees from customers) over its economic life. The fair value
indicated by that approach is CU15 million
b) The cost approach is applied by estimating the amount that currently would be required to construct a substitute
software asset of comparable utility (i.e. taking into account functional and economic obsolescence). The fair value
indicated by that approach is CU10 million.
Through its application of the cost approach, the entity determines that market participants would not be able to construct
a substitute software asset of comparable utility and therefore that the substitute asset used for the purposes of the cost
approach is not directly comparable to its own asset. This is because some characteristics of the software asset are unique,
having been developed using proprietary information, and cannot be readily replicated. The entity determines that the fair
value of the software asset is CU15 million, as indicated by the income approach.
7. FAIR VALUE HIERARCHY

IFRS 13 Fair Value Measurement establishes a fair value hierarchy similar to the hierarchy established under IFRS 7 Financial
Instruments: Disclosure. As a result, non-financial items that are scoped into IFRS 13 will now be required to apply the
hierarchy concept as has been applied currently to financial instruments under IFRS 7.
The IFRS 13 fair value hierarchy categorises elements of the financial statements (that fall within the scope of IFRS 13) into
three levels, based on the inputs used in the valuation techniques to determine their fair value. The fair value hierarchy gives
the highest priority to Level 1 (observable) inputs, and the lowest priority to Level 3 (unobservable) inputs (IFRS 13.72). The
fair value hierarchy prioritises the inputs utilised in the fair value valuation techniques (emphasising the use of Level 1 inputs),
rather than the type of valuation techniques being used (IFRS 13.74).
When the fair value measurement of an asset or liability uses inputs that fall into different fair value hierarchy levels, the fair
value hierarchy category attributed to the element as a whole is equal to the fair value hierarchy level of the lowest-level
input that is significant to the entire measurement. An input is significant if it can result in a significantly different fair value
measurement.
Determining the level of significance is a matter of judgement. In doing so, an entity must develop a good understanding of:
–– All the inputs that are used in the valuation technique
–– The overall significance of each of the inputs
–– Whether the inputs are externally verifiable or are derived through entity’s own estimates.
There are no bright lines in determining significance, meaning that two entities may reach slightly different conclusions using
the same set of inputs. Management will need to consider the effect of lower level inputs on fair value measurement at the
time the measurement is made, as well as their potential impact on future movements in fair value.
In assessing the level of significance of the inputs to measure fair value, an entity should consider the sensitivity of an item’s
overall value to changes in inputs, and also assess the likelihood of variability in the data over the period in which the item
will be measured at fair value. This assessment will depend on the specific set of facts and circumstances to a given item and
may require significant judgement. In considering the judgement(s) that may be involved, entities may need to document
their considerations in the process of determining the classification of inputs in the fair value hierarchy, particularly in
instances where the determination is not straightforward. In addition, they should develop and consistently apply a policy for
determining significance.
Data and inputs that are not part of fair value but for which other IFRSs require entity to include in measurement, are not
considered when determining the hierarchical level. This includes, for example, costs to sell in the determination of fair value
less costs of disposal (IFRS 13.73).
7.1. Level 1 inputs

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at
the measurement date (IFRS 13.76). IFRS 13.78 includes additional guidance for Level 1 inputs:
–– When the item being valued is exchanged in multiple active markets, the principal market should be used
(or if unavailable, the most advantageous), and
–– The transacting entity should be able to transact in that market at the measurement date.
The available quoted price should be used without adjustment, except in certain restricted circumstances (see below).
There may be instances that entities only have access to a single price source or quote. When the source represents
transactions on an exchange market, the price is a Level 1 input.
BDO comment
Without this guidance, a single valuation source would not always be considered to be a Level 1 input, as the existence of only a
single market-maker can lead to conclusion of an inactive market. In some cases, a single market-maker dominates the market
for a particular security such that trading in that security may be active but all the activity flows through that market-maker. In
those circumstances, a Level 1 determination may be supported if the market-maker is also willing to transact at in that price. In
other cases, the price is not Level 1 input, and the entity should determine if that single broker quote represents a Level 2 input
or Level 3 input. This determination may include:
–– Level 2: The single broker quote may be a Level 2 input in circumstances in which there is observable market information on
comparable items which support the single broker quote, and/or the broker is willing to transact in the comparable security
at that price
–– Level 3: The single broker quote is often considered to be a Level 3 input if there is no comparable observable market
information and the quote was provided merely as an indicative value without intentions to transact at that price
(e.g. information obtained under an agreement to provide pricing support to a buyer of a security from that broker). Such
information will require additional procedures before it can serve as fair value for the purpose of financial reporting.
Management should specifically consider the underlying facts associated with each valuation input in assessing the appropriate
classification in the fair value hierarchy.
The starting point in IFRS 13 is that if a Level 1 price is available, that price is used without adjustment. However, IFRS 13.79
provides three limited exceptions to the requirement not to adjust Level 1 inputs. The use of any of these exceptions will lead
to the ranking of the measurement as a whole within Level 2 or 3. The three exceptions are:
1. The entity holds a large number of similar (but not identical) assets or liabilities that are measured at fair value and a
quoted price in an active market is available but not readily accessible for each of those items individually (i.e. given the
large number of similar items held by the entity, it would be difficult to obtain pricing information for each individual
asset or liability at the measurement date). In such cases, as a practical expedient, an entity may measure fair value using
an alternative pricing method that does not rely exclusively on quoted prices.
2. In some situations, a quoted market price may not be representative of fair value on the measurement date. That may be
the case where significant events (e.g. market transactions, brokered trades and announcements) occur after the close of
a market but before the measurement date (e.g. a market closes on Friday, 29 December, 20X0 and reopens on Monday,
1 January, 20X1 and significant events occur between the points at which the market closes and reopens. When this is the
case, management need to establish (and consistently apply) a policy for identifying and incorporating events that may
affect fair value measurements.
3. When measuring the fair value of a liability or an entity’s own equity instruments using the quoted price in an active
market for the identical item traded as an asset, and that price needs to be adjusted for factors specific to the item or
asset. In such cases, the fair value needs to be adjusted for these factors. For example, the unit of account for the asset
might not be the same as for a related liability; this could be the case when a debt instrument quoted on an active market
benefits from unrelated third party credit enhancement. In this case, the issuer would adjust the observable price for the
asset to exclude the effect of the unrelated third-party credit enhancement.
7.2. Level 2 inputs

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly (IFRS 13.81).
Level 2 inputs include (IFRS 13.82):
–– Quoted prices for similar assets or liabilities in active markets
–– Quoted prices for identical or similar assets or liabilities in markets that are not active
–– Inputs other than that quoted prices are observable for the item being valued, for example:
–– Interest rates and yield curves, observable at commonly quoted intervals
–– Implied volatilities
–– Credit spreads.
–– Market-corroborated inputs (see examples below).
The following requirements apply to Level 2 inputs:
–– If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term
of the asset or liability (IFRS 13.82)
–– Adjustments to Level 2 inputs include factors such as the condition and/or location of the asset or the liability on
the measurement date, and the volume and level of activity in the markets within which the inputs are observed.
Adjustments are also required to the extent to which inputs relate to items that are comparable to the asset (IFRS 13.83).
However, an adjustment to a Level 2 input that is significant to the overall measurement may result in the valuation being
included in the Level 3 category (IFRS 13.84).
IFRS 13.B35 sets out a number of examples of Level 2 inputs, including:
–– Receive-fixed, pay-variable interest rate swap based on the London Interbank Offered Rate (LIBOR) swap rate
–– Receive-fixed, pay-variable interest rate swap based on a yield curve denominated in a foreign currency
–– Receive-fixed, pay-variable interest rate swap based on a specific bank’s prime rate
–– Three-year option on exchange-traded shares
–– Licensing arrangement
–– Finished goods inventory at a retail outlet
–– Building held and used
–– Cash-generating unit.
7.3. Level 3 inputs

Level 3 inputs are unobservable inputs for the asset or liability (IFRS 13.86). Unobservable inputs are those for which market
data is not available. Instead, they are developed using the best available assumptions that would be used for the purposes of
pricing the asset or liability.
In relation to Level 3 inputs IFRS 13 notes that:
–– They are used only when observable inputs are not available (IFRS 13.87)
–– The objective of fair value measurement is to measure an exit price at the measurement date from the perspective of a
market participant that holds the asset or owes the liability. The unobservable inputs used in the fair value measurements
should therefore reflect the assumptions that market participants would use when pricing the asset or liability, including
assumptions about risk (IFRS 13.87)
–– Both the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and the risk
inherent in the inputs to the valuation technique are considered (IFRS 13.88)
–– Level 3 inputs should be developed using the best information available in the circumstances, which might include an
entity’s own data. However, the entity’s own data should be adjusted if reasonably available information indicates that
other market participants would use different data or there is something particular to the entity that is not available
to other market participants (e.g. an entity-specific synergy that is not available to market participants should not be
factored in the measurement). An entity need not undertake exhaustive efforts to obtain information about market
participant assumptions (IFRS 13.89).
IFRS 13 permits the use of prices quoted by third parties (e.g. pricing services and brokers), subject to the following:
–– The entity should determine that these prices are developed in accordance with the requirements of
IFRS 13 (IFRS 13.B45), including requirements for those limited cases in which there has been a significant decrease
in the volume/level of activity for the asset or liability (IFRS 13.B46)
–– Less weight is placed on quotes that do not reflect the results of transactions (IFRS 13.B46)
–– The nature of a quote (e.g. an indicative price vs. a binding offer) should be considered, and more weight is given to
binding offers (IFRS 13.B47).
IFRS 13.B36 sets out a number of examples of Level 3 inputs, including:
–– Long-dated currency swaps
–– Three-year option on exchange-traded shares
–– Interest rate swaps
–– Decommissioning liability assumed in a business combination
–– Cash-generating units.
Example 7.3(a): Extrapolation of observable market data

Assume that the interest rate yield curve in Country A is correlated to the interest rate yield curve of Country B. In addition,
assume that the interest yield curve in Country A is observable for two years, but the interest yield curve of Country B is
observable for only one year. It is possible to extrapolate the second year of the Country B interest yield curve in Country B
based on the extrapolation of the yield curve from year one and the correlation of the second-year interest yield curve in
Country A.
In this example, the yield of Country B for the second year would be considered a Level 2 input. In contrast, extrapolating
short-term data to measure longer term inputs (e.g. to measure the yield for the fifth year in both Countries, absent an
observable market data) may require assumptions and judgements that cannot be corroborated by observable market data,
and therefore may represent a Level 3 input.
Example 7.3(b): Determination of level in the fair value hierarchy

Assume that an entity determines fair values based on interpolation of observable market data. Some of the considerations
in determining the appropriate classification within the fair value hierarchy are:
–– If a spot foreign exchange (FX) rate can be observed through data from an active market, this would be a Level 1 input
–– Assume that there are forward prices available for 30-day and 60-day FX contracts that qualify as Level 1 inputs and the
entity is measuring a 50-day FX contract. If the price can be derived through interpolation, the resulting measurements
are classified as a Level 2 inputs
–– Assume a contract has a duration of two years, and prices are only available for the next year. The extrapolated amount
for the two year period would be considered a Level 3 valuation if there is no other observable market information to
corroborate the pricing inputs in the second year.
BDO comment
Unlike in example 7.3(a), where the interest rate curve yield of Country B is corroborated by the yield curve in Country A,
the FX rate for the second year in example 7.3(b) is not corroborated by any observable market information, and is therefore
classified in Level 3 of the hierarchy.
8. DISCLOSURES
IFRS 13 Fair Value Measurement introduces a comprehensive disclosure framework for fair value measurement. This
framework is intended to help users of financial statements assess the valuation techniques and inputs used to develop those
measurements.
The disclosures required are affected by the fair value hierarchy discussed above, with increased disclosure requirements
applying to the lower levels of that hierarchy (in particular Level 3). A distinction is also made between recurring fair
value measurements (measurements made on a fair value basis at each reporting date) and non-recurring measurements
(measurements triggered by particular circumstances). Disclosure of the effect of the fair value measurement on profit or
loss or other comprehensive income for the period is required for recurring fair value measurements that involve significant
unobservable (Level 3) inputs.
Disclosure requirements also apply to each class of asset and liability not measured at fair value in the statement of financial
position but for which the fair value is disclosed (e.g. financial instruments measured at amortised cost, and investment
property accounted for in accordance with the cost model). For these items, the disclosures requirements are less extensive.
A number of factors affect the extent and type of disclosures required, in particular:
–– Fair values on initial recognition: Fair values that are required or permitted only on initial recognition are exempted from
IFRS 13’s disclosures, including:
–– Using fair value as deemed cost on initial application of IFRS in accordance with IFRS 1 First-time Adoption of
International Financial Reporting Standards
–– Measuring most assets acquired and liabilities assumed in a business combination at fair value in accordance with
IFRS 3 Business Combinations
–– Initial recognition of financial assets and liabilities that will subsequently be measured at amortised cost in accordance
with IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments).
–– The level in the fair value hierarchy: Significant differences in disclosure requirements apply to the different levels within
the fair value hierarchy. In particular, extensive disclosures are required for Level 3 measurements, in order to provide
users with information regarding the assumptions and unobservable data developed
–– Recurring vs. non-recurring fair value measurements: Some disclosures are required for recurring but not for non-
recurring fair value measurements, and vice versa.
Specific disclosures are needed for circumstances where:
–– The current use of non-financial assets differs from its highest and best use (HBU): an explanation of why this is the case
–– The exception which results in a group of financial assets and financial liabilities being measured on the basis of the net
position is taken, in which case disclosure of that fact is required.
Disclosure requirements Recurring fair value Non-recurring Fair value

(IFRS 13.93) Measurement fair value Measurement disclosure only
(a) Fair value at reporting date x x
(a) Reasons for fair value measurement x
(b) Fair value hierarchy level (i.e. Level 1, 2, or 3) x x x
Transfers between Level 1 and Level 2
(c) (including reasons for the transfer and x
the entity’s policy for transfer)
Valuation technique, inputs, changes,
(d) x x x
reasons for change etc. for Level 2 and 3
(d) Level 3 unobservable inputs x x
Level 3 reconciliation of total gains or losses
in profit or loss (P&L), in other comprehensive
(e) x
income, purchases, sales issues, settlements,
and transfers
(f) Level 3 unrealised gains/losses recognised in P&L x
(g) Level 3 valuation processes/policies x x
Level 3 sensitivity to changes in unobservable
(h)(i) x
inputs (Qualitative: non-financial instruments)
Level 3 sensitivity to changes in unobservable
(h)(ii) x
inputs (Quantitative: financial instruments)
(i) Reasons if HBU differs from current use x x x
Figure 5: The main disclosure requirements of IFRS 13
A simplified example of how these disclosures may appear for a hypothetical generic set of financial statements is illustrated
in Appendix A at the back of this publication.
9. CONVERGENCE WITH US GAAP

IFRS 13 Fair Value Measurement is substantially consistent with the equivalent US GAAP requirements (currently codified as
Topic 820). Some of the differences between IFRS 13 and US GAAP Topic 820 are:
–– When certain criteria are met, Topic 820 allows investment companies to use net assets of investees as the fair value of
that investment. IFRS 13 does not permit this approach
–– The fair value of a financial liability with a demand feature under Topic 820 is the amount payable on demand at the
period end. IFRS 13 maintains the requirement of IAS 39 Financial Instruments: Recognition and Measurement, which states
that the fair value for such liability is not less than the present value of the amount payable on demand, discounted from
the first point at which payment could be required to be made
–– IFRS 13 requires a quantitative sensitivity analysis for financial instruments measured at fair value categorised at Level 3.
Topic 820 does not contain this requirement
–– As the two standards do not establish which items are and are not permitted to be measured at fair value, differences
arise from the specific requirements of other standards (in both IFRS and US GAAP). For example, IFRS permits
investment property to be measured at fair value or depreciated cost, whereas US GAAP requires depreciated cost.
10. IASB EDUCATIONAL MATERIAL

During the development of IFRS 13 Fair Value Measurement, the International Accounting Standards Board (IASB) was made
aware that entities in emerging and transition economies had concerns about applying the fair value measurement principles
in their jurisdictions. These concerns included that the fair value measurement guidance was not detailed enough to enable
fair values to be determined on a consistent basis, a limited availability of suitably skilled valuations practitioners, and limited
access to market data (due to the lack of deep and liquid markets).
However, it was noted by the IASB that the concerns raised were not specific to entities in emerging and transition
economies and that the lack of market data or other key information necessary to perform fair value measurements is a
global constraint, rather than a regional one.
In response to this, the International Accounting Standards Board (IASB) tasked the IFRS Foundation Education Initiative to
develop educational material to address, at a high level, the application of the principles in IFRS 13 for the measurement of
assets, liabilities and own equity instruments.
The educational material is structured to address the application of IFRS 13 on different topics in a number of chapters.
The first chapter, issued in December 2012 (and updated in February 2013) covers the fair value measurement of unquoted
equity instruments within the scope of IFRS 9 Financial Instruments. The educational material has been published by the
IFRS Foundation, and its content is non-authoritative and has not been approved by the IASB.
10.1. Unquoted equity instruments within the scope of IFRS 9

IFRS 9 applies to investments in equity instruments where the investor holds a non-controlling interest (e.g. 10% of the
ordinary shares) which:
–– In its consolidated or individual financial statements, is not required to be accounted for as an associate, joint venture
(IAS 31 Interests in Joint Ventures) or joint arrangement (IFRS 11 Joint Arrangements)
–– In its separate financial statements, if the investment is an interest in a subsidiary, associate, joint venture, or joint
arrangement that the investor has elected to measure in accordance with IFRS 9.
IFRS 9 requires all investments in equity instruments that are within its scope to be measured at fair value. For equity
instruments that are not traded in quoted markets, practical difficulties can be encountered in the determination of fair value
measurement because the inputs used to determine fair value are not always readily available.
The objective of the educational material is to assist entities in measuring the fair value of their investments in unquoted
equity instruments by describing (at a high level) how various valuation techniques should be applied in the context of the
requirements of IFRS 13 – even if only limited financial information is available.
The education material does not prescribe a specific valuation technique, but encourages the use of judgment together with
consideration of all relevant facts and circumstances.
Approaches to valuation addressed in the educational material

The educational material describes three different valuation approaches, together with the different valuation techniques
under those approaches that are in accordance with the principles in IFRS 13 and could be applied in determining the fair
value of an unquoted equity instrument. However, regardless of the valuation technique used, the fair value measurement of
those equity instruments is required to reflect market conditions at the investor’s reporting date.
1. Market approach
a) Transaction price paid for an identical or a similar instrument in an investee
b) Comparable company valuation multiples.
2. Income approach
a) Discounted cash flow method
b) Dividend discount model
c) Constant growth dividend discounted model
d) Capitalisation model.
3. Adjusted net asset method.

1. Market approach
The market approach uses prices and other relevant information available by reference to market transactions involving
identical or comparable (i.e. similar) assets. The following valuation techniques are described under the market approach in
the document:
b) Comparable company valuation multiples.

If an investor has recently acquired an investment in another equity instrument that is identical or similar to the unquoted
equity instrument being valued, then the price for that transaction might be a reasonable starting point for measuring fair
value.
(i) Identical instrument
If the equity instrument that was recently acquired is identical to the unquoted equity instrument being valued, the
investor should assess whether there are any factors or events that have occurred after the purchase date that could
affect the fair value of the unquoted equity instrument at the reporting (measurement) date. If so, the investor adjusts
the transaction price for those factors. Factors could include changes in market conditions that have affected the
investee’s growth prospects or expected milestones, or internal matters such as fraud, commercial disputes, changes
in management or strategy.
(ii) Similar instrument
If the equity instrument that was recently acquired is similar to the unquoted equity instrument being valued, the
investor needs to understand, and make adjustments for, any differences between the two equity instruments.
Differences might include different economic rights (e.g. dividend rights, priority upon liquidation) and control rights
(i.e. a controlling interest vs. a non-controlling interest).
b) Comparable company valuation multiples
This technique assumes that the fair value of an unquoted asset can be measured by comparing that unquoted asset
to similar assets for which market prices are available. Information can usually be sourced from quoted prices and/or
observable data from transactions such as mergers and acquisitions. This technique involves the following four steps:
(i) Step one: Identify comparable company peers.
(ii) Step two: – Select the performance measure that is most relevant to assessing the value of the investee
(e.g. earnings, equity book value or revenue)
–– Once selected, derive and analyse possible valuation multiples and select the most appropriate one
(e.g. EBIT, EBITA, EBITDA, or P/E for earnings, P/B for book value)
–– Adjust the relevant multiple as appropriate for general qualitative differences between the investee and
its company peers (e.g. size in terms of revenues or assets, level and rate of growth of earnings, diversity
of product range, diversity and quality of customer base, leverage, lack of liquidity).
(iii) Step three: Apply the appropriate valuation multiple to the relevant performance measure of the investee to obtain an
indicated fair value of the investee’s equity or the enterprise value.
Note: for the purposes of the educational material, enterprise value (EV) is the fair value of all financial
claims on an entity that are attributable to all capital providers (i.e. debt and equity holders).
(iv) Step four: Make appropriate adjustments for differences that are directly related to the characteristics of equity
instruments being valued (e.g. non-controlling interest, lack of liquidity).
2. Income approach
The valuation techniques under the income approach convert future amounts to a single current (i.e. discounted) amount.
The following valuation techniques are described in the document:
a) Discounted cash flow (DCF) method
c) Constant growth dividend discounted model
d) Capitalisation model.
a) Discounted cash flow method

Under this method, the investor would discount expected cash flows to a present value at a rate of return that
represents the time value of money and the relative risks of the investment. Equity instruments can be valued directly
using ‘free cash flow to equity’ (FCFE) (i.e. an equity valuation), or indirectly, by obtaining the enterprise value using
‘free cash flow to firm’ (FCFF) and then subtracting the fair value of the investee’s debt net of cash.
This model assumes that the price of an equity instrument equals the present value of all its expected future dividends in
perpetuity. It is often used when the investee consistently pays dividends.
c) Constant-growth dividend discount model
This model determines the fair value of the equity instrument by referring to a forecast of growing dividend streams. This
model is sensitive to the assumptions about the growth rate. The model is best suited for investments that:
–– Are growing at a rate that is equal to or lower than the nominal growth rate in the economy, and
–– Have a well established dividend payout policy that the investee intends to continue into the future.
d) Capitalisation model
This model applies a rate to an amount that represents a measure of economic income (e.g. FCFF or FCFE) to arrive at an
estimate of present value. The model is useful as a cross-check when other approaches have been used.
3. Adjusted net asset method

The adjusted net asset method is a combination of the market and income approach. It involves directly measuring the fair
value of the recognised and unrecognised assets and liabilities of the investee. This method is likely to be appropriate for
entities that derive value from holding assets (such as property holding companies or investment entities) and may also be
appropriate for entities in their early stages that have little financial history and may not yet have developed products.
Typically, the adjusted net asset method involves making adjustments to the balance sheet carrying amounts of assets and
liabilities. Items that are commonly subject to adjustments include:
–– Intangible assets
–– Property plant and equipment
–– Receivables
–– Inter-company balances
–– Financial assets not measured at fair value
–– Unrecognised contingent liabilities.
Once an equity valuation has been derived, the investor would also need to consider making the following adjustments for
its share of the investee’s equity instruments held:
–– Non-controlling interest
–– Lack of liquidity
–– The passage of time that could have an effect on the changes in fair value of the assets and liabilities or any additions/
disposals
–– Any other contractual agreements specific to the equity instruments held.
Use of judgement
When determining a price that is most representative of the fair value, an investor needs to consider:
–– Which valuation technique makes the least adjustment to the inputs used (and, consequently, which technique maximises
the use of relevant observable inputs, which is the valuation approach that IFRS requires)
–– The range of values indicated by the techniques used and whether they overlap
–– The reasons for the differences in value under different techniques.
Depending on the circumstances, one valuation technique might be more appropriate than another. Some of the factors that
need to be considered when selecting the most appropriate valuation technique include:
–– Information that is reasonably available to an investor
–– The market conditions (i.e. bullish or bearish markets might require an investor to consider different valuation techniques)
–– The investment horizon and the type of investment
–– The life cycle of the investee (some valuation techniques are better at capturing the market sentiment when measuring
the fair value of a short-term financial investment)
–– The nature of an investee’s business (some valuation techniques are better at capturing the volatile or cyclical nature of
an investee’s business)
–– The industry in which the investee operates.
Judgement needs to be applied in both the application of a particular valuation technique and the selection of the valuation
technique. For example, an investor is likely to place more emphasis on the comparable company valuation multiples
techniques, where there is a sufficient number of comparable peers.
Common oversights
The educational guidance also sets out a list of common oversights when applying the valuation techniques it describes, or
determining their inputs. While not exhaustive, these may assist entities in avoiding potentially significant errors.
1. Market approach (comparable company valuation multiples)

–– Inappropriate selection of comparable company peers
–– Using the multiples extracted from transactions entered into over a very long period of time during which market
conditions have changed significantly (even a relatively short period of time may not be appropriate of there have been
very significant recent market changes)
–– Using the average of transaction multiples that have a wide dispersion without confirming their reasonableness
–– Deriving the equity multiple by using an EV valuation basis (e.g. P/EBITDA)
–– Performance measures used (both from comparable company peers and from the investee being valued) have not been
appropriately normalised
–– Mismatch between an earnings multiple and the investee’s performance measure that is used (e.g. use of an historical
earnings multiple on forward-looking earnings)
–– Application of post-tax multiples to pre-tax performance measures
–– Omission of adjustments affecting the valuation multiples based on differences between the investee and its comparable
company peers (e.g. insufficient consideration of different accounting policies)
–– Omission of other adjustments (e.g. insufficient consideration given to non-operating assets in the investee or in the
comparable company peers, discount for the lack of liquidity).
2. Income approach (DCF method)

–– Double-counting or omitting cash flows (e.g. not including working capital requirements when calculating cash flows or
assuming a significant level of revenue growth for an extended period of time with relatively small changes in required
capital expenditures)
–– Errors or inadequate allowance for uncertainties in cash flow forecasts
–– Mismatching cash flows and discount rates (e.g. discounting FCFE at the weighted average cost of capital (WACC) or the
FCFF at the cost of equity capital)
–– Inconsistencies between risks inherent in cash flows and those reflected in the discount rate
–– Inappropriately high growth rates in the terminal value calculation
–– A perpetuity approach applied where businesses have limited life contracted revenue, concentrated customers and risk
renewals
–– Inappropriate risk-free rates used for the discount rate calculation (e.g. use of a government rate with dissimilar duration
to the cash flows arising from an investment)
–– Applying parameters derived from different jurisdictions to the investee without making necessary adjustments
–– Currency mismatch between the currency used to estimate the cash flow projections and the currency of the inputs to
derive the discount rate (e.g. cash flows denominated in Brazilian reals discounted with a USD-based WACC)
–– Inappropriate βs used for the discount rate calculation (e.g. using the estimated β of an investor instead of the
estimated β of an investee)
–– Inappropriate calculation of WACC (e.g. computing WACC using book values of debt and equity, using a cost of debt that
is incompatible with the capital structure assumed in the WACC)
–– Inappropriate treatment of country risk (e.g. not considering the country risk, arguing that it is diversifiable)
–– Omission of other adjustments (e.g. discount for the lack of liquidity).
3. Adjusted net asset method

–– Not measuring the investee’s assets and liabilities at fair value (e.g. measuring assets at book values for which fair values
might be materially higher or lower, omitting economic obsolescence when valuing tangible assets)
–– Omission of unrecognised intangible assets
–– Omission of assessment of collectibility of trade receivables
–– Omission of contingent liabilities and other unrecognised liabilities (e.g. unrecognised commitments)
–– Omission of deferred tax adjustments, when economically relevant, arising from adjusting assets’ carrying amounts to
fair value.
11. DEFINITIONS
11.1. Definitions IFRS 13
Active market A market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an on-going basis.
Cost approach A valuation technique that reflects the amount that would be required
currently to replace the service capacity of an asset (often referred to as current
replacement cost).
Entry price The price paid to acquire an asset or received to assume a liability in an exchange
transaction.
Exit price The price that would be received to sell an asset or paid to transfer a liability.
Expected cash flow The probability-weighted average (i.e. mean of the distribution) of possible
future cash flows.
Fair value 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.
Highest and best use The use of a non-financial asset by market participants that would maximise
the value of the asset or the group of assets and liabilities (e.g. a business) within
which the asset would be used.
Income approach Valuation techniques that convert future amounts (e.g. cash flows or income
and expenses) to a single current (i.e. discounted) amount. The fair value
measurement is determined on the basis of the value indicated by current
market expectations about those future amounts.
Inputs The assumptions that market participants would use when pricing the asset or
liability, including assumptions about risk, such as the following:
a) The risk inherent in a particular valuation technique used to measure fair
value (such as a pricing model); and
b) The risk inherent in the inputs to the valuation technique.
Inputs may be observable or unobservable.
Level 1 inputs Quoted prices (unadjusted) in active markets for identical assets or liabilities that
the entity can access at the measurement date.
Level 2 inputs Inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 3 inputs Unobservable inputs for the asset or liability.
Market approach A valuation technique that uses prices and other relevant information generated
by market transactions involving identical or comparable (i.e. similar) assets,
liabilities or a group of assets and liabilities, such as a business.
Market-corroborated inputs Inputs that are derived principally from or corroborated by observable market
data by correlation or other means.
Market participants Buyers and sellers in the principal (or most advantageous) market for the asset
or liability that have all of the following characteristics:
a) They are independent of each other, i.e. they are not related parties as
defined in IAS 24 Related Party Disclosures, although the price in a related
party transaction may be used as an input to a fair value measurement if the
entity has evidence that the transaction was entered into at market terms.
b) They are knowledgeable, having a reasonable understanding about the asset
or liability and the transaction using all available information, including
information that might be obtained through due diligence efforts that are
usual and customary.
c) They are able to enter into a transaction for the asset or liability.
d) They are willing to enter into a transaction for the asset or liability, ie they are
motivated but not forced or otherwise compelled to do so.
Cost advantageous market The market that maximises the amount that would be received to sell the asset
or minimises the amount that would be paid to transfer the liability, after taking
into account transaction costs and transport costs.
Non-performance risk The risk that an entity will not fulfil an obligation. Non-performance risk
includes, but may not be limited to, the entity’s own credit risk.
Observable inputs Inputs that are developed using market data, such as publicly available
information about actual events or transactions, and that reflect the
assumptions that market participants would use when pricing the asset or
liability.
Orderly transaction A transaction that assumes exposure to the market for a period before the
measurement date to allow for marketing activities that are usual and customary
for transactions involving such assets or liabilities; it is not a forced transaction
(e.g. a forced liquidation or distress sale).
Principal market The market with the greatest volume and level of activity for the asset or
liability.
Risk premium Compensation sought by risk-averse market participants for bearing the
uncertainty inherent in the cash flows of an asset or a liability. Also referred to as
a ‘risk adjustment’.
Transaction costs The costs to sell an asset or transfer a liability in the principal (or most
advantageous) market for the asset or liability that are directly attributable to
the disposal of the asset or the transfer of the liability and meet both of the
following criteria:
a) They result directly from and are essential to that transaction
b) They would not have been incurred by the entity had the decision to sell
the asset or transfer the liability not been made (similar to costs to sell, as
defined in IFRS 5).
Transport costs The costs that would be incurred to transport an asset from its current location
to its principal (or most advantageous) market.
Unit of account The level at which an asset or a liability is aggregated or disaggregated in
an IFRS for recognition purposes.
Unobservable inputs Inputs for which market data are not available and that are developed using
the best information available about the assumptions that market participants
would use when pricing the asset or liability.
APPENDIX A – EXAMPLE IFRS 13 DISCLOSURES

FOR 31 DECEMBER 2013
Note XX – Fair value measurements
The following table sets out the group’s assets and liabilities that are measured and recognised at fair value at
31 December 2013 [IFRS 13.93(a) and (b)].
At 31 December 2013 Level 1 Level 2 Level 3 Total

Recurring fair value measurements
Financial assets:
Derivatives at FVTPL - XX - XX
Available-for-sale equity securities XX - XX XX
Total recurring financial assets XX XX XX XX
Non-financial assets:
Investment properties - - XX XX
Land and buildings - XX XX XX
Total recurring non-financial assets - XX XX XX
Non-recurring fair value measurements

Land held for sale - XX - XX
Total non-recurring - XX - XX
The group has measured land at fair value on a non-recurring basis as a result of the reclassification of the land as held for
sale [IFRS 13.93(a)].
There have been no transfers between levels 1 and level 2 recurring fair value measurements during the year
[IFRS 13.93(c)].
The group’s policy is to recognise transfers into and out of the different fair value hierarchy levels at the date the event or
change in circumstances that caused the transfer occurred [IFRS 13.95].
Valuation processes applied by the Group for level 3 fair values [IFRS 13.93(g)]
The group engages external, independent and qualified values to determine:
–– The fair value of the group’s financial instruments that are in level 3 of the fair value hierarchy every 6 months
–– The fair value of the group’s investment property at the end of every annual reporting period, and
–– The fair value of the group’s land and buildings that are classified as property plant and equipment every three years.
The following table sets out the reconciliation of the opening and closing balances for level 3 fair value measurements as at
31 December 2013 [IFRS 13.93(e)&(f)].
Unlisted Investment
equity Buildings Total
property
securities
Opening balance: XX XX XX XX
Transfer from level 1 XX - - XX
Transfer to level 1 (XX) - - (XX)
Transfer from level 2 - - - -
Transfer to level 2 - (XX) - -
Acquisitions XX XX XX XX
Disposals (XX) - (XX) (XX)
Depreciation and impairment - - (XX) XX
Gains recognised in other comprehensive income XX - XX XX
Gains recognised in other income - XX - XX
Closing balance XX XX XX XX
The following table sets out the amount of total gains or losses for the period included in profit or loss that is attributable
to the changes in unrealised gains or loss relating to those assets and liabilities held at the end of the reporting period that
is included in gains/(losses) recognised in other income [IFRS 13.93(f)].
Unlisted Investment
equity Buildings Total
property
securities
Unrealised gains or (losses) recognised in profit

or loss attributable to assets held at - XX - XX
the end of the reporting
The following table sets out the valuation techniques used in the determination of fair values within level 3 including the
key unobservable inputs used and the relationship between unobservable inputs to fair value [IFRS 13.93(d)(h)(i)(ii]).
Relationship between
Item and valuation approach Key unobservable inputs unobservable inputs to fair value
Unlisted equity securities –– Weighted average cost of capital Increased long term revenue growth
(X% to X%; rate and long-term pre-tax operating
Fair value is determined by
weighted average X%) margin by X% and lower weighted
discounted cash flow.
average cost of capital (-X%) would
–– Long term revenue growth rate
increase fair value by $XX; lower long
(X% to X%;
term revenue growth rate and long-
weighted average X%)
term pre-tax operating margin (-X%)
–– Long-term pre-tax operating and higher weighted average cost of
margin (X% to X%; capital (X%) would decrease fair value
weighted average X%) by $X.
–– Discount for lack of marketability
(X% to X%;
–– Control premium (X% to X%;
Investment property –– Discount rate (X% to X%; The higher the discount rate, terminal
weighted average X%) yield and expected vacancy rate the
Fair value is determined by applying
lower the fair value.
the income approach based on –– Terminal yield (X% to X%;
the estimated rental value of the weighted average X%) The higher the rental growth rate, the
property. Discount rates, terminal higher the fair value.
–– Expected vacancy rate (X% to X%;
yields, expected vacancy rates and
rental growth rates are estimated by
an external valuer or management –– Rental growth rate (X% to X%;
based on comparable transactions and weighted average X%)
industry data.
Buildings –– Discount rate (X% to X%; The higher the discount rate, terminal
weighted average X%) yield and expected vacancy rate the
Fair value is determined by applying
lower the fair value.
the income approach based on –– Terminal yield (X% to X%;
the estimated rental value of the weighted average X%) The higher the rental growth rate, the
property. Discount rates, terminal higher the fair value.
–– Expected vacancy rate (X% to X%;
yields, expected vacancy rates and
rental growth rates are estimated by
an external valuer or management –– Rental growth rate (X% to X%;
based on comparable transactions and weighted average X%)
industry data.
The following table set out the valuation technique used in determination of fair values within level 2 including the key
inputs used [IFRS 13.93(d)].
Item Valuation approach and inputs used

Derivatives at FVTPL The fair value of interest rate swaps is calculated as the present value of the
estimated future cash flows based on observable yield curves.
The fair value of forward exchange contracts is determined based on the forward
exchange rates as at reporting date.
Land The fair values of land are derived using the sale comparison approach.
Sale prices of comparable land in similar location are adjusted for differences
in key attributes such as land size. The valuation model is based on price per
square metre.
Land held for sale The fair values of land are derived using the sale comparison approach.
Sale prices of comparable land in similar location are adjusted for differences
in key attributes such as land size. The valuation model is based on price per
square metre.
The following table sets out the assets and liabilities for which fair values are disclosed in the notes.
Fair value Significant

Item Fair value Valuation technique hierarchy unobservable inputs
level
Trade receivables and XX The carrying amount of short Level 3 Discount rate X% for other
payables term (less than 12 months) receivables.
trade receivable and payables
Discount rate of X% for related
approximates its fair values.
parties and key management
The carrying amount of personnel.
non-current trade receivables
at floating interest rates
approximates fair value.
Fair values of non-current
receivables are based on cash
flows discounted using an
estimated current lending rate
of X% and loans to related
parties and key management
personnel X%.
Non-current XX The fair value of non-current Level 2 Discount rate range X-X%.

borrowings borrowings in note X, is
estimated by discounting
the future contractual cash
flows at the current market
interest rates.
CONTACT
For further information about how BDO can assist you and your organisation, please
get in touch with one of our key contacts listed below. Alternatively, please visit
www.bdointernational.com/Services/Audit/IFRS/IFRS Country Leaders where
you can find full lists of regional and country contacts.
EUROPE
Alain Frydlender France alain.frydlender@bdo.fr
Jens Freiberg Germany jens.freiberg@bdo.de
Teresa Morahan Ireland tmorahan@bdo.ie
Ehud Greenberg Israel ehudg@bdo.co.il
Ruud Vergoossen Netherlands ruud.vergoossen@bdo.nl
Reidar Jensen Norway reidar.jensen@bdo.no
Denis Taradov Russia d.taradov@bdo.ru
René Krügel Switzerland rene.kruegel@bdo.ch
Brian Creighton United Kingdom brian.creighton@bdo.co.uk
ASIA PACIFIC
Wayne Basford Australia wayne.basford@bdo.com.au
Zheng Xian Hong China zheng.xianhong@bdo.com.cn
Fanny Hsiang Hong Kong fannyhsiang@bdo.com.hk
Khoon Yeow Tan Malaysia tanky@bdo.my
LATIN AMERICA
Marcelo Canetti Argentina mcanetti@bdoargentina.com
Luis Pierrend Peru lpierrend@bdo.com.pe
Ernesto Bartesaghi Uruguay ebartesaghi@bdo.com.uy
NORTH AMERICA & CARIBBEAN

Armand Capisciolto Canada acapisciolto@bdo.ca
Wendy Hambleton USA whambleton@bdo.com
MIDDLE EAST
Rupert Dodds Bahrain rupert.dodds@bdo.bh
Antoine Gholam Lebanon agholam@bdo-lb.com
SUB SAHARAN AFRICA

Nigel Griffith South Africa ngriffith@bdo.co.za
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NEED TO KNOW

IFRS 13 Fair Value Measurement

2. SCOPE, EFFECTIVE DATE AND TRANSITION

2.2. Scope exclusion – measurement and disclosures

2.3. Scope exclusions – disclosures only

2.4. Examples of the scope of IFRS 13

2.5. Effective date and transition

3. RATIONALE FOR A FAIR VALUE STANDARD

4.2. Market participant

4.3. Orderly transaction

4.4. Principal market and most advantageous

4.5. Highest and best use

4.6. Unit of account

4.7. Transport costs

The following examples are based on IFRS 13.IE28 and 29:

Example 5.1(a): restriction on the sale of an equity instrument (of another entity)

Example 5.1(b): Restrictions on the use of an asset

5.2. Exit price vs. entry price

5.3. The market concept

Also, IFRS 13.2 notes that:

Example 5.3(a): Identifying the principal (or the most advantageous) market

Price (at period end, CU) 100 97

Figure 1: Example 5.3(a) – Market data

It should be noted that:

Example 5.3(b): Identifying the principal (or the most advantageous) market

Example 5.3(c): Market accessibility

Example 5.3(d): Interest rate swap at initial recognition (based on IFRS 13.IE24-26)

5.4. Market participant

5.5. The price

5.6. Fair value at initial recognition

5.7. Non-financial assets

Example 5.7(a): Entity vs. market participant considerations (alternative use)

Example 5.7(b): Entity vs. market participant considerations (financial feasibility)

Example 5.7(c): Entity vs. market participant considerations (defensive values)

Example 5.7(e): Research and development project

HBU in combination with other assets/liabilities

Example 5.7(f): Asset group

Example 5.8(a): Interest rate swap at initial recognition (based on IFRS 13.IE24-26)

The following examples are based on IFRS 13 Illustrative Examples:

Example 5.8(b)(ii): Decommissioning liability

Cash flow estimate (CU) Probability assessment Expected cash flows (CU)

Figure 2: Example 5.8(b)(ii) – Labour costs estimates

Expected labour costs 131,250

Expected cash flows adjusted for inflation 419,637

Expected present value using discount rate of 8.5% for 10 years 194,879

Figure 3: Example 5.8(b)(ii) – Table illustrating measurement of the obligation’s fair value

Example 5.8(b)(iii): Debt obligation: quoted price

Example 5.8(b)(iv): Debt obligation: present value technique

5.9. Bid and ask prices

5.10. Premium and discount

Consideration of the unit of account

Example 5.10(a): Unit of account and unit of valuation: Large holding

Example 5.10(b): Investment in a private entity

Example 5.10(c): Fair value of cash-generating unit (CGU)

Example 5.10(d): Fair value of cash-generating unit (CGU)

Example 5.10(e): Fair value of a forward contract on publicly traded shares

Is the unit of account aggregation of identical item measured?

Application issue – Premium or discount

The following examples are based on IFRS 13 Illustrative Examples.