A lecture Guide by:

DR NIK ZAM NIK WAN

Faculty of Accountancy, UiTM Cawangan Kelantan
013-3824527
MFRS 13: FAIR VALUE MEASUREMENT

1.0 INTRODUCTION

▪ Fair value is a market-based measurement rather than an entity-specific

measurement
▪ To measure an asset or liability at FV encompasses various factors:

1. The characteristics of the asset and liability

2. The nature of the transaction
3. The profile of the market participants
4. Whether the price is observable or not
5. The economic benefits that will be generated by the asset

https://www.youtube.com/watch?v=s_muKwtD_Oc&t=128s

How does the company decided on

the Price to be RM30 mill?

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2.0 MEASUREMENT
2.1 WHAT IS FAIR VALUE?
▪ According to MFRS 13 FV is “the price that would be received to sell an asset OR
paid to transfer a liability in an orderly transaction between market participants at
the measurement date”

2.2 OBJECTIVE OF FAIR VALUE MEASUREMENT

▪ To estimate the price at which an orderly transaction to sell the asset OR to transfer
the liability would take place between market participants at the measurement date
under current market conditions.
▪ In determining the FV, entity is required to determine:
 The particular asset or liability that is subject of the measurement
 For a non-financial asset, the valuation premise that is appropriate for the
measurement (consistently with its highest and best use)
 The principal (or most advantageous) market for the asset or liability
 The valuation technique appropriate for the measurement, considering the
availability of data with which to develop inputs and level of fair value hierarchy.

2.2.1 The Particular Asset or Liability

▪ FV measurement is applicable to a particular asset or liability.
▪ The asset or liability can be a stand-alone item or a group of assets and
liabilities.
▪ Only characteristics of the asset or liability that market participants will consider
when pricing the asset or liability at the measurement date.
▪ Such characteristics include the condition and location of the asset and any
restrictions on its sale or use.
▪ Specific conditions of entity are not relevant

2.2.2 The Transaction

▪ It is assumed that ➔ the sale of asset or transfer of liability is done in an
orderly manner between market participants at the measurement date under
current market condition.
▪ It is NOT a forced transaction, such as liquidation or stress sales
▪ Rather, an orderly transaction has exposure to the market for a period to
undertake marketing activities that are usual and customary

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▪ It is assumed that ➔the transaction to sell the asset or transfer the liability takes
place in the principal market, if absent then the most advantageous market for
the asset or liability.
▪ Principal market: the one that has the greatest volume and level of activity for
the particular asset or liability that can be accessed by the entity.

market where the asset or liability is

actively traded in volume or activity
A market where the asset or liability is actively
traded in volume or activity
▪ Most advantageous market: one that maximises the amount that would be
received to sell the asset OR minimises the amount that would be paid to
transfer a liability, after taking into account transactions cost and
transportation cost
▪

In determining In determining
the MOST the FAIR VALUE
ADVANTAGEOUS of ASSET /
MARKET LIABILITY

Price that would be received RM 700,000 RM700,000

for the asset

Transaction cost - (RM XXX) -

Transportation Cost - (RM XXX) - (RM XXX)

Note:(Chose the highest value) RM XXX,XXX RM XXX,XXX

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Illustration 1
An entity has an asset that could be sold in two different active markets (market A and market
B) at a different price. The entity enters in transactions in both markets. (Assuming no
principal market)

Market A Market B
RM RM
Price that would be received for the asset 555,000 550,000
Transaction cost 55,000 50,000
Cost to transport the asset 28,000 20,000

Required
Discuss the most advantageous market and the fair value of the asset
1. To determine the MOST ADVANTAGEOUS MARKET

Market A Market B
RM RM
Price that would be received for the asset 555,000 550,000
Transaction cost (55,000) (50,000)
Cost to transport the asset (28,000) (30,000)
Net amount 472,000 470,000

2. To determine the FAIR VALUE OF THE ASSET

Market A Market B
RM RM
Price that would be received for the asset 555,000 550,000
Transaction cost
Cost to transport the asset (28,000) (30,000)
FAIR VALUE 527,000 520,000

Why should we find the Most Advantageous Market?

So, which market is the Most Advantageous Market? Market A or Market B? Why?
So, what is the FV of the asset? Why?

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EXERCISE 1:

Yoyo Bhd has an asset that could be sold in the three different active markets (Market X,
Market Y and Market Z) at different price.

Market P Market Q Market R

Price that would be received for the
asset 850,000 820,000 838,000
Commission (Transaction Cost) (80,000) (50,000) (60,000)
Shipping Cost (25,000) (22,000) (20,000)

Determine the most advantageous market and the fair value of the asset.

Answer:

2.2.3 Market Participants

 Market Participants: are buyers and sellers in the principal (or most
advantageous) market who are:
a. Independent of each other (unrelated parties)
b. Knowledgeable about the asset and liability to make investment decision.
c. Able to enter into transaction; or
d. Willing to enter into a transaction (not forced or compelled)

2.2.4 The Price

 The PRICE at the measurement date is the EXIT PRICE
 It is the FAIR VALUE that will be received for an asset or paid for a liability in the
most advantageous market.
 The PRICE can be:
o An observable price
o An estimate of the market value of the asset or liability using valuation
techniques.

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 Transaction Cost are NOT considered in determining FAIR VALUE because it is
not characteristic of the asset or liability
 Transport Cost are NOT considered as well EXCEPT in situation where location is
a characteristic of the asset.

2.2.5 Application to Non-Financial Asset

Highest and Best Use
 FV measurement is based on the market participant’s [1] ability to generate
economic benefits by using the asset or [2] selling it to another market participant
who will use the asset in its “highest and best use”
 This is the use that maximises the value of asset (or group of assets and liabilities)
 The use of the asset is constrained by.
a. Physically possible
b. Legally permissible and
c. Financially feasible

 Is determined from the perspective of the market participant and does not consider
the intended use of the asset by the acquirer or holder
 In situation where the asset is used with another asset which is not its highest and
best use, the fair value of the asset will comprise:
a. Value in its current use; and
b. The difference between its fair value and its value in its current use
(incremental value of the asset group)

Illustration 2
An entity has a piece of land on which is situated a building that is used as a
warehouse. The indicated value as currently used is RM2 million for the land and RM1
million for the building.
If the warehouse is demolished and the whole piece of land is used as a parking lot,
the fair value of the land will be RM4.5 million (after demolition cost of building).
Required:
Discuss the fair value measurement of the land and warehouse
Answer:
• The Entity has 2 Non-Financial Assets:

1. LAND
2. BUILDING / WAREHOUSE

• The entity has more than one option on generating economic benefits from LAND:

1. Currently used (in use) as location of building/warehouse

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 2. Use as a parking lot

• So, need to find the highest and Best Use of the land

IN USE (current use) RM2 mil vs IN EXCHANGE (parking lot) RM4.5 mil

• So which one is the highest and Best Use of the LAND?

✓ IN EXCHANGE (parking lot) RM4.5 mil

• BUT……
• The question asked for the FV measurement of land AND building

• We have a situation where the asset i.e. LAND is used with another asset i.e.
BUILDING which is not its higher and best use (≠ current use), since when the
LAND turn into PARKING LOT, the building is demolished

• So…

• The FV of the asset LAND will comprise:

1. Value in its current use = RM2 million +

2. The difference between it FV (using highest and best Use earlier) and the value
in its current use (INCREMENTAL VALUE of the asset group)

 RM 4.5 million - (as asset group RM 2 mil + RM1 mil) = RM 1.5 mil

• Therefore, in this situation:

•
 FV of LAND = RM 2 mil + RM1. 5 mil = RM 3.5 mil
 FV of LAND and BUILDING = RM3.5 mil + RM 1 mil (warehouse)
 RM 4.5 mil

Illustration 3
An entity has a piece of land on which is situated a building that is used as a
warehouse. The indicated value as currently used is RM3 million for the land and RM2
million for the building.
If the warehouse is demolished and the whole piece of land is used as a parking lot,
the fair value of the land will be RM2.5 million (after demolition cost of building).
Required:
Discuss the fair value measurement of the land and warehouse

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Answer:
The Entity has 2 Non-Financial Assets:
1. LAND
2. BUILDING / WAREHOUSE
•The entity has more than one option on generating economic benefits from LAND:
1.Currently used (in use) as location of building/warehouse’
2.Use as a parking lot
•So need to find the highest and Best Use of the land

IN USE (current use) RM3 mil vs IN EXCHANGE (parking lot) RM2.5 mil
•So which one is the highest and Best Use of the LAND?
IN USE (current use) RM3 mil
•BUT……
•The question asked for the FV measurement of land AND building
Unlike previous illustration, now we have a situation where the asset i.e. LAND is used
with another asset i.e. BUILDING that is its higher and best use ( = current use) , the
LAND is not going to turn into PARKING LOT and the building is continue to be used
as WAREHOUSE
•Therefore, in this situation:
•FV of LAND and BUILDING = RM3 mil + RM 2 mil (warehouse)
= RM 5 million

2.5. Application to Non-Financial Asset

2.5 2 Valuation Premise
 The highest and best use establishes the valuation premise used to measure the
FV of asset DEPENDING on STAND ALONE or COMBINATION WITH OTHER
ASSET
 If highest and Best use ➔ stand-alone basis
 Fair Value the price that would be received in a current sale to a market participant
that would use the asset on a stand-alone basis
 If highest and Best use ➔ Combination
 Fair Value the price that would be received in a current sale to market participants
assuming the asset will be used in combination with those assets (which are also
assumed to be available to be available to the market participants)

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2.6. Application to Liabilities and Entity’s Own Equity Instruments
 The FV measurement assumes that the liability or an entity’s own equity instrument
is transferred to a market participant at measurement date
 The liability remains outstanding and the market participant is the one who will fulfill
the obligation
 The liability is not settled or extinguished
 It is the market participant who is expected to settle the liability
 Similar to the entity’s own equity instrument
 Where there is NO QUOTED PRICE for the transfer of the identical or a similar
liability or an entity’s own equity instrument and that identical item is held by
another party as an asset, the entity is required to measure the FV of the liability
or equity instrument from the prospective of a market participant that holds the
identical asset at the measurement date
 The entity shall measure the FV of the liability or equity instruments using:
a. Quoted price in an active market for the identical item, or if not available
b. Other observable inputs, or if not available
c. Another valuation technique such as income approach or market approach

3.0 FAIR VALUE AT INITIAL RECOGNITION

 In an exchange transaction, the transaction price is the price paid to acquire the
asset OR received to assume the liability (an entry price)
 In many cases TRANSACTION PRICE FAIR VALUE
 However, the transaction price might not represent the FV of an asset or liability if
any of the evidence exists:
1. The transaction was between related parties
2. It was a duress transaction
3. The transaction price included other elements (for example in a business
combination); or
4. The transaction did not take place in the principle (or most advantageous)
market

4.0 VALUATION TECHNIQUES

 An entity is to use valuation techniques that are appropriate for the individual
situation given sufficient data are available maximising observable inputs and
minimizing un observable inputs

4.1 Valuation Approaches

 There are three approaches to determining FV using valuation techniques. They
are:
a. Market approach
b. Income approach and
c. Cost approach

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a. Market Approach

o Relevant information such as price generated by market transactions

involving identical or comparable (that is similar) assets and liabilities (or
businesses) is used to determine the FAIR VALUE

b. Income Approach

o Uses valuation techniques to convert future amounts (for example cash

flows or income and expenses) to a single current (that is discounted) or
present value amount
o It is determined on the basis of the value indicated by current market
expectations about those future amounts

c. Cost Approach

o The valuation technique is used to determine the amount required to

replace the service capacity of an asset, which is referred to as current
replacement cost

5.0 INPUTS

 All three valuation approaches rely on INPUTS or ASSUMPTIONS market

participants will use in pricing an asset or a liability
 INPUT can be:
 OBSERVABLE inputs based on available market data that market
participants will use to price an asset or liability
 UNOBSERVABLE non market data that are developed on the best
available information that market participants will use

5.1 Three Level of Inputs

a. LEVEL 1
o Quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity has access to at measurement date:

o EXAMPLE

o The unadjusted quoted price of equity shares in a listed company

b. LEVEL 2
o Inputs other than quoted prices in Level 1 that are observable directly or
indirectly Include:

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 o quoted prices for similar assets and liabilities in:
✓ an active market
✓ Not active market
• non quoted prices that are observable and inputs that are derived or
corroborated by observable market data

o EXAMPLE
o FV of a building held for use, may use the price per square meter
derived from observable market data form comparable buildings in a
similar locations may be used
c. LEVEL 3

o Inputs are NOT BASE on observable market data fall within Level 3
o Though unobservable date are used, they must still reflect the
assumptions that market participants will use when pricing an asset or
liability, including risk

o EXAMPLE

o FV of a cash generating unit, an entity may use the financial

forecast from the cash flows developed using its own data

6.0 DISCLOSURE

 The following minimum disclosures are required:

o The valuation techniques and inputs used to develop the fair value of
assets and liabilities
o For those measured using significant unobservable inputs (Level 3 the
effect of the measurements in the Statement of Profit or Loss
o Disclosure requirements will include:
i. Reconciliation from the opening to closing balances
ii. Quantitative information regarding the inputs used
iii. Valuation processes used by the entity and
iv. Sensitivity to change in inputs

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FAR570/TUTORIAL/FAIRVALUEMEASUREMENT

FAR570: TUTORIAL
FAIR VALUE MEASUREMENT
PART A

1. The Malaysian Financial Reporting Standard (MFRS) that provides guidance on how to
measure fair value refer to:
A. MFRS 3
B. MFRS 13
C. MFRS 113
D. MFRS 131

2. To measure an asset or liability at fair value encompasses various factors given below
EXCEPT:
A. The characteristics of the asset and liability
B. The nature of the transaction
C. The profile of the entity that own the asset and liability
D. Whether the price is observable or not

3. Fair Value is “ the (i)_________ that would be received to sell an asset or paid to transfer
a liability in an (ii) ______________ between (iii) ____________ at the measurement date”.
(i), (ii) and (iii) in above definition refer:

A. Amount , transaction , buyers

B. Price, fair transaction , competitors
C. Price, orderly transaction, entity
D. Price, orderly transaction, market participants

4. ‘The one that has the greatest volume and level of activity for the particular asset or liability
that can be accessed by the entity”. This statement refers to
A. Target market
B. Principal market
C. Trading market
D. Fair value market

5. Corona Bhd has an asset that could be sold in the three different active markets (Market X,
Market Yand Market Z) at different prices. The entity enters in transactions in both markets.
Market X Market Y Market Z
Price that would be received for the asset 750,000 720,000 735,000
Commission (Transaction Cost) (65,000) (25,000) (45,000)
Cost to transport the asset (15,000) (12,000) (15,000)
The most advantageous market is

A. Market X
B. Market Y
C. Market Z

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FAR570/TUTORIAL/FAIRVALUEMEASUREMENT

6. Citra Ria Bhd has an asset that could be sold in the two different active markets (Market R
and Market S) at different prices. The entity enters in transactions in both markets.

Market R Market S
Price that would be received for the asset 750,000 735,000
Commission (Transaction Cost) (65,000) (45,000)
Cost to transport the asset (15,000) (15,000)

Determine the most advantageous market and the fair value of the asset.

A. Market R , Fair Value of Asset is RM735,000

B. Market R , Fair Value of Asset is RM670,000
C. Market S , Fair Value of Asset is RM720,000
D. Market S , Fair Value of Asset is RM675,000

7. Market participants are buyers and sellers in the principal (or most advantageous) market
who has the criteria provided EXCEPT:
A. Loyal buyers and sellers of the entity
B. Independent of each other
C. Knowledgeable about the asset and liability to make investment decision
D. Able to enter into transaction

8. The use of the asset in ‘highest and best use’ is constrained by all the items provided
EXCEPT:
A. Physically possible
B. Profile of the entity that own the asset
C. Legally permissible
D. Financially feasible

9. Which of the following is not the valuation approach within the scope of MFRS 13?
A. Income Approach
B. Market Approach
C. Cost Approach
D. Financial Approach

10. Which of the following best describes Level 1 inputs?

A. Unadjusted quoted prices in active markets
B. Unobservable input
C. Input other than quoted prices
D. Quoted prices for similar assets

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FAR570/TUTORIAL/FAIRVALUEMEASUREMENT

11. Which market is the one that maximizes the amount that would be received for the asset or
paid to extinguish the liability after transport and transaction costs?
A. Highest and best market
B. Most active market
C. Most advantageous market
D. Most preferred market.

12. It is assumed that the sale of asset or transfer of liability is done in an orderly manner
between market participants at the measurement date under current market condition. This
statement refer to the activities mentioned below EXCEPT:

A. Not a forced transaction

B. Has exposure to the market for a period to undertake marketing activities
C. Sale of asset due to liquidation
D. The sale of asset takes place in the principal market

13. ‘The one that maximizes the amount that would be received to sell the asset OR minimizes
the amount that would be paid to transfer a liability, after taking into account transaction cost
and transportation cost. This statement refers to…
A. Target market
B. Principal market
C. Fair value market
D. Most advantageous market
E.
14. Miss3 Bhd has an asset that could be sold in the two different active markets (Market X and
Market Y) at different prices. The entity enters in transactions in both markets.
Market X Market Y
Price that would be received for the asset 950,000 970,000
Commission (Transaction Cost) (125,000) (155,000)
Cost to transport the asset (25,000) (25,000)

Determine the most advantageous market and the fair value of the asset.

A. Market X , Fair Value of Asset is RM825,000

B. Market X , Fair Value of Asset is RM925,000
C. Market Y , Fair Value of Asset is RM815,000
D. Market Y , Fair Value of Asset is RM945,000 ( 2 MARKS)

15. An equipment is sold in two different active markets at different prices. An entity enters into
transactions in both markets and can access the price in those markets for the asset at the
measurement date. In Market X, the price that would be received is RM1,000, transaction
costs in that market are RM150 and the costs to transport the asset to that market are RM50.
In Market Y, the price that would be received is RM1,500, transaction costs in that market are
RM200 and the costs to transport the asset to that market are RM100.

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FAR570/TUTORIAL/FAIRVALUEMEASUREMENT

Which of the following statement is true?

A. RM950 based on Market X if market X is the principal market for the asset.
B. RM1,400 based on the Market Y after comparing the net amount that would be
received for the asset if neither market is the principal market.
C. RM800 after deducting transaction and transportation costs based on Market X.
D. Both (A) and (B) above.
(2 MARKS)

16. When measuring the fair value of a non-financial asset, reference must be made to the highest
and best use of the asset. Which of the following statements are true about the highest and
best use of the asset?
17.
A. the use must be physically possible, legally permissible and financially feasible
B. the highest and best use is determined from the perspective of market participants,
only if the entity intends to use the asset in its operations
C. the highest and best use is determined from the perspective of market participants,
regardless of whether the entity intends to use the asset.
D. A and C
(1 MARKS)

18. A building is used as a factory but is in a newly residential area. Other industrial and
commercial buildings have been converted into residential use in the area. The expected
cashflow from continuing use of the factory is RM20 million. However, the building could be
sold for conversion to residential property for RM21 million, incurring transaction costs of
RM1.5m (surveys, fees etc). Prior to sale, the building would require repairs costing RM500k
to return site to safe for human dwelling. Calculate the fair value of the building.

a) RM19m
b) RM19.5m
c) RM20.5m
d) RM21m
(2 MARKS)

PART B: Past Semester Test

QUESTION 1

An asset is sold in two different active markets at different prices. An entity enters into transactions
in both markets and can access the price in those markets for the asset at the measurement date.
In Market A, the price that would be received to sell the asset is RM260,000 with transportation
cost is RM30,000 and the transaction costs that market isRM20,000. In Market B, the price that
would be received is RM250,000 transaction costs in that market are RM15,000 and the costs to
transport the asset to that market are RM20,000.

a) Calculate the Fair Value of the asset if Market A is the principal market for the asset.

b) Determine the Fair Value of the assets if neither market is the principal market for the asset.
Provide explanation for your answer.

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FAR570/TUTORIAL/FAIRVALUEMEASUREMENT

QUESTION 2

a) Identify the three approaches to determining the Fair Value using the valuation techniques.

b) An entity acquires a machine in a business combination. The machine will be held and used
in its operations. The machine was originally purchased by the acquired entity from an outside
vendor and, before the business combination, was customized by the acquired entity for use
in its operations. However, the customization of the machine was not extensive. The acquiring
entity 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 (as installed or
otherwise configured for use). There is no evidence to suggest that the current use of the
machine is not its highest and best use. Therefore, the highest and best use of the machine
is its current use in combination with other assets or with other assets and liabilities.

Discuss the valuation techniques relevant the above situation.

QUESTION 3 (Dec 2020)

Discuss the accounting treatment of transactions and transportation costs in identifying the
principal and most advantageous market in measuring fair value of an entity’s asset or liability.

QUESTION 4 (Jan 2022)

The machines are available for purchase in two active markets, Indonesia and Thailand, each
with its own set of prices. Hanim Berhad transacts in both markets and has accessed to the
machine's price in those markets at the measurement date. The price that would be received in
the Indonesian market is RM 52,000, including transaction fees of RM 6,000 and transportation
costs of RM 4,000. The price that would be obtained in the Thailand market is RM50,000,
transaction expenses in that market are RM2,000, and transportation costs to that market are
RM4,000.

Discuss how the fair value of 200 units of machine is determined at the measurement date in
accordance to MFRS 13 Fair Value Measurement.
(5 marks)

QUESTION 5 (June 2021)

Kayangan Bhd is a company which sells agriculture machines. It wishes to measure the fair value
of the inventory of machines. Three markets currently exist for the machines and Kayangan has
transacted regularly in all three market. At 30 April 2021, Kayangan wishes to find fair value of
100 new machines, which are identical. The current volume and prices in the three markets are
as follows:

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FAR570/TUTORIAL/FAIRVALUEMEASUREMENT

Market Total volume Sales price Transportation Transaction

of machines per costs to the costs per
sold in machines market per machine
market (RM) machines (RM)
(RM)
Laos 800,000 80,000 500 400
Thailand 500,000 76,000 400 700
Vietnam 200,000 68,000 300 600

Required:
Advise Kayangan Bhd for the amount the of fair value of the 100 new machines that would be
acceptable under MFRS13 Fair Value Measurement. (5 marks)

QUESTION 6 (Feb 2023)

Orchid Bhd involves in raising cow for supply of meat in Malaysia. In 2022, Orchid Bhd is trying
to expand its business to supply meat outside Malaysia. Therefore, it searches for different
markets to enter in order to sell meat for the expansion. Below is the relevant information for the
markets.

Market Sales price per kilo Transaction cost per Transport per kilo
(RM) kilo (RM) (RM)
A 13 1 2
B 15 3 3

Required:
a. Assess the market that Orchid Bhd can choose to enter by considering the fair value as
per MFRS13 Fair Value Measurement.
(4 marks)
b. Compute the fair value of 100 kilo of meat based on market chosen in (a) above.
(1 mark)
(Total: 5 marks)

QUESTION 7 (July 2022)

Kencana Emas Bhd is a listed real estate company which specialises mainly in industrial property.
Investment properties constitute more than 70% of its total assets.

Kencana Emas Bhd measures its industrial property using the fair value model. Valuations are
conducted by a member of the board of directors by considering the age of the property and the
nature of its use. According to the board, this method of calculation is complex but gives a very
precise result which is accepted by the industry. There are sales values for similar properties in
similar locations available as well as market rent data per square metre for similar industrial
buildings.

Discuss whether the above valuation technique is appropriate in reference to MFRS13 Fair Value
Measurements.
(5 marks)

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