IFRS 13: fair value measurement

What is a building worth? The answer depends on whom you ask. The owner may say what it cost. An agent may say what the owner hopes for. A buyer may say what it would earn. Before International Financial Reporting Standard (IFRS) 13, each accounting standard that used fair value had its own wording and its own guidance, so two companies holding the same asset could report different figures.

IFRS 13, Fair Value Measurement, gives one definition and one method for all of them.

This topic covers the definition of fair value as an exit price, the asset or liability being measured and the unit of account, market participants, principal and most advantageous markets, highest and best use, the three valuation techniques, the hierarchy of inputs, liabilities and own equity, the exception for portfolios managed on a net basis, initial recognition, and disclosure.

The previous topic covered share-based payment, which has its own fair value rules. The next topic covers financial instruments. May 2026 Question 3(b) tested the fair value of an investment property.

Key terms in plain English

Syllabus check

IFRS 13 is examinable under syllabus area B and is used by every standard that measures at fair value. This topic covers:

• the definition, the unit of account and market participants;
• principal and most advantageous markets, and highest and best use;
• valuation techniques, the hierarchy and bid and ask prices;
• liabilities and own equity, net-risk portfolios and initial recognition;
• disclosure, including the difference between recurring and non-recurring measurements.

CAMA 2020 and fair value

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS and give a true and fair view.

Why IFRS 13 exists and what it covers

Many standards use fair value: the revaluation model in International Accounting Standard (IAS) 16 and IAS 38, the fair value model in IAS 40, financial instruments under IFRS 9, goodwill and acquired assets under IFRS 3, impairment under IAS 36, and held-for-sale assets under IFRS 5. IFRS 13 gives one framework. It does not say which items must be measured at fair value. Each standard says that. IFRS 13 applies at initial recognition and afterwards.

Scope. It applies wherever another IFRS requires or permits fair value, or disclosure based on it (such as fair value less costs of disposal). It does not apply to share-based payments (IFRS 2), leases (IFRS 16), or measures that look like fair value but are defined differently: net realisable value in IAS 2 and value in use in IAS 36.

The disclosure rules do not apply to plan assets under IAS 19, to retirement benefit plan investments under IAS 26, or to assets whose recoverable amount is fair value less costs of disposal under IAS 36 (which has its own disclosures).

The core idea

Fair value is how the market would price the item today, not how the entity sees it. If two companies hold identical assets in identical conditions, they should report the same fair value. Intentions (to keep the asset in use or to sell it next year) do not matter. The principles also apply to the entity’s own equity instruments, for example shares issued as consideration in an acquisition.

Market participants

Market participants are independent of the reporting entity, knowledgeable (they have a sound understanding of the item), able to transact and willing to transact without being forced. Use the assumptions they would use, such as the condition and location of the asset and any restrictions on its sale or use.

Unit of account

The standard that requires fair value says what is measured: a single asset or liability, a group of assets, a group of liabilities, or a net position. For example, IFRS 9 values each derivative contract, and IAS 41 values biological assets by crop or herd.

Principal and most advantageous market

• Use the price in the principal market (the greatest volume and level of activity). Without a principal market, use the most advantageous market.
• No exhaustive search is needed. The market in which the entity normally transacts is presumed to be the principal market unless there is evidence otherwise.
• If a principal market exists, use its price even if another market quotes a better one.
• Transaction costs are not deducted from fair value. They are costs of the transaction, not features of the asset. (They may be used to identify the most advantageous market.)
• Transport costs are deducted when location is a characteristic of the asset, to move it from its present location to the market.

Highest and best use of non-financial assets

Fair value assumes the use that market participants would adopt to maximise the asset’s value, which may differ from how the entity uses it. The use must be:

1. physically possible (size, design, condition, location allow it);
2. legally permissible (zoning, environmental and other rules allow it, or a permit is obtainable); and
3. financially feasible (it earns an acceptable return after the costs of conversion).

The entity’s current use is presumed to be the highest and best use unless market evidence shows a better one. The value is stated on a stand-alone basis (the asset used on its own) or an in-combination basis (maximum value arises when used with complementary assets that are available to market participants).

Valuation techniques and the hierarchy

Choose the technique that fits the facts and for which enough data exists. More than one may be used. A change of technique is a change in accounting estimate under IAS 8. Maximise relevant observable inputs and minimise unobservable inputs. A quoted price in an active market for an identical item must be used.

The level of the whole measurement is the level of the lowest-level input that is significant to it.

Bid and ask prices

Where a market quotes a bid and an ask, use the price within the spread that is most representative of fair value in the circumstances. Using the bid for assets and the ask for liabilities is permitted but no longer required.

Liabilities and the entity’s own equity

• Assume the liability or equity instrument is transferred to a market participant, who takes on the obligation. It is not settled or extinguished. An own equity instrument stays outstanding.
• If there is a quoted price for the identical item held by another party as an asset, use it, adjusted for features that differ. Without observable prices, use a technique, usually an income approach: the cash outflows a transferee would expect, discounted at a rate that reflects the time value of money and non-performance risk.
• Non-performance risk includes the entity’s own credit risk and is assumed to be the same before and after transfer.
• Do not add a separate deduction for a restriction on transfer. It is assumed to be in the other inputs.
• The fair value of a liability with a demand feature is not less than the amount payable on demand, discounted from the first date payment could be required.

Portfolios managed on a net-risk basis

An entity may measure a group of financial assets and liabilities at the price that would be received to sell a net long position (or paid to transfer a net short position) for a particular market or credit risk, but only if it:

1. manages the group on the basis of its net exposure under a documented risk management or investment strategy;
2. provides information on that basis to key management; and
3. measures the assets and liabilities at fair value in the statement of financial position at each reporting date.

This is an exception to the measurement rules. It does not allow offsetting in the statement of financial position. Offsetting follows IAS 32.

Fair value at initial recognition

The transaction price is an entry price. Fair value is an exit price. They are often equal, but may differ, for example if the transaction is between related parties, is under duress, or is in a different market. In that case consider whether the price represents fair value, and follow the standard that requires the measurement on whether a day-one gain or loss is recognised.

Disclosure

The objective is to help users assess the techniques and inputs used, and the effect of Level 3 measurements on profit or loss and other comprehensive income. Disclosures are given by class of assets and liabilities, based on nature, characteristics and risks and on the level of the hierarchy.

Recurring measurements are required at every reporting date (for example investment property at fair value under IAS 40). Non-recurring ones arise only when an event occurs (for example an asset held for sale under IFRS 5). Items measured on another basis whose fair value is only disclosed (for example loans at amortised cost) have their own, shorter, disclosure list.

The rules in more depth

Why an exit price

An asset’s worth to a holder is the cash it can fetch or generate in the market, and an exit price reflects that. An entry price includes costs and margins that the holder could not recover on sale.

Why transaction costs are ignored

They depend on how a transaction is done, not on what the item is. Two holders of the same share would have the same fair value, even if one pays higher fees. Costs are considered when a standard asks for fair value less costs to sell.

Why the highest and best use matters

If a depot sits on land worth more as housing, a market participant would pay for the housing value. Reporting the lower value would understate the asset.

Why own credit risk lowers a liability’s fair value

A buyer taking over a liability from a weak credit would demand a lower price to take it on, because it is less likely to be paid in full. Many students find this counter-intuitive, because it can give a gain when the entity’s credit worsens.

Effect on analysis

A large share of Level 3 assets means that reported equity depends on management estimates. Analysts check the inputs and the sensitivities.

Worked examples

1. Principal market = FMDQ (greatest volume).
2. Most advantageous market (net of costs) = the Nigerian Exchange (₦103.05 against ₦102.65), but it does not apply because a principal market exists.
3. Fair value = ₦102.75 per ₦100 nominal. Costs are not deducted.

1. Principal market = Lagos (18 rigs a year). Most advantageous = Port Harcourt (₦605m net against ₦600m).
2. Use the principal market.
   Location is a characteristic of the rig, so deduct transport: ₦625m − ₦25m = ₦600m.

1. Principal market = FMDQ (610,000 against 220,000).
2. Choose the price within the spread that is most representative. Using the bid for an asset is acceptable and conservative, and it should be justified.
3. Fair value.
   4,000,000 × ₦23.65 = ₦94.6m.
   Costs are ignored.
   Level 1.

1. Physically possible: yes. Legally permissible: yes, a permit is obtainable. Financially feasible: yes, there is an acceptable margin.
2. Value in alternative use.
   ₦5.2bn − ₦0.4bn = ₦4.8bn, which is more than ₦3.5bn.
3. Fair value = ₦4.8bn, even though the company uses the site as a depot. The note discloses that the current use differs from the highest and best use.

Note: ICAN’s version of this example gives the industrial value as ₦3.6bn, but ₦350m at a 10% yield is ₦3.5bn. Our figure is slightly different from theirs. The conclusion is the same. A full valuation would also deduct the developer’s profit and the time to build, so the examples are simplified.

1. The three conditions are met, so the net exposure approach is allowed.
2. Receivable legs after adjustment.
   ₦1,540m − ₦25m = ₦1,515m.
   Payable legs = ₦1,465m − ₦18m = ₦1,447m.
3. Net fair value.
   ₦1,515m − ₦1,447m = ₦68m asset.
4. Discount curves and observable swap rates are Level 2. Internal credit spreads are Level 3 inputs. If the Level 3 inputs are significant, the whole measurement is Level 3.
5. This is a measurement result. Presenting a net asset in the statement of financial position still depends on the IAS 32 offsetting rules.

1. With non-performance risk.
   ₦2,000,000 ÷ 1.07² = ₦1,746,874.
2. Ignoring it (5%): ₦2,000,000 ÷ 1.05² = ₦1,814,059.
   This would overstate the fair value.

1. Property. No observable prices, so use the income approach. Market participants would require more return in a declining market, so use 14%.
   Present value of rent = ₦60m × 3.4331 = ₦206.0m.
   Present value of terminal value = ₦800m × 0.5194 = ₦415.5m.
   Fair value ≈ ₦621.5m.
   At 12% it would be about ₦670.2m, so the value is very sensitive to the rate.
2. The discount rate and terminal value are unobservable, so the measurement is Level 3. Disclose the technique, the inputs and quantitative information about them, the valuation process, a sensitivity analysis and a reconciliation of opening to closing balances.
3. Equipment. The forced-liquidation price is not an orderly transaction and is rejected. The ₦90m offer is the better evidence, so fair value is about ₦90m.
4. Level. There is no quoted price in an active market for an identical asset. A single non-binding offer for a specialised asset, adjusted by judgement, is best classified as Level 3. Level 2 is arguable only if the offer is treated as observable market evidence. State and justify one.
5. If the equipment is held for sale, IFRS 5 measures it at the lower of carrying amount and fair value less costs to sell.

Note: the Pathfinder solution is slightly different from ours on the equipment. It concludes Level 2, then later Level 3, and says that Level 3 inputs are observable. Level 3 inputs are unobservable. In the exam, give one level with reasons and do not mix them.

How to score full marks

• Start with the unit of account and the standard that requires fair value.
• Identify the market: principal first, then most advantageous. Say why.
• Treat costs correctly: ignore transaction costs, deduct transport costs if location matters.
• For a non-financial asset, run the three highest-and-best-use tests and compare values net of conversion costs.
• Choose the technique and justify it by the data available. Maximise observable inputs.
• Classify the inputs into Levels 1 to 3 and give the level of the whole measurement.
• For liabilities, assume transfer and include non-performance risk.
• Add the disclosure, with extra detail for Level 3.

Common mistakes in the exam

• Deducting transaction costs from fair value.
• Using the best price in another market when a principal market exists.
• Valuing an asset by the entity’s current use when a better use is feasible.
• Ignoring conversion costs and permits when comparing uses.
• Calling an input Level 1 when the item is not identical or the market is not active.
• Leaving out non-performance risk in a liability.
• Applying IFRS 13 to share-based payments, leases or value in use.
• Treating the net-risk exception as a right to offset in the statement of financial position.

Quick revision

• Fair value = exit price in an orderly transaction between market participants at the measurement date.
• Principal market first. Transaction costs ignored. Transport costs deducted if location matters.
• Highest and best use: physically possible, legally permissible, financially feasible.
• Market, cost and income approaches. Maximise observable inputs.
• Level 1 quoted identical, Level 2 other observable, Level 3 unobservable. The lowest significant input decides.
• Liabilities: transfer, include non-performance risk. Demand liabilities not below the amount payable on demand.
• Net-risk portfolios: three conditions, a measurement exception only.
• Disclosure by class, more for Level 3, recurring and non-recurring.
• CAMA 2020: ss. 377(1), 378, 374(1), 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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