IFRS 13 Fair Value Measurement: Definition, Market, Valuation Techniques and Hierarchy

Several standards say an asset or liability must be measured at fair value: investment property, financial assets, assets acquired in a business combination, and revalued property. Before one standard for fair value existed, each had its own wording, and values for the same thing could differ.

International Financial Reporting Standard (IFRS) 13 Fair Value Measurement gives one definition, one way of choosing the market and the inputs, and one set of disclosures. It does not say when fair value must be used. This topic covers the definition, the market and the market participants, valuation of non-financial assets and liabilities, the valuation techniques, the three-level hierarchy and the disclosures. The next topic covers financial assets.

In the diets reviewed for this page none of the questions tests the standard directly. But fair value runs through questions on investment property, revaluation, acquisitions and financial assets, so the definition and the hierarchy are worth knowing precisely. Read deferred tax recognition, measurement and disclosure first.

The definition and the market

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Each part matters.

• Exit price. It is what the entity would receive for an asset or pay to transfer a liability, not what it paid to acquire it. The entry price and exit price may differ.
• Orderly transaction. The asset is exposed to the market for a period before the measurement date, with normal marketing. A forced sale or a distress sale is not orderly.
• Market participants. Buyers and sellers in the principal (or most advantageous) market who are independent, knowledgeable, able to transact and willing, but not forced. The entity measures fair value using the assumptions they would use in pricing the asset, assuming they act in their economic best interest. It is not what the entity intends to do with the asset.
• Measurement date. Fair value is a point-in-time measure, so conditions are those at the date.

The principal market

Fair value is measured assuming the transaction takes place in the principal market for the asset or liability, the market with the greatest volume and level of activity. If there is no principal market, it is the most advantageous market: the market that maximises the amount that would be received for an asset (or minimises the amount paid for a liability), after taking into account transaction costs and transport costs.

The entity need not search all markets, but should consider all information reasonably available. The market is one the entity can access at the measurement date, and in the absence of contrary evidence, the market in which it normally transacts is assumed to be the principal one.

Transaction costs and transport costs

Transaction costs are the incremental costs to sell, such as brokers’ fees. They are not part of fair value, because they are characteristics of the transaction, not of the asset. They are, however, considered when finding the most advantageous market. Transport costs are different.

If location is a characteristic of the asset, as for a commodity at a remote site, the price in the principal market is adjusted for the costs of transporting the asset to that market.

For example, there is no principal market. In Market X the price is ₦100m, with transaction costs of ₦2m and transport costs of ₦5m. In Market Y the price is ₦104m, with transaction costs of ₦3m and transport costs of ₦9m. Net proceeds are ₦100m − ₦5m − ₦2m = ₦93m in X and ₦104m − ₦9m − ₦3m = ₦92m in Y. Market X is the most advantageous.

Fair value is the price in X adjusted for transport only: ₦100m − ₦5m = ₦95m. Transaction costs of ₦2m are not deducted.

Non-financial assets and liabilities

For a non-financial asset, fair value takes account of a market participant’s ability to generate economic benefits by using it at its highest and best use, or by selling it to another market participant who would. The use must be physically possible, legally permissible and financially feasible.

Highest and best use is assumed to be the current use unless market or other factors suggest a different use would maximise value. For example, land used for a warehouse is worth ₦200m as it stands. Market participants would pay for it as a residential site whose value after redevelopment is ₦260m less ₦40m of redevelopment cost, so its fair value is ₦260m − ₦40m = ₦220m, not ₦200m.

For a liability (and the entity’s own equity instruments), fair value assumes it is transferred to a market participant, not settled or extinguished, and that the non-performance risk, including the entity’s own credit risk, is the same before and after the transfer.

Valuation techniques

The entity uses valuation techniques appropriate in the circumstances and for which enough data is available, maximising the use of relevant observable inputs and minimising unobservable ones. Three approaches are used, and more than one may be applied.

• Market approach: uses prices and other information generated by market transactions involving identical or comparable assets, for example quoted prices, or multiples from comparable companies.
• Cost approach: the amount that would be required currently to replace the service capacity of an asset (current replacement cost), adjusted for obsolescence.
• Income approach: converts future amounts, such as cash flows or earnings, to a single current (discounted) amount, reflecting current market expectations.
  An asset that is expected to produce ₦10,000,000 a year for four years, discounted at 12%, has a value of ₦10,000,000 × 3.0373 = ₦30,373,493.

The fair value hierarchy

Inputs are ranked by how observable they are. A measurement is categorised in its entirety within the lowest level of input that is significant to it.

• Level 1: unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. This is the most reliable evidence. Shares listed on the Nigerian Exchange are an example.
• Level 2: inputs other than Level 1 prices that are observable for the asset or liability, directly or indirectly: quoted prices for similar items, prices in markets that are not active, and inputs such as yield curves, interest rates and implied volatilities. A corporate bond valued from the yields of similar traded bonds is an example.
• Level 3: unobservable inputs, used only when relevant observable inputs are not available. They reflect the entity’s own assumptions about what market participants would use, based on the best information available. An unlisted equity stake valued with discounted cash flows using the entity’s own growth forecasts is an example.

Disclosure

The standard requires information that helps users assess the techniques and inputs used and the effect on profit or loss or other comprehensive income. For assets and liabilities measured at fair value after initial recognition, the entity discloses, for each class:

• the fair value at the end of the period and the level in the hierarchy;
• for Level 2 and Level 3, a description of the valuation technique and the inputs, and any change in technique with the reason;
• for Level 3 recurring measurements, a reconciliation from the opening to the closing balance (gains and losses in profit or loss and in other comprehensive income, purchases, sales, issues, settlements and transfers into or out of Level 3), quantitative information about the significant unobservable inputs, and a narrative description of the sensitivity of the measurement to changes in them; and
• transfers between Level 1 and Level 2 and the entity’s policy for deciding when transfers occur.

The ideas in more depth

What the standard does not cover

The standard applies when another standard requires or permits fair value, but not to share-based payment transactions, leases, or measurements that are similar to but not fair value, such as net realisable value for inventories and value in use for impairment. It does not itself say when fair value must be used.

Why the exit price and market participants

An exit price from the point of view of market participants makes fair value comparable between entities. Two entities holding the same share should report the same fair value even if one plans to keep it for ten years and the other to sell it tomorrow.

Sources and references

• IFRS 13 Fair Value Measurement: definition, the market, non-financial assets and liabilities, valuation techniques, hierarchy, and disclosures.

These points are stated as at 5 November 2026.

Worked examples

1. Net proceeds in X.
   ₦100m − ₦5m − ₦2m = ₦93m.
2. Net proceeds in Y.
   ₦104m − ₦9m − ₦3m = ₦92m.
3. Market. X is the most advantageous.
4. Fair value.
   Price less transport only: ₦100m − ₦5m = ₦95m.
   Transaction costs are excluded.

1. Annuity factor.
   (1 − 1.12⁻⁴) ÷ 0.12 = 3.0373.
2. Fair value.
   ₦10,000,000 × 3.0373 = ₦30,373,493.
   It is a Level 3 measurement if the cash flows are the entity’s own forecasts.

1. (a) Quoted price, identical item, active market: Level 1.
2. (b) Observable inputs for similar items: Level 2.
3. (c) Significant unobservable inputs: Level 3.

How to answer in the exam

• Define. Give the full definition: exit price, orderly transaction, market participants, measurement date.
• Name the market. Principal, or most advantageous after transaction and transport costs.
• Classify the inputs. Go from Level 1 down and place a measurement at the lowest significant input.
• Apply the costs rule. Exclude transaction costs and adjust for transport.

Common mistakes in the exam

• Deducting transaction costs from fair value.
• Describing fair value as the price paid, or as the price the entity wants.
• Forgetting highest and best use for non-financial assets.
• Mixing up Level 2 and Level 3.
• Treating value in use or net realisable value as fair value.

Quick revision

• Fair value: exit price, orderly transaction, market participants, measurement date.
• Principal market, otherwise most advantageous; transaction costs excluded; transport included.
• Non-financial assets: highest and best use. Liabilities: transfer.
• Techniques: market, cost, income. Hierarchy: Level 1 quoted, Level 2 observable, Level 3 unobservable.
• Level 3 needs a reconciliation and sensitivity disclosure.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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