1. Objective of IFRS 13

IFRS 13 provides:

• A single framework for measuring fair value

• Consistent definitions and disclosures

• Guidance on valuation techniques and inputs

It does not specify when to measure at fair value — only how.

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2. Definition of Fair Value

Fair Value =
Price received to sell an asset or paid to transfer a liability
→ in an orderly transaction
→ between market participants
→ at the measurement date
→ Under current market conditions

This is a market-based measurement, not entity-specific.

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3. Key Fair Value Concepts

3.1 Market Participants

Independent, knowledgeable, able and willing to transact.

3.2 Orderly Transaction

Not forced sale; assumes exposure to the market.

3.3 Highest and Best Use (HBU) – Non-financial assets only

Fair value reflects the most valuable use (physically possible + legally allowed + financially feasible).

📌 Example:
Land purchased for a factory.

• Industrial use value = $2.5M

• Residential development value = $3.2M
  → Fair value = $3.2M (higher) even if entity intends to use it for factory.

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4. Fair Value Hierarchy (Levels 1→3)

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5. Valuation Techniques (IFRS 13)

5.1 Market Approach

Based on market transactions of similar items.

Example:
Valuing a building using prices of comparable properties (“comps”).

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5.2 Income Approach

Present value of future cash flows (DCF).

📌 Example Calculation: DCF Valuation
Asset generates cash flows:
Year 1–5 = $20,000 annually
Discount rate = 10%

Fair value ≈ PV = 20,000 × (3.7908) = $75,816

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5.3 Cost Approach

Current replacement cost.

Example:
Machine replacement cost = $150,000
Obsolescence (20%) = $30,000
→ Fair value = $120,000

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6. Fair Value of Liabilities

Fair value assumes:

• Liability transferred to market participant

• Entity’s own credit risk included in measurement

Example:
Bond liability carrying amount = $100,000
Market interest rate rises → fair value = $96,000
(Credit spread increased)

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7. Fair Value of Financial Instruments

(a) Quoted equity investment (Level 1)

Shares traded at $12 on measurement date
Holding = 5,000 shares
→ FV = $60,000

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(b) Unlisted shares (Level 3)

Use DCF or market multiples.

Example:
Profit = $50,000
Industry multiple = P/E 8×
→ Fair value = $400,000

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8. Fair Value of Investment Property (IAS 40 ref.)

Property value based on rental income.

Example:
Annual rent = $50,000
Capitalisation rate = 5%
Fair value = 50,000 / 0.05 = $1,000,000

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9. Fair Value Disclosures (IFRS 13)

Required disclosures include:

• Fair value for each class of assets and liabilities

• Valuation technique used

• Level in fair value hierarchy

• Significant assumptions (Level 3)

• Sensitivity analysis (Level 3)

📌 Example disclosure (simplified)

The company valued its investment property using the income approach (DCF model). A discount rate of 8% was applied. A 1% increase in the discount rate reduces fair value by $50,000.

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10. Practical Examples Summary

Example 1: Level 1 – Quoted Shares

Stock market: 1,000 shares × $15 = $15,000

Example 2: Level 2 – Bond Valuation

Use observable market yield curve
Bond FV = $980 per $1,000 nominal

Example 3: Level 3 – Private Company Valuation

DCF method → FV = $520,000

Example 4: Highest & Best Use – Land

Industrial use: $500,000
Residential use: $650,000
→ FV = $650,000

Example 5: Liability Fair Value

Loan payable at 4% interest
Market rate now 6%
→ FV decreases (liability value decreases)

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Final Quick Summary (Exam-Ready)

✔ Fair value = market-based exit price
✔ Use market participants assumptions
✔ Non-financial assets use Highest & Best Use
✔ Three valuation methods: Market, Income (DCF), Cost
✔ Fair value hierarchy L1–L3
✔ Level 3 requires sensitivity disclosure
✔ Fair value applies to assets and liabilities

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