Many accounting standards require or permit the use of fair values in measuring assets and liabilities. However, there has not always been consistency between these standards regarding the methods of arriving at fair values. IFRS 13 Fair values was issued on may 2011 as an attempt to remedy this problem. The IFRS aim to define fair value, set out the framework for measuring fair values and standardize disclosures about the use of fair values by entities in their financial statements. It does not attempt to give guidance regarding the use of resulting fair value figures, leaving this to the relevant standards dealing with the asset or liability in question.
IFRS 13 defines fair value as 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 (i.e an exit price) The above definition of fair value emphasizes that fair value is market based measurement, not an entity specific measurement. When measuring fair value, an entity uses an assumption that market participant would use when pricing the assets and liability under current market condition, including assumption about risk. As result, an entity’s intention to hold an asset or to settle or otherwise fulfil a liability is not relevant when measuring fair values. The IFRS 13 explains that a fair value measurement require an entity to determine the following.
- the particular asset or liability being measured
- For a non financial asset, the highest and best use of the asset and whether the asset is used in combination with other asset or in stand-alone basis;
- the market in which an orderly transaction would take place for the asset or liability.
- The appropriate valuation techniques to use when measuring fair value. The valuation technique(s) used should maximize the use of relevant observable inputs and minimize unobservable inputs. Those input should be consistent with the inputs a market participant would use when pricing the asset or liability.