1.7 Fair Value Measurement

Fair value measurement is a fundamental concept in accounting and financial reporting. It refers to the process of determining the value of an asset or liability based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.

The key standard governing fair value measurement is IFRS 13, which provides guidance on how to measure fair value and the disclosures required. Here are some important points regarding fair value measurement:

1. Definition of Fair Value: Fair value is defined 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, under current market conditions and in the principal market or, in the absence of a principal market, the most advantageous market.
2. Fair Value Hierarchy: IFRS 13 establishes a fair value hierarchy that categorizes inputs into three levels based on the reliability and observability of the inputs used in the valuation. Level 1 inputs are quoted prices in active markets for identical assets or liabilities, Level 2 inputs are observable inputs other than quoted prices in active markets, and Level 3 inputs are unobservable inputs.
3. Valuation Techniques: Fair value measurement involves the use of various valuation techniques, depending on the nature of the asset or liability. Common valuation techniques include market approaches (using market prices or multiples of similar assets), income approaches (discounted cash flows or earnings multiples), and cost approaches (replacement cost or reproduction cost).
4. Disclosures: IFRS 13 requires extensive disclosures related to fair value measurements. These disclosures include information about the valuation techniques used, significant unobservable inputs (Level 3), sensitivity analysis, and the level in the fair value hierarchy of the inputs used.
5. Use of Fair Value: Fair value measurements are used in various contexts, such as financial instruments, investment properties, biological assets, intangible assets acquired in a business combination, and other financial and non-financial assets and liabilities.