IFRS 13- Fair value measurement (Part -1)

  Introduction:

•  IFRS 13 specifies how the fair value is to be measured and not when it is to be measured. Even for the     purpose of measurement it specifies the hierarchy of inputs to be used for fair value measurement, it does not  specify the particular formula or method for calculation.
• It redefines the term fair value in order to make it more concrete and simple to interpret. 
• It provides inputs for fair value measurement where ever other IFRS requires fair value measurement.

            New Definition:

Definition: “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.”

Features of this definition:

• Exit price: As per new definition fair value is defined as exit price, the wordings “price that would be received to sell an asset or paid to transfer a liability” specifies this.
• Current price: Fair value is the current price the term “at measurement date” specifies this.
• Normal transaction: The fair value is the value based on normal transaction and not on forced or distress sale the term “orderly transaction” specifies it.

 New terms: principal market and most advantageous market

• Principal Market: It can be explained as market with highest level of transactions or activities.
• Most advantageous Market:  This means the market in which highest returns can be earned for asset and lowest amount will be paid for liability.

             Fair value measurement:

IFRS 13 specifies the ranking for inputs based on which fair value is to be determined; it do not specifies the measurement technique as it will differ from circumstances. The hierarchies of inputs are to be followed in sequence.

• Level 1 Inputs: Quoted price for identical asset or liability, if this price is available use it for calculating fair value. Example: In case of listed shares.
• Level 2 inputs: If level 1 inputsare not available we need to consider level 2 inputs for fair value measurement. These inputs include observable inputs other than quoted prices. Example: In case of fixed income securities.
•  Level 3 inputs:  These inputs include non-observable inputs. This is the option of last resolve, if no inputs for level 1 or Level 2 are available level 3 inputs are to be used. Example: In case of Non-current assets (Not always).

The flowchart below explains the requirements of IFRS 13.