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Summary IFRS 13 Fair value
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The fair value standard is notoriously "wordy" and quite technical. My summary aims to unpack all the technical jargon in a way that is understandable for the reader. Please enjoy!
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Fair Value (IFRS 13)The term fair in the phrase “fair value” implies that the entity has taken into account
all reasonable information to price the asset. Fair means that the seller is
compensated adequately for enhancements made to the asset, and the buyer is not
overpaying.
Inference to price can be taken from the characteristics of the physical asset itself or
from other transactions that have occurred in the market previously dealing with a
similar asset. Hence, fair value is a market-based measurement as it based on
identical or similar assets in a hypothetical sale situation.
When the entity measures fair value, it is done under current market conditions.
Factors such as the state of the economy, interest rates, exchange rates, inflation
and supply and demand should be taken into account.
Fair value is an exit price which means it is taken from the perspective of the entity
that is selling the asset. An entry price is taken from the perspective of the buyer
and refers to the transaction price (actual amount paid) for the asset or liability.
Principal market is the market an entity would normally enter into transactions.
However, if the entity can receive a higher price in another market, then fair value
should be based on the more advantageous market.
Para 25 and para 26 mention transaction costs being excluded from the fair price.
Examples of transaction costs include commission to agents or transfer duty when
selling a property. These are not regarded as a characteristic of an asset as some
properties are exempt from transfer duty and is therefore uncommon to all sales
inherent in the industry.
Characteristics when pricing fair value:
Location on the other hand is a factor that should be included in fair value. For
example, delivering/shipping fruit and vegetables to the market is an expense all
farmers in that industry have to bear. Hence, imported fruit is considerably more
expensive than local due to transport costs and import taxes.
Condition is the second factor that IFRS 13 mentions. If the asset is new, it will
command a higher price than if second hand.
The last factor that the standard mentions is any restrictions on the use or sale of
the asset. The example given is zoning regulations. Land may not be zoned for
industrial/commercial purposes. Likewise, for residential purposes. If zoning costs
need to be incurred to convert the land as required by management, then they are
to be taken into account in fair value calculations.
Highest and best use
The IFRS 13 Standard mentions unit of account. This refers to the lowest level of
aggregation that would maximize fair value. It can either be a stand-alone asset, a
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