IFRS 13 Fair Value Measurement

IFRS13 Fair Value Measurement refers to the International Financial Reporting Standard framework, which states the principles for measuring and disclosing the fair value of a company's assets and liabilities. It frames a hierarchy for systematically categorizing the valuation inputs as unadjusted quoted price, quoted price, and unobservable inputs.

Here, the fair value denotes the exit price as of the measurement date, acquired or paid on the selling of an asset or transferring of a liability, respectively, when an orderly transaction occurs among the market participants. The fair value measurement ensures greater reliability, transparency, and relevance in financial disclosures in a volatile market scenario.

The IFRS 13 fair value measurement is a set of principles stated by the International Financial Reporting Standard 13 for measuring the fair value of the assets sold or the liabilities transferred among the market participants engaged in an orderly transaction on the measurement date. Now, fair value is the exit price of these assets and liabilities. It was issued in May 2011.

Some of the prominent considerations under the IFRS 13 are:

1. Exit Price: IFRS 13 undertakes a market-based approach where the fair value is the price that market participants would accept or pay rather than considering an entity-based measure.

2. Fair Value Hierarchy: There is a systematic categorization of the inputs used for valuation into three levels:

• Level 1: It contains observable quoted prices;
• Level 2: It has unadjusted quoted price inputs for assets or liabilities recognized directly or indirectly.
• Level 3: It comprises unobservable inputs that would need significant judgment.

Moving forward, companies can have an overview of the IFRS 13 fair value measurement illustrative examples that would help them convert market values to fair values.

The International Accounting Standards Board (IASB) issued the IFRS 13 Fair Value Measurement in May 2011, applicable for annual financial reporting on or after January 1, 2013. It aimed to measure the fair value under International Financial Reporting Standards (IFRS). This value is the exit price of assets and liabilities when the former is sold, and the latter is transferred under an orderly transaction between two or more market participants.

Since then, the IFRS 13 has been amended multiple times, and a summary of these changes is listed below:

1. IAS 19 Employee Benefits (June 2011): The IFRS was slightly modified to consider employee benefits in fair valuation.
2. Annual Improvements to IFRS's 2011–2013 Cycle (December 2013): The changes included a more explicit framework for measuring and disclosing fair value under IFRS 13.
3. IFRS 9 Financial Instruments (July 2014): It was further amended to include measuring financial instruments' fair value.
4. IFRS 16 Leases (January 2016): The changes were made to cover fair value consideration for lease accounting.

Then, in 2017, the IASB performed a Post-Implementation Review (PIR) of IFRS 13. The review team found that IFRS 13 is working as desired; however, it has various implementation challenges. Moreover, the submitted financial reports and disclosures are significantly helpful to users like investors. Also, it has not increased the cost in any way.

The primary purpose of the IFRS 13 fair value measurement is to establish a common framework or structure for determining and disclosure of the fair value of assets and liabilities. Further, it ensures the following:

1. Annual financial reports exhibit consistency;
2. They are comparable across different accounting periods and in between companies;
3. The fair value measurement should be of high quality and reliable;
4. It should be informative, relevant, and meaningful for the stakeholders like investors.

For determining the fair value using IFRS 13 principles, a firm should keep the following aspects into consideration:

• Asset or liability: The condition, sale, or use restrictions, location, and other factors related to an asset or liability—the relevance, use, and joint use of non-financial assets.
• Market: Where an asset or liability is transacted orderly.
• Market Participants: Assuming the risk of transaction about the market participants' pricing of these assets or liabilities.
• Inputs: The category of input chosen out of the three levels of fair value measurement input hierarchy as discussed above.

The IFRS 13 framework of the International Financial Reporting Standards (IFRS) Foundation must adequately disclose fair value measurements in financial statements. Such disclosure requirements apply to all assets and liabilities. 

The primary disclosures include:

1. The inputs to valuation and methods used to determine the fair value measurements of the assets and liabilities on a recurring and non-recurring basis in the financial statements after their initial recognition.
2. The impact of Level 3 - unobservable inputs over the period's fair value measurement and performance.

It aims to disclose the fair value at the closing of the reporting period according to the transfer across the fair value hierarchy levels. Hence, the companies must disclose complete information about valuation methods for Level 3, including the methods used and any alteration in unobservable inputs.

However, certain assets are exempted from such disclosure requirements, including:

1. Plan assets under IAS 19;
2. Assets measured under IAS 36.

Further, the companies should also state the appropriate assets and liabilities class for disclosure, which is a matter of detailed categorization other than the regular financial statements. Such disclosures are usually made in a tabular format; however, a different format can be considered if it is deemed more suitable. Moreover, it doesn't require any comparative information for the periods before the initial application.

The IFRS 13 fair value measurement standardizes the financial reporting of fair value. It is critical for stakeholders like creditors, investors, and other users for the following reasons:

• Greater Reliability: These insights facilitate more reliable financial reporting, with assets and liabilities (sold or transferred, respectively) stated at their fair value.
• More Transparency: The financial reports presented in this way clearly show the company's financial health to stakeholders like creditors, regulators, investors, and others.
• Relevant and Quality Information: Companies can report timely and relevant financial information to the public using these principles.
• Better Comparability: This framework ensures that the financial reports are comparable between different entities and across various accounting periods.