Fair Value (IFRS 13)
IASB has adopted a fair value method to measure assets and liabilities in its IFRS accounting standards because the historic cost convention was not consistent with the underlying qualitative characteristic of relevance.
The issue was the there was no definition of what fair value actually was, until IFRS 13 was created.
Fair value – 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.
The price should not be adjusted for transaction costs, but it is adjusted for transport costs.”
IFRS 13 adopts a hierarchical approach to measuring fair value, whilst giving consideration to the principal market, being the largest market in which an asset/liability is traded. It also considers the highest and best use of an asset and if no principal market exists then we consider the most advantageous market.
1 Level 1 inputs
Level 1 inputs are quoted prices in active markets (frequency and volume) for identical assets or liabilities that the entity can access at the measurement date.
A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.
2 Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include:
quoted prices for similar assets or liabilities in active markets
quoted prices for identical or similar assets or liabilities in markets that are not active
inputs other than quoted prices that are observable for the asset or liability, for example interest rates and yield curves observable at commonly quoted intervals
3 Level 3 inputs
Level 3 inputs are unobservable inputs for the asset or liability and covers the scenarios whereby there is little, if any, market activity.
An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available.
When a scenario supplies prices, name the level of the hierarchy each belongs to and say why, then use it: a quoted price for the identical asset is level 1; prices for similar assets or comparable nearby properties are level 2. A general account of IFRS 13 that never reaches a level answers a different question.