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International Financial Reporting Standard (IFRS) 13
Fair Value Measurement

Fair value of an asset is the price
--> an entity would receive when an asset is sold
--> in an orderly transaction
--> between market participants.

Fair value of a liability is the price
--> an entity would pay when a liability is transferred
--> in an orderly transaction
--> between market participants.

(1) Fair value is an exit price.
--> The price an entity would receive when an asset is sold.
--> The price an entity would pay when a liability is transferred.

(2) Fair value is a market based measurement.
--> Fair value is not an entity-specific measurement.

(3) Fair value is a price from an orderly transaction.
--> A price from a transaction that is not orderly requires adjustments.

The exchange transaction is assumed to occur
--> in the principal market.

If the principal market does not exit, the transaction is assumed
--> in the most advantageous market.

Principal market is the market that has
--> the greatest volume and level of activity.

Most advantageous market is the market that provides
--> the maximum amount for the sale of an asset and
--> the minimum amount for the transfer of a liability.

In determining the most advantageous market
--> both transaction costs and transport costs are considered.

In determining the fair value
--> transaction costs are not considered but
--> transport costs are considered.
     

Highest and best use is
--> the use
--> that provides the maximum value
--> to market participants.

An entity's current use is
--> assumed to be the highest and best use
--> unless other factors suggest that
--> the value of the asset will be maximised by a different use.
      

(2) If idential instrument is not held by another party as an asset
--> use a valuation technique
--> from the perspective of a market participant
--> who issues such instruments.

Fair value of a liability reflects
--> the effect of non-performance risk.

Non-performance risk includes
--> an entity's own credit risk.

Fair value of a liabiity reflects
--> an entity's own credit risk

Fair value of a liability does not reflect
--> the effect of a third-party credit enhancement (i.e., guaranetee of debt)

Non-performance risk is
--> the risk that an entity will not performe the obligation.

Fair value of a financial liability with a demand feature, such as demand deposit,
--> is not less than the present value of the amount payabld on demand.

Market risk
--> Risk due to the changes in market price
(1) interest rate risk
(2) currency risk
(3) other price risk

Credit risk
--> Risk due to the failure of performing an obligation
     

Fair value of a group of financial assets
--> can be measured
--> based on the price to be received
--> to sell a net long position.

Fair value of a group of financial liabilities
--> can be measured
--> based on the price to be paid
--> to transfer a net short position.

Conditions for fair value measurement based on net exposure
(1) The group of financial assets and financial liabilities are
--> managed based on net exposure.
(2) Information to key management personnel is
--> provided based on net exposure.
(3) Financial assets and financial liabilities in the group are
--> measured at fair value.

If an asset or a liability is initially measured at fair value
--> and the transaction price is different from fair value,
--> the difference is recognised in profit or loss.

Transaction price is
--> the price an entity pays to acquire an asset or
--> the price an entity receives to assume a liability.

Transaction price is an entry price.
Fair value is an exit price.    

Valuation techniques
(1) Market approach
(2) Cost approach
(3) Income approach

Market approach
--> uses information from market transactions.

Cost approach
--> uses the cost required to replace an asset or a liability.
--> Current replacement cost

Income approach
--> uses the present value of future cash flows.

In using valuation techniques,
--> maximise the use of observable inputs and
--> minimise the use of unobservable inputs.
    

Level 1 inputs are
--> quoted prices of iedntial assets or liabilities
--> in an active market.

Level 2 inputs are
--> observable inputs other than level 1 inputs

Level 3 inputs are
--> unobservable inputs.

Examples of level 2 inputs:

(1) Quoted prices of idential assets or liabilites
--> in a market that is not active
(2) Quoted prices of similar assets or liabilities
--> in an active market
(3) Quoted prices of similar assets or liabilities
--> in a market that is not active
(4) Observable inputs other than quoted prices

Active market is a market
--> that provides pricing information on an ongoing basis.

In an active market,
--> the frequency and volume of transations are sufficient
--> to provide pricing information on an ongoing basis.

If the volume and level of activity significantly decrease,
--> further analysis of quoted prices is necessary.

If quoted prices do not represent fair value or
--> transactions are not orderly,
--> quoted prices are adjusted in measuring fair value.