Chapter Two Fair value measurement and Impairment

Chapter Two
Fair value measurement and Impairment
2.1. Fair value measurement
2.1.1. Definition
Fair value is defined as ‘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’.

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  The definition of fair value in IFRS 13 is a current exit price, not an entry price.
  

The exit price for an asset or liability is conceptually different from its transaction price (an entry price). While exit and entry prices may be identical in many situations, the transaction price is not presumed to represent the fair value of an asset or liability on some situations. Examples of situations where a transaction price may not equal fair value include transactions:

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  between related parties
  
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  entered into under duress or forced circumstances (e.g. where the seller is experiencing severe financial difficulty)
  

2.1.2. Measurement of fair value
When measuring fair value, an entity must determine all of the following:

1. 
   the particular asset or liability that is the subject of the measurement (consistent with its unit of account);
   

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  a stand-alone asset or liability (e.g., a financial instrument or an operating asset); or
  
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  a group of assets, a group of liabilities, or a group of assets and liabilities (e.g. a cash generating unit or a business).
  

2. 
   for a non-financial asset, the valuation premise that is appropriate for the measurement (consistent with its highest and best use);
   
3. 
   the principal¹ (or most advantageous) market for the asset or liability; and
   
4. 
   the valuation technique appropriate for the measurement, considering the availability of data.
   

When measuring fair value, an entity should consider the characteristics of the asset or liability. For example, age and miles flown are attributes to be considered in determining a fair value measure for an aircraft. Examples of such characteristics could include:

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  the condition and location of an asset; and
  

For example: An asset may not be in the location that market participants would require for its sale at an observable market price. In order to determine the fair value of the asset as it currently exists, the market price needs to be adjusted to cost of transporting and the like.

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  restrictions, if any, on the sale or use of an asset or transfer of a liability.
  

A restriction that would transfer with the asset in an assumed sale would generally be deemed a characteristic of the asset and, therefore, would likely be considered by market participants when pricing the asset.