Last reviewed: August 2026. IFRS 13 Fair Value Measurement explains how to measure fair value when another IFRS Accounting Standard requires or permits it. This guide covers the exit-price concept, principal market, highest and best use, valuation techniques, the Level 1–3 hierarchy, disclosures and a worked example.
What does IFRS 13 do?
IFRS 13:
- defines fair value;
- provides one framework for measuring fair value; and
- sets disclosure requirements for fair value measurements.
It applies when another IFRS requires or permits fair value or a measurement based on fair value, subject to stated exceptions. For example, its measurement and disclosure requirements do not apply to share-based payment transactions within IFRS 2 or leasing transactions accounted for under IFRS 16. Some disclosure exceptions also apply.
Fair value definition in plain English
Fair value is an exit price: 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.
| Element | Meaning | Practical question |
|---|---|---|
| Exit price | A selling or transfer price, not an entity-specific entry price. | What price would market participants use today? |
| Orderly transaction | Normal market exposure; not a forced liquidation or distress sale. | Was there enough usual marketing activity? |
| Market participants | Independent, knowledgeable and willing parties acting in their economic interests. | Which assumptions would typical buyers and sellers use? |
| Measurement date | Current market conditions at the reporting or transaction date. | Are prices and assumptions current? |
IFRS 13 measurement process
- Identify the asset or liability. Consider its condition, location and other characteristics that market participants would price. Keep the unit of account specified by the relevant IFRS.
- Identify the principal market. Use the accessible market with the greatest volume and level of activity. If there is no principal market, use the most advantageous accessible market.
- Choose market-participant assumptions. Remove entity-specific intentions that a typical market participant would not share.
- For a non-financial asset, assess highest and best use. The use must be physically possible, legally permissible and financially feasible.
- Select an appropriate valuation technique. Use the market, cost or income approach—or a suitable combination—and maximise observable inputs.
- Classify the measurement in the hierarchy. Classification follows the lowest-level input that is significant to the entire measurement.
- Document judgements and disclosures. Record the market, technique, inputs, hierarchy level, sensitivity and changes where required.
Principal market and most advantageous market
The principal market is the market with the greatest volume and level of activity for the item. It is not automatically the market offering the highest net proceeds. The entity must be able to access the market at the measurement date, although it does not have to intend or be able to sell the specific item on that date.
If no principal market exists, the entity uses the most advantageous market: the accessible market that maximises the amount received for an asset or minimises the amount paid to transfer a liability after considering transaction and transport costs.
Highest and best use of non-financial assets
Highest and best use is assessed from a market-participant perspective, even when management plans a different use. Current use is presumed to be highest and best use unless market or other evidence shows that another use would maximise value.
- Physically possible: consistent with size, location and physical condition.
- Legally permissible: consistent with zoning, contractual and other legal restrictions.
- Financially feasible: expected to produce an adequate market return after conversion costs.
The asset may provide maximum value on a stand-alone basis or in combination with other assets and liabilities. This concept applies to non-financial assets, not financial assets or liabilities.
Fair value hierarchy: Level 1, Level 2 and Level 3
The hierarchy prioritises the inputs used in valuation—not the name of the valuation model.
| Level | Definition | Typical examples | Judgement |
|---|---|---|---|
| Level 1 | Unadjusted quoted prices in active markets for identical items accessible at the measurement date. | Quoted shares traded in an active exchange. | Lowest, subject to confirming the market and identical item. |
| Level 2 | Observable inputs other than Level 1 quoted prices, directly or indirectly. | Quoted prices for similar assets; observable yield curves; market-corroborated inputs. | Moderate; adjustments must remain based on observable information. |
| Level 3 | Unobservable inputs developed using the best available information and market-participant assumptions. | Long-term cash-flow forecasts, unobservable growth rates or risk adjustments for a unique asset. | Highest; robust documentation and sensitivity information may be required. |
If significant inputs fall into different levels, classify the entire measurement at the lowest level that is significant. For example, a valuation using observable market prices plus a significant unobservable adjustment is Level 3.
Three valuation approaches
1. Market approach
Uses prices and other relevant information from market transactions involving identical or comparable assets, liabilities or businesses. Examples include comparable transactions and market multiples.
2. Cost approach
Reflects the amount currently required to replace the service capacity of an asset, often described as current replacement cost. Adjustments may be needed for physical deterioration and functional or economic obsolescence.
3. Income approach
Converts future amounts—such as cash flows or income—into one current discounted amount. The cash flows and discount rate should consistently reflect market-participant assumptions, uncertainty and risk without double counting.
Use techniques that are appropriate in the circumstances and supported by sufficient data. Apply them consistently, but change a technique or weighting when the change produces an equally or more representative measurement. Such a revision is generally treated as a change in accounting estimate.
Worked IFRS 13 example
Scenario: An entity measures a specialised machine at fair value. The principal market contains a recent observable price of $1,200,000 for a similar machine. Observable market data supports a net 3% downward adjustment for differences in condition and capacity. Transport from the machine's present location to the principal market would cost $20,000. A broker would charge $15,000 to complete a sale.
Step 1—Adjusted market indication:
$1,200,000 × 97% = $1,164,000
Step 2—Location adjustment:
$1,164,000 − $20,000 transport cost = $1,144,000 fair value
Step 3—Transaction cost:
Do not deduct the $15,000 broker fee from fair value. Account for transaction costs under the relevant IFRS.
Hierarchy: If the comparable price and adjustments are observable and no significant unobservable input is used, the measurement is normally Level 2. A significant unobservable adjustment would move the entire measurement to Level 3.
Disclosures: what to prepare
The exact disclosures depend on whether the fair value measurement is recurring or non-recurring and whether it is Level 1, 2 or 3. A practical working-paper checklist includes:
- the fair value at the reporting date and the hierarchy level;
- transfers between levels and the reasons for them, where required;
- valuation techniques and inputs for Level 2 and Level 3 measurements;
- quantitative information about significant unobservable Level 3 inputs;
- Level 3 reconciliation and where gains or losses were recognised, where required;
- valuation processes and sensitivity to reasonably possible changes in significant unobservable inputs; and
- for non-financial assets, disclosure when highest and best use differs from current use.
Common IFRS 13 mistakes
- Treating management's intended use or holding period as the valuation basis.
- Selecting the market with the best price without first assessing the principal market.
- Deducting transaction costs from fair value.
- Calling a measurement Level 2 merely because a market approach was used.
- Ignoring a significant unobservable adjustment when classifying the hierarchy level.
- Using stale prices without assessing market activity and whether transactions remain orderly.
- Recognising all fair value changes in profit or loss without checking the underlying IFRS.
- Failing to document market-participant assumptions, model calibration and sensitivity.
Related accounting guides
- Fixed Asset Valuation Bases under IAS 16 and IFRS 13
- IAS 36 Impairment: Recoverable Amount and CGU Example
- Free IFRS Concepts & Policies Quick Reference
- Financial Ratio Calculator
IFRS 13 FAQs
Does IFRS 13 require assets to be measured at fair value?
Usually no. Another IFRS determines whether fair value is required or permitted. IFRS 13 explains how to perform that measurement and what to disclose.
Is fair value the same as value in use?
No. Fair value is market-participant based. Value in use under IAS 36 is an entity-specific present value measure.
Is a discounted cash-flow valuation always Level 3?
No. Classification depends on the significant inputs. A model using observable market inputs can be Level 2; significant unobservable inputs generally make it Level 3.
Are transaction costs deducted from fair value?
No. They are specific to the transaction, not a characteristic of the item. Transport costs may adjust the price when location is a characteristic of the asset.
Can the valuation technique change?
Yes, when a change produces an equally or more representative fair value—for example because markets, information or conditions change. Apply and document the change consistently.
Authoritative sources
- IFRS Foundation: IFRS 13 Fair Value Measurement overview
- IFRS Foundation: IFRS 13 issued Standard (2026 edition)
- IFRS Foundation: IFRS 13 supporting material
Educational note: This guide is a learning resource, not accounting, audit, tax, investment or valuation advice. Apply the current official IFRS requirements and professional judgement to the entity's facts.