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IFRS 13

Accounting >> Part I – International Financial Reporting Standards >> 2014 Edition >> IFRSs in effect on January 1, 2014 >> IFRS 13 Fair value measurement

INTERNATIONAL FINANCIAL REPORTING STANDARD 13

fair value measurement

CONTENTS Paragraph

OBJECTIVE 1

SCOPE 5

MEASUREMENT 9

Definition of fair value 9

The asset or liability 11

The transaction 15

Market participants 22

The price 24

Application to non-financial assets 27

Application to liabilities and an entity's own equity instruments 34

Application to financial assets and financial liabilities with offsetting

positions in market risks or counterparty credit risk

Fair value at initial recognition 57

Valuation techniques 61

Inputs to valuation techniques 67

Fair value hierarchy 72

DISCLOSURE 91

APPENDICES

A Defined terms

B Application guidance

C Effective date and transition

Objective

1 This IFRS:

(a) defines fair value;

(b) sets out in a single IFRS a framework for measuring fair value; and

2 Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities,

observable market transactions or market information might be available. For other assets and liabilities,

observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same — to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date

under current market conditions (ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

3 When a price for an identical asset or liability is not observable, an entity measures fair value using another

valuation technique that maximises the use of relevant observable inputs and minimises the use of

unobservable inputs. Because fair value is a market-based measurement, it is measured using the

assumptions that market participants would use when pricing the asset or liability, including assumptions

about risk. As a result, an entity's intention to hold an asset or to settle or otherwise fulfil a liability is not

relevant when measuring fair value.

4 The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting

measurement. In addition, this IFRS shall be applied to an entity's own equity instruments measured at fair value.

Scope

5 This IFRS applies when another IFRS requires or permits fair value measurements or disclosures about

fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except as specified in paragraphs 6 and 7.

6 The measurement and disclosure requirements of this IFRS do not apply to the following:

(a) share-based payment transactions within the scope of IFRS 2 Share-based Payment;

(b) leasing transactions within the scope of IAS 17 Leases; and

value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets.

7 The disclosures required by this IFRS are not required for the following:

(a) plan assets measured at fair value in accordance with IAS 19 Employee Benefits;

(b) retirement benefit plan investments measured at fair value in accordance with IAS 26 Accounting and

Reporting by Retirement Benefit Plans; and

8 The fair value measurement framework described in this IFRS applies to both initial and subsequent

measurement if fair value is required or permitted by other IFRSs.

Measurement

Definition of fair value

9 This IFRS defines fair value 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.

10 Paragraph B2 describes the overall fair value measurement approach.

The asset or liability

11 A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an

entity shall take into account the characteristics of the asset or liability if market participants would

take those characteristics into account when pricing the asset or liability at the measurement date.

Such characteristics include, for example, the following:

(a) the condition and location of the asset; and

(b) restrictions, if any, on the sale or use of the asset.

12 The effect on the measurement arising from a particular characteristic will differ depending on how that

characteristic would be taken into account by market participants.

13 The asset or liability measured at fair value might be either of the following:

(a) a stand-alone asset or liability (eg a financial instrument or a non-financial asset); or

(b) a group of assets, a group of liabilities or a group of assets and liabilities (eg a cash-generating unit or a

business).

14 Whether the asset or liability is a stand-alone asset or liability, a group of assets, a group of liabilities or a group

of assets and liabilities for recognition or disclosure purposes depends on its unit of account. The unit of

account for the asset or liability shall be determined in accordance with the IFRS that requires or permits the fair value measurement, except as provided in this IFRS.

The transaction

15 A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction

between market participants to sell the asset or transfer the liability at the measurement date under current market conditions.

16 A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes

place either:

(a) in the principal market for the asset or liability; or

(b) in the absence of a principal market, in the most advantageous market for the asset or liability.

17 An entity need not undertake an exhaustive search of all possible markets to identify the principal market or, in

the absence of a principal market, the most advantageous market, but it shall take into account all information that is reasonably available. In the absence of evidence to the contrary, the market in which the entity would normally enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal

market or, in the absence of a principal market, the most advantageous market.

18 If there is a principal market for the asset or liability, the fair value measurement shall represent the price in that

market (whether that price is directly observable or estimated using another valuation technique), even if the price in a different market is potentially more advantageous at the measurement date.

19 The entity must have access to the principal (or most advantageous) market at the measurement date. Because

different entities (and businesses within those entities) with different activities may have access to different markets, the principal (or most advantageous) market for the same asset or liability might be different for

different entities (and businesses within those entities). Therefore, the principal (or most advantageous)

market (and thus, market participants) shall be considered from the perspective of the entity, thereby allowing for differences between and among entities with different activities.

20 Although an entity must be able to access the market, the entity does not need to be able to sell the particular

asset or transfer the particular liability on the measurement date to be able to measure fair value on the basis of the price in that market.

21 Even when there is no observable market to provide pricing information about the sale of an asset or the

transfer of a liability at the measurement date, a fair value measurement shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owes the liability. That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability.

Market participants

22 An entity shall measure the fair value of an asset or a liability using the assumptions that market

participants would use when pricing the asset or liability, assuming that market participants act in

their economic best interest.

23 In developing those assumptions, an entity need not identify specific market participants. Rather, the entity shall

identify characteristics that distinguish market participants generally, considering factors specific to all the

following:

(a) the asset or liability;

(b) the principal (or most advantageous) market for the asset or liability; and

The price

24 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction in the principal (or most advantageous) market at the measurement date under current

market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.

25 The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability

shall not be adjusted for transaction costs. Transaction costs shall be accounted for in accordance with other IFRSs. Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a

transaction and will differ depending on how an entity enters into a transaction for the asset or liability.

26 Transaction costs do not include transport costs. If location is a characteristic of the asset (as might be the case,

for example, for a commodity), the price in the principal (or most advantageous) market shall be adjusted for the costs, if any, that would be incurred to transport the asset from its current location to that market.

Application to non-financial assets

Highest and best use for non-financial assets

27 A fair value measurement of a non-financial asset takes into account a market participant's ability to

generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

28 The highest and best use of a non-financial asset takes into account the use of the asset that is physically

possible, legally permissible and financially feasible, as follows:

(a) A use that is physically possible takes into account the physical characteristics of the asset that market

participants would take into account when pricing the asset (eg the location or size of a property).

(b) A use that is legally permissible takes into account any legal restrictions on the use of the asset that

market participants would take into account when pricing the asset (eg the zoning regulations

applicable to a property).

and legally permissible generates adequate income or cash flows (taking into account the costs of

converting the asset to that use) to produce an investment return that market participants would

require from an investment in that asset put to that use.

29 Highest and best use is determined from the perspective of market participants, even if the entity intends a

different use. However, an entity's current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the

value of the asset.

30 To protect its competitive position, or for other reasons, an entity may intend not to use an acquired non-

financial asset actively or it may intend not to use the asset according to its highest and best use. For

example, that might be the case for an acquired intangible asset that the entity plans to use defensively by preventing others from using it. Nevertheless, the entity shall measure the fair value of a non-financial asset assuming its highest and best use by market participants.

Valuation premise for non-financial assets

31 The highest and best use of a non-financial asset establishes the valuation premise used to measure the fair

value of the asset, as follows:

(a) The highest and best use of a non-financial asset might provide maximum value to market participants

through its use in combination with other assets as a group (as installed or otherwise configured for

use) or in combination with other assets and liabilities (eg a business).

(i) If the highest and best use of the asset is to use the asset in combination with other assets or

with other assets and liabilities, the fair value of the asset is the price that would be received in

a current transaction to sell the asset assuming that the asset would be used with other assets

or with other assets and liabilities and that those assets and liabilities (ie its complementary

assets and the associated liabilities) would be available to market participants.

(ii) Liabilities associated with the asset and with the complementary assets include liabilities that fund working capital, but do not include liabilities used to fund assets other than those within

the group of assets.

(iii) Assumptions about the highest and best use of a non-financial asset shall be consistent for all the assets (for which highest and best use is relevant) of the group of assets or the group of

assets and liabilities within which the asset would be used.

(b) The highest and best use of a non-financial asset might provide maximum value to market participants

on a stand-alone basis. If the highest and best use of the asset is to use it on a stand-alone basis, the

fair value of the asset is the price that would be received in a current transaction to sell the asset to

market participants that would use the asset on a stand-alone basis.

32 The fair value measurement of a non-financial asset assumes that the asset is sold consistently with the unit of

account specified in other IFRSs (which may be an individual asset). That is the case even when that fair

value measurement assumes that the highest and best use of the asset is to use it in combination with other assets or with other assets and liabilities because a fair value measurement assumes that the market

participant already holds the complementary assets and the associated liabilities.

33 Paragraph B3 describes the application of the valuation premise concept for non-financial assets.

Application to liabilities and an entity's own equity instruments

General principles

34 A fair value measurement assumes that a financial or non-financial liability or an entity's own equity

instrument (eg equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity's own equity

instrument assumes the following:

(a) A liability would remain outstanding and the market participant transferee would be required to

fulfil the obligation. The liability would not be settled with the counterparty or otherwise

extinguished on the measurement date.

(b) An entity's own equity instrument would remain outstanding and the market participant

transferee would take on the rights and responsibilities associated with the instrument. The

instrument would not be cancelled or otherwise extinguished on the measurement date.

35 Even when there is no observable market to provide pricing information about the transfer of a liability or an

entity's own equity instrument (eg because contractual or other legal restrictions prevent the transfer of such items), there might be an observable market for such items if they are held by other parties as assets (eg a corporate bond or a call option on an entity's shares).

36 In all cases, an entity shall maximise the use of relevant observable inputs and minimise the use of

unobservable inputs to meet the objective of a fair value measurement, which is to estimate the price at which an orderly transaction to transfer the liability or equity instrument would take place between market

participants at the measurement date under current market conditions.

Liabilities and equity instruments held by other parties as assets

37 When a quoted price for the transfer of an identical or a similar liability or entity's own equity instrument

is not available and the identical item is held by another party as an asset, an entity shall measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.

38 In such cases, an entity shall measure the fair value of the liability or equity instrument as follows:

(a) using the quoted price in an active market for the identical item held by another party as an asset, if that

price is available.

(b) if that price is not available, using other observable inputs, such as the quoted price in a market that is

not active for the identical item held by another party as an asset.

(i) an income approach (eg a present value technique that takes into account the future cash flows

that a market participant would expect to receive from holding the liability or equity instrument

as an asset; see paragraphs B10 and B11).

(ii) a market approach (eg using quoted prices for similar liabilities or equity instruments held by other parties as assets; see paragraphs B5–B7).

39 An entity shall adjust the quoted price of a liability or an entity's own equity instrument held by another party as

an asset only if there are factors specific to the asset that are not applicable to the fair value measurement of the liability or equity instrument. An entity shall ensure that the price of the asset does not reflect the effect of

a restriction preventing the sale of that asset. Some factors that may indicate that the quoted price of the asset

should be adjusted include the following:

(a) The quoted price for the asset relates to a similar (but not identical) liability or equity instrument held by

another party as an asset. For example, the liability or equity instrument may have a particular

characteristic (eg the credit quality of the issuer) that is different from that reflected in the fair value of

the similar liability or equity instrument held as an asset.

(b) The unit of account for the asset is not the same as for the liability or equity instrument. For example, for

liabilities, in some cases the price for an asset reflects a combined price for a package comprising

both the amounts due from the issuer and a third-party credit enhancement. If the unit of account for

the liability is not for the combined package, the objective is to measure the fair value of the issuer's

liability, not the fair value of the combined package. Thus, in such cases, the entity would adjust the

observed price for the asset to exclude the effect of the third-party credit enhancement.

Liabilities and equity instruments not held by other parties as assets

40 When a quoted price for the transfer of an identical or a similar liability or entity's own equity instrument

is not available and the identical item is not held by another party as an asset, an entity shall measure the fair value of the liability or equity instrument using a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity.

41 For example, when applying a present value technique an entity might take into account either of the following:

(a) the future cash outflows that a market participant would expect to incur in fulfilling the obligation,

including the compensation that a market participant would require for taking on the obligation (see

paragraphs B31–B33).

(b) the amount that a market participant would receive to enter into or issue an identical liability or equity

instrument, using the assumptions that market participants would use when pricing the identical item

(eg having the same credit characteristics) in the principal (or most advantageous) market for issuing

a liability or an equity instrument with the same contractual terms.

Non-performance risk

42 The fair value of a liability reflects the effect of non-performance risk. Non-performance risk includes,

but may not be limited to, an entity's own credit risk (as defined in IFRS 7 Financial Instruments:

Disclosures). Non-performance risk is assumed to be the same before and after the transfer of the

liability.

43 When measuring the fair value of a liability, an entity shall take into account the effect of its credit risk (credit

standing) and any other factors that might influence the likelihood that the obligation will or will not be fulfilled.

That effect may differ depending on the liability, for example:

(a) whether the liability is an obligation to deliver cash (a financial liability) or an obligation to deliver goods

or services (a non-financial liability).

(b) the terms of credit enhancements related to the liability, if any.

44 The fair value of a liability reflects the effect of non-performance risk on the basis of its unit of account. The

issuer of a liability issued with an inseparable third-party credit enhancement that is accounted for separately from the liability shall not include the effect of the credit enhancement (eg a third-party guarantee of debt) in the fair value measurement of the liability. If the credit enhancement is accounted for separately from the

liability, the issuer would take into account its own credit standing and not that of the third party guarantor

when measuring the fair value of the liability.

Restriction preventing the transfer of a liability or an entity's own equity instrument

45 When measuring the fair value of a liability or an entity's own equity instrument, an entity shall not include a

separate input or an adjustment to other inputs relating to the existence of a restriction that prevents the

transfer of the item. The effect of a restriction that prevents the transfer of a liability or an entity's own equity instrument is either implicitly or explicitly included in the other inputs to the fair value measurement.

46 For example, at the transaction date, both the creditor and the obligor accepted the transaction price for the

liability with full knowledge that the obligation includes a restriction that prevents its transfer. As a result of the

restriction being included in the transaction price, a separate input or an adjustment to an existing input is not required at the transaction date to reflect the effect of the restriction on transfer. Similarly, a separate input or an adjustment to an existing input is not required at subsequent measurement dates to reflect the effect of the restriction on transfer.

Financial liability with a demand feature

47 The fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount

payable on demand, discounted from the first date that the amount could be required to be paid.

Application to financial assets and financial liabilities with offsetting positions in market

risks or counterparty credit risk

48 An entity that holds a group of financial assets and financial liabilities is exposed to market risks (as defined in

IFRS 7) and to the credit risk (as defined in IFRS 7) of each of the counterparties. If the entity manages that group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, the entity is permitted to apply an exception to this IFRS for measuring fair value. That exception permits an entity to measure the fair value of a group of financial assets and financial liabilities on the basis of the

price that would be received to sell a net long position (ie an asset) for a particular risk exposure or paid to

transfer a net short position (ie a liability) for a particular risk exposure in an orderly transaction between

market participants at the measurement date under current market conditions. Accordingly, an entity shall

measure the fair value of the group of financial assets and financial liabilities consistently with how market

participants would price the net risk exposure at the measurement date.

49 An entity is permitted to use the exception in paragraph 48 only if the entity does all the following:

(a) manages the group of financial assets and financial liabilities on the basis of the entity's net exposure to

a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the

entity's documented risk management or investment strategy;

(b) provides information on that basis about the group of financial assets and financial liabilities to the

entity's key management personnel, as defined in IAS 24 Related Party Disclosures; and

statement of financial position at the end of each reporting period.

50 The exception in paragraph 48 does not pertain to financial statement presentation. In some cases the basis for

the presentation of financial instruments in the statement of financial position differs from the basis for the

measurement of financial instruments, for example, if an IFRS does not require or permit financial instruments to be presented on a net basis. In such cases an entity may need to allocate the portfolio-level adjustments (see paragraphs 53–56) to the individual assets or liabilities that make up the group of financial assets and financial liabilities managed on the basis of the entity's net risk exposure. An entity shall perform such

allocations on a reasonable and consistent basis using a methodology appropriate in the circumstances.

51 An entity shall make an accounting policy decision in accordance with IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors to use the exception in paragraph 48. An entity that uses the exception shall apply that accounting policy, including its policy for allocating bid-ask adjustments (see paragraphs 53–55) and credit adjustments (see paragraph 56), if applicable, consistently from period to period for a particular

portfolio.

52 The exception in paragraph 48 applies only to financial assets and financial liabilities within the scope of IAS 39

Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments.

Exposure to market risks

53 When using the exception in paragraph 48 to measure the fair value of a group of financial assets and financial

liabilities managed on the basis of the entity's net exposure to a particular market risk (or risks), the entity shall

apply the price within the bid-ask spread that is most representative of fair value in the circumstances to the entity's net exposure to those market risks (see paragraphs 70 and 71).

54 When using the exception in paragraph 48, an entity shall ensure that the market risk (or risks) to which the

entity is exposed within that group of financial assets and financial liabilities is substantially the same. For

example, an entity would not combine the interest rate risk associated with a financial asset with the

commodity price risk associated with a financial liability because doing so would not mitigate the entity's

exposure to interest rate risk or commodity price risk. When using the exception in paragraph 48, any basis risk resulting from the market risk parameters not being identical shall be taken into account in the fair value measurement of the financial assets and financial liabilities within the group.

55 Similarly, the duration of the entity's exposure to a particular market risk (or risks) arising from the financial

assets and financial liabilities shall be substantially the same. For example, an entity that uses a 12-month futures contract against the cash flows associated with 12 months' worth of interest rate risk exposure on a five-year financial instrument within a group made up of only those financial assets and financial liabilities

measures the fair value of the exposure to 12-month interest rate risk on a net basis and the remaining

interest rate risk exposure (ie years 2–5) on a gross basis.

Exposure to the credit risk of a particular counterparty

56 When using the exception in paragraph 48 to measure the fair value of a group of financial assets and financial

liabilities entered into with a particular counterparty, the entity shall include the effect of the entity's net

exposure to the credit risk of that counterparty or the counterparty's net exposure to the credit risk of the entity in the fair value measurement when market participants would take into account any existing arrangements that mitigate credit risk exposure in the event of default (eg a master netting agreement with the counterparty or an agreement that requires the exchange of collateral on the basis of each party's net exposure to the

credit risk of the other party). The fair value measurement shall reflect market participants' expectations about the likelihood that such an arrangement would be legally enforceable in the event of default.

Fair value at initial recognition

57 When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the

transaction price is the price paid to acquire the asset or received to assume the liability (an entry price). In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price). Entities do not necessarily sell assets at the prices paid to acquire them.

Similarly, entities do not necessarily transfer liabilities at the prices received to assume them.

58 In many cases the transaction price will equal the fair value (eg that might be the case when on the transaction

date the transaction to buy an asset takes place in the market in which the asset would be sold).

59 When determining whether fair value at initial recognition equals the transaction price, an entity shall take into

account factors specific to the transaction and to the asset or liability. Paragraph B4 describes situations in which the transaction price might not represent the fair value of an asset or a liability at initial recognition.

60 If another IFRS requires or permits an entity to measure an asset or a liability initially at fair value and the

transaction price differs from fair value, the entity shall recognise the resulting gain or loss in profit or loss

unless that IFRS specifies otherwise.

Valuation techniques

61 An entity shall use valuation techniques that are appropriate in the circumstances and for which

sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

62 The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the

asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Three widely used valuation techniques are the market approach, the cost

approach and the income approach. The main aspects of those approaches are summarised in paragraphs

B5–B11. An entity shall use valuation techniques consistent with one or more of those approaches to

measure fair value.

63 In some cases a single valuation technique will be appropriate (eg when valuing an asset or a liability using

quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation

techniques will be appropriate (eg that might be the case when valuing a cash-generating unit). If multiple

valuation techniques are used to measure fair value, the results (ie respective indications of fair value) shall be evaluated considering the reasonableness of the range of values indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

64 If the transaction price is fair value at initial recognition and a valuation technique that uses unobservable inputs

will be used to measure fair value in subsequent periods, the valuation technique shall be calibrated so that at initial recognition the result of the valuation technique equals the transaction price. Calibration ensures that the valuation technique reflects current market conditions, and it helps an entity to determine whether an

adjustment to the valuation technique is necessary (eg there might be a characteristic of the asset or liability that is not captured by the valuation technique). After initial recognition, when measuring fair value using a valuation technique or techniques that use unobservable inputs, an entity shall ensure that those valuation techniques reflect observable market data (eg the price for a similar asset or liability) at the measurement

date.

65 Valuation techniques used to measure fair value shall be applied consistently. However, a change in a valuation

technique or its application (eg a change in its weighting when multiple valuation techniques are used or a change in an adjustment applied to a valuation technique) is appropriate if the change results in a

measurement that is equally or more representative of fair value in the circumstances. That might be the case if, for example, any of the following events take place:

(a) new markets develop;

(b) new information becomes available;

(d) valuation techniques improve; or

(e) market conditions change.

66 Revisions resulting from a change in the valuation technique or its application shall be accounted for as a

change in accounting estimate in accordance with IAS 8. However, the disclosures in IAS 8 for a change in accounting estimate are not required for revisions resulting from a change in a valuation technique or its

application.

Inputs to valuation techniques

General principles

67 Valuation techniques used to measure fair value shall maximise the use of relevant observable inputs

and minimise the use of unobservable inputs.

68 Examples of markets in which inputs might be observable for some assets and liabilities (eg financial

instruments) include exchange markets, dealer markets, brokered markets and principal-to-principal markets (see paragraph B34).

69 An entity shall select inputs that are consistent with the characteristics of the asset or liability that market

participants would take into account in a transaction for the asset or liability (see paragraphs 11 and 12). In some cases those characteristics result in the application of an adjustment, such as a premium or discount (eg a control premium or non-controlling interest discount). However, a fair value measurement shall not

incorporate a premium or discount that is inconsistent with the unit of account in the IFRS that requires or

permits the fair value measurement (see paragraphs 13 and 14). Premiums or discounts that reflect size as a characteristic of the entity's holding (specifically, a blockage factor that adjusts the quoted price of an asset or

a liability because the market's normal daily trading volume is not sufficient to absor

b the quantity held by the

entity, as described in paragraph 80) rather than as a characteristic of the asset or liability (eg a control

premium when measuring the fair value of a controlling interest) are not permitted in a fair value

measurement. In all cases, if there is a quoted price in an active market (ie a Level 1 input) for an asset or a liability, an entity shall use that price without adjustment when measuring fair value, except as specified in

paragraph 79.

Inputs based on bid and ask prices

70 If an asset or a liability measured at fair value has a bid price and an ask price (eg an input from a dealer

market), the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value regardless of where the input is categorised within the fair value hierarchy (ie Level 1, 2 or 3; see paragraphs 72–90). The use of bid prices for asset positions and ask prices for liability

positions is permitted, but is not required.

71 This IFRS does not preclude the use of mid-market pricing or other pricing conventions that are used by market

participants as a practical expedient for fair value measurements within a bid-ask spread.

Fair value hierarchy

72 To increase consistency and comparability in fair value measurements and related disclosures, this IFRS

establishes a fair value hierarchy that categorises into three levels (see paragraphs 76–90) the inputs to

valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

73 In some cases, the inputs used to measure the fair value of an asset or a liability might be categorised within

different levels of the fair value hierarchy. In those cases, the fair value measurement is categorised in its

entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire

measurement. Assessing the significance of a particular input to the entire measurement requires judgement, taking into account factors specific to the asset or liability. Adjustments to arrive at measurements based on fair value, such as costs to sell when measuring fair value less costs to sell, shall not be taken into account when determining the level of the fair value hierarchy within which a fair value measurement is categorised. 74 The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation

techniques (see paragraph 61). However, the fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value. For example, a fair value measurement developed using a present value technique might be categorised within Level 2 or Level 3, depending on the inputs that are significant to the entire measurement and the level of the fair value hierarchy within which those inputs are categorised.

75 If an observable input requires an adjustment using an unobservable input and that adjustment results in a

significantly higher or lower fair value measurement, the resulting measurement would be categorised within Level 3 of the fair value hierarchy. For example, if a market participant would take into account the effect of a restriction on the sale of an asset when estimating the price for the asset, an entity would adjust the quoted price to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an

unobservable input that is significant to the entire measurement, the measurement would be categorised

within Level 3 of the fair value hierarchy.

Level 1 inputs

76 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity

can access at the measurement date.

77 A quoted price in an active market provides the most reliable evidence of fair value and shall be used without

adjustment to measure fair value whenever available, except as specified in paragraph 79.

78 A Level 1 input will be available for many financial assets and financial liabilities, some of which might be

exchanged in multiple active markets (eg on different exchanges). Therefore, the emphasis within Level 1 is on determining both of the following:

(a) the principal market for the asset or liability or, in the absence of a principal market, the most

advantageous market for the asset or liability; and

(b) whether the entity can enter into a transaction for the asset or liability at the price in that market at the

measurement date.

79 An entity shall not make an adjustment to a Level 1 input except in the following circumstances:

(a) when an entity holds a large number of similar (but not identical) assets or liabilities (eg debt securities)

that are measured at fair value and a quoted price in an active market is available but not readily

accessible for each of those assets or liabilities individually (ie given the large number of similar assets

or liabilities held by the entity, it would be difficult to obtain pricing information for each individual asset

or liability at the measurement date). In that case, as a practical expedient, an entity may measure fair

value using an alternative pricing method that does not rely exclusively on quoted prices (eg matrix

pricing). However, the use of an alternative pricing method results in a fair value measurement

categorised within a lower level of the fair value hierarchy.

(b) when a quoted price in an active market does not represent fair value at the measurement date. That

might be the case if, for example, significant events (such as transactions in a principal-to-principal

market, trades in a brokered market or announcements) take place after the close of a market but

before the measurement date. An entity shall establish and consistently apply a policy for identifying

those events that might affect fair value measurements. However, if the quoted price is adjusted for

new information, the adjustment results in a fair value measurement categorised within a lower level of

the fair value hierarchy.

for the identical item traded as an asset in an active market and that price needs to be adjusted for

factors specific to the item or the asset (see paragraph 39). If no adjustment to the quoted price of the

asset is required, the result is a fair value measurement categorised within Level 1 of the fair value

hierarchy. However, any adjustment to the quoted price of the asset results in a fair value

measurement categorised within a lower level of the fair value hierarchy.

80 If an entity holds a position in a single asset or liability (including a position comprising a large number of

identical assets or liabilities, such as a holding of financial instruments) and the asset or liability is traded in an active market, the fair value of the asset or liability shall be measured within Level 1 as the product of the

quoted price for the individual asset or liability and the quantity held by the entity. That is the case even if a market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price.

Level 2 inputs

81 Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or

liability, either directly or indirectly.

82 If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the

full term of the asset or liability. Level 2 inputs include the following:

(a) quoted prices for similar assets or liabilities in active markets.

(b) quoted prices for identical or similar assets or liabilities in markets that are not active.

(i) interest rates and yield curves observable at commonly quoted intervals;

(ii) implied volatilities; and

(iii) credit spreads.

(d) market-corroborated inputs.

83 Adjustments to Level 2 inputs will vary depending on factors specific to the asset or liability. Those factors

include the following:

(a) the condition or location of the asset;

(b) the extent to which inputs relate to items that are comparable to the asset or liability (including those

factors described in paragraph 39); and

84 An adjustment to a Level 2 input that is significant to the entire measurement might result in a fair value

measurement categorised within Level 3 of the fair value hierarchy if the adjustment uses significant

unobservable inputs.

85 Paragraph B35 describes the use of Level 2 inputs for particular assets and liabilities.

Level 3 inputs

86 Level 3 inputs are unobservable inputs for the asset or liability.

87 Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not

available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability.

Therefore, unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.

88 Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value

(such as a pricing model) and the risk inherent in the inputs to the valuation technique. A measurement that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one when pricing the asset or liability. For example, it might be necessary to include a risk

adjustment when there is significant measurement uncertainty (eg when there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities, and the entity has determined that the transaction price or quoted price does not represent fair value, as described in paragraphs B37–B47).

89 An entity shall develop unobservable inputs using the best information available in the circumstances, which

might include the entity's own data. In developing unobservable inputs, an entity may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the entity that is not available to other market participants (eg an entity-specific synergy). An entity need not undertake exhaustive efforts to obtain information about

market participant assumptions. However, an entity shall take into account all information about market

participant assumptions that is reasonably available. Unobservable inputs developed in the manner described above are considered market participant assumptions and meet the objective of a fair value measurement.

90 Paragraph B36 describes the use of Level 3 inputs for particular assets and liabilities.

Disclosure

91 An entity shall disclose information that helps users of its financial statements assess both of the

following:

(a) for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in

the statement of financial position after initial recognition, the valuation techniques and inputs

used to develop those measurements.

(b) for recurring fair value measurements using significant unobservable inputs (Level 3), the effect

of the measurements on profit or loss or other comprehensive income for the period.

92 To meet the objectives in paragraph 91, an entity shall consider all the following:

(a) the level of detail necessary to satisfy the disclosure requirements;

(b) how much emphasis to place on each of the various requirements;

(d) whether users of financial statements need additional information to evaluate the quantitative

information disclosed.

If the disclosures provided in accordance with this IFRS and other IFRSs are insufficient to meet the objectives in paragraph 91, an entity shall disclose additional information necessary to meet those objectives.

93 To meet the objectives in paragraph 91, an entity shall disclose, at a minimum, the following information for

each class of assets and liabilities (see paragraph 94 for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this IFRS) in the statement of financial position after initial recognition:

(a) for recurring and non-recurring fair value measurements, the fair value measurement at the end of the

reporting period, and for non-recurring fair value measurements, the reasons for the measurement.

Recurring fair value measurements of assets or liabilities are those that other IFRSs require or permit

in the statement of financial position at the end of each reporting period. Non-recurring fair value

measurements of assets or liabilities are those that other IFRSs require or permit in the statement of

financial position in particular circumstances (eg when an entity measures an asset held for sale at fair

value less costs to sell in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued

Operations because the asset's fair value less costs to sell is lower than its carrying amount).

(b) for recurring and non-recurring fair value measurements, the level of the fair value hierarchy within

which the fair value measurements are categorised in their entirety (Level 1, 2 or 3).

recurring basis, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy,

the reasons for those transfers and the entity's policy for determining when transfers between levels

are deemed to have occurred (see paragraph 95). Transfers into each level shall be disclosed and

discussed separately from transfers out of each level.

(d) for recurring and non-recurring fair value measurements categorised within Level 2 and Level 3 of the

fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value

measurement. If there has been a change in valuation technique (eg changing from a market

approach to an income approach or the use of an additional valuation technique), the entity shall

disclose that change and the reason(s) for making it. For fair value measurements categorised within

Level 3 of the fair value hierarchy, an entity shall provide quantitative information about the significant

unobservable inputs used in the fair value measurement. An entity is not required to create

quantitative information to comply with this disclosure requirement if quantitative unobservable inputs

are not developed by the entity when measuring fair value (eg when an entity uses prices from prior

transactions or third-party pricing information without adjustment). However, when providing this

disclosure an entity cannot ignore quantitative unobservable inputs that are significant to the fair value

measurement and are reasonably available to the entity.

(e) for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a

reconciliation from the opening balances to the closing balances, disclosing separately changes during

the period attributable to the following:

(i) total gains or losses for the period recognised in profit or loss, and the line item(s) in profit or loss

in which those gains or losses are recognised.

(ii) total gains or losses for the period recognised in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognised.

(iii) purchases, sales, issues and settlements (each of those types of changes disclosed

separately).

(iv) the amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons for those transfers and the entity's policy for determining when transfers between levels are deemed to

have occurred (see paragraph 95). Transfers into Level 3 shall be disclosed and discussed

separately from transfers out of Level 3.

(f) for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, the amount

of the total gains or losses for the period in (e)(i) included in profit or loss that is attributable to the

change in unrealised gains or losses relating to those assets and liabilities held at the end of the

reporting period, and the line item(s) in profit or loss in which those unrealised gains or losses are

recognised.

(g) for recurring and non-recurring fair value measurements categorised within Level 3 of the fair value

hierarchy, a description of the valuation processes used by the entity (including, for example, how an

entity decides its valuation policies and procedures and analyses changes in fair value measurements

from period to period).

(h) for recurring fair value measurements categorised within Level 3 of the fair value hierarchy:

(i) for all such measurements, a narrative description of the sensitivity of the fair value

measurement to changes in unobservable inputs if a change in those inputs to a different

amount might result in a significantly higher or lower fair value measurement. If there are

interrelationships between those inputs and other unobservable inputs used in the fair value

measurement, an entity shall also provide a description of those interrelationships and of how

they might magnify or mitigate the effect of changes in the unobservable inputs on the fair value

measurement. To comply with that disclosure requirement, the narrative description of the

sensitivity to changes in unobservable inputs shall include, at a minimum, the unobservable

inputs disclosed when complying with (d).

(ii) for financial assets and financial liabilities, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, an

entity shall state that fact and disclose the effect of those changes. The entity shall disclose

how the effect of a change to reflect a reasonably possible alternative assumption was

calculated. For that purpose, significance shall be judged with respect to profit or loss, and total

assets or total liabilities, or, when changes in fair value are recognised in other comprehensive

income, total equity.

(i) for recurring and non-recurring fair value measurements, if the highest and best use of a non-financial

asset differs from its current use, an entity shall disclose that fact and why the non-financial asset is

being used in a manner that differs from its highest and best use.

94 An entity shall determine appropriate classes of assets and liabilities on the basis of the following:

(a) the nature, characteristics and risks of the asset or liability; and

(b) the level of the fair value hierarchy within which the fair value measurement is categorised.

The number of classes may need to be greater for fair value measurements categorised within Level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and subjectivity.

Determining appropriate classes of assets and liabilities for which disclosures about fair value measurements should be provided requires judgement. A class of assets and liabilities will often require greater

disaggregation than the line items presented in the statement of financial position. However, an entity shall

provide information sufficient to permit reconciliation to the line items presented in the statement of financial position. If another IFRS specifies the class for an asset or a liability, an entity may use that class in providing the disclosures required in this IFRS if that class meets the requirements in this paragraph.

95 An entity shall disclose and consistently follow its policy for determining when transfers between levels of the fair

value hierarchy are deemed to have occurred in accordance with paragraph 93(c) and (e)(iv). The policy

about the timing of recognising transfers shall be the same for transfers into the levels as for transfers out of the levels. Examples of policies for determining the timing of transfers include the following:

(a) the date of the event or change in circumstances that caused the transfer.

(b) the beginning of the reporting period.

96 If an entity makes an accounting policy decision to use the exception in paragraph 48, it shall disclose that fact.

97 For each class of assets and liabilities not measured at fair value in the statement of financial position but for

which the fair value is disclosed, an entity shall disclose the information required by paragraph 93(b), (d) and

(i). However, an entity is not required to provide the quantitative disclosures about significant unobservable

inputs used in fair value measurements categorised within Level 3 of the fair value hierarchy required by

paragraph 93(d). For such assets and liabilities, an entity does not need to provide the other disclosures

required by this IFRS.

98 For a liability measured at fair value and issued with an inseparable third-party credit enhancement, an issuer

shall disclose the existence of that credit enhancement and whether it is reflected in the fair value

measurement of the liability.

99 An entity shall present the quantitative disclosures required by this IFRS in a tabular format unless another

format is more appropriate.

Appendix A

Defined terms

This appendix is an integral part of the IFRS.

active market A market in which transactions for the asset or liability take place with sufficient

frequency and volume to provide pricing information on an ongoing basis.

cost approach A valuation technique that reflects the amount that would be required currently to

replace the service capacity of an asset (often referred to as current replacement

cost).

entry price The price paid to acquire an asset or received to assume a liability in an

exchange transaction.

exit price The price that would be received to sell an asset or paid to transfer a liability. expected cash flow The probability-weighted average (ie mean of the distribution) of possible future

cash flows.

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. highest and best use The use of a non-financial asset by market participants that would maximise the

value of the asset or the group of assets and liabilities (eg a business) within

which the asset would be used.

income approach Valuation techniques that convert future amounts (eg cash flows or income and

expenses) to a single current (ie discounted) amount. The fair value

measurement is determined on the basis of the value indicated by current

market expectations about those future amounts.

inputs The assumptions that market participants would use when pricing the asset or

liability, including assumptions about risk, such as the following:

(a) the risk inherent in a particular valuation technique used to measure fair value

(such as a pricing model); and

(b) the risk inherent in the inputs to the valuation technique.

Inputs may be observable or unobservable.

Level 1 inputs Quoted prices (unadjusted) in active markets for identical assets or liabilities that

the entity can access at the measurement date.

Level 2 inputs Inputs other than quoted prices included within Level 1 that are observable for

the asset or liability, either directly or indirectly.

Level 3 inputs Unobservable inputs for the asset or liability.

market approach A valuation technique that uses prices and other relevant information generated

by market transactions involving identical or comparable (ie similar) assets,

liabilities or a group of assets and liabilities, such as a business.

market-corroborated inputs Inputs that are derived principally from or corroborated by observable market

data by correlation or other means.

market participants Buyers and sellers in the principal (or most advantageous) market for the asset

or liability that have all of the following characteristics:

(a) They are independent of each other, ie they are not related parties as defined

in IAS 24, although the price in a related party transaction may be used as an

input to a fair value measurement if the entity has evidence that the

transaction was entered into at market terms.

(b) They are knowledgeable, having a reasonable understanding about the asset

or liability and the transaction using all available information, including

information that might be obtained through due diligence efforts that are usual

and customary.

(d) They are willing to enter into a transaction for the asset or liability, ie they are

motivated but not forced or otherwise compelled to do so.

most advantageous market The market that maximises the amount that would be received to sell the asset

or minimises the amount that would be paid to transfer the liability, after taking

into account transaction costs and transport costs.

non-performance risk The risk that an entity will not fulfil an obligation. Non-performance risk includes,

but may not be limited to, the entity's own credit risk.

observable inputs Inputs that are developed using market data, such as publicly available

information about actual events or transactions, and that reflect the assumptions

that market participants would use when pricing the asset or liability.

orderly transaction A transaction that assumes exposure to the market for a period before the

measurement date to allow for marketing activities that are usual and customary

for transactions involving such assets or liabilities; it is not a forced transaction

(eg a forced liquidation or distress sale).

principal market The market with the greatest volume and level of activity for the asset or liability. risk premium Compensation sought by risk-averse market participants for bearing the

uncertainty inherent in the cash flows of an asset or a liability. Also referred to as

a 'risk adjustment'.

transaction costs The costs to sell an asset or transfer a liability in the principal (or most

advantageous) market for the asset or liability that are directly attributable to the

disposal of the asset or the transfer of the liability and meet both of the following

criteria:

(a) They result directly from and are essential to that transaction.

(b) They would not have been incurred by the entity had the decision to sell the

asset or transfer the liability not been made (similar to costs to sell, as defined

in IFRS 5).

transport costs The costs that would be incurred to transport an asset from its current location to

its principal (or most advantageous) market.

unit of account The level at which an asset or a liability is aggregated or disaggregated in an

IFRS for recognition purposes.

unobservable inputs Inputs for which market data are not available and that are developed using the

best information available about the assumptions that market participants would

use when pricing the asset or liability.

Appendix B

Application guidance

This appendix is an integral part of the IFRS. It describes the application of paragraphs 1–99 and has the same authority as the other parts of the IFRS.

B1 The judgements applied in different valuation situations may be different. This appendix describes the judgements that might apply when an entity measures fair value in different valuation situations.

The fair value measurement approach

B2 The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. A fair value measurement requires an entity to determine all the following:

(a) the particular asset or liability that is the subject of the measurement (consistently with its unit of

account).

(b) for a non-financial asset, the valuation premise that is appropriate for the measurement (consistently

with its highest and best use).

(d) the valuation technique(s) appropriate for the measurement, considering the availability of data with

which to develop inputs that represent the assumptions that market participants would use when

pricing the asset or liability and the level of the fair value hierarchy within which the inputs are

categorised.

Valuation premise for non-financial assets (paragraphs 31–33)

B3 When measuring the fair value of a non-financial asset used in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (eg a business), the effect of the valuation premise depends on the circumstances. For example:

(a) the fair value of the asset might be the same whether the asset is used on a stand-alone basis or in

combination with other assets or with other assets and liabilities. That might be the case if the asset is

a business that market participants would continue to operate. In that case, the transaction would

involve valuing the business in its entirety. The use of the assets as a group in an ongoing business

would generate synergies that would be available to market participants (ie market participant

synergies that, therefore, should affect the fair value of the asset on either a stand-alone basis or in

combination with other assets or with other assets and liabilities).

(b) an asset's use in combination with other assets or with other assets and liabilities might be incorporated

into the fair value measurement through adjustments to the value of the asset used on a stand-alone

basis. That might be the case if the asset is a machine and the fair value measurement is determined

using an observed price for a similar machine (not installed or otherwise configured for use), adjusted

for transport and installation costs so that the fair value measurement reflects the current condition

and location of the machine (installed and configured for use).

into the fair value measurement through the market participant assumptions used to measure the fair

value of the asset. For example, if the asset is work in progress inventory that is unique and market

participants would convert the inventory into finished goods, the fair value of the inventory would

assume that market participants have acquired or would acquire any specialised machinery necessary

to convert the inventory into finished goods.

(d) an asset's use in combination with other assets or with other assets and liabilities might be incorporated

into the valuation technique used to measure the fair value of the asset. That might be the case when

using the multi-period excess earnings method to measure the fair value of an intangible asset

because that valuation technique specifically takes into account the contribution of any complementary

assets and the associated liabilities in the group in which such an intangible asset would be used.

(e) in more limited situations, when an entity uses an asset within a group of assets, the entity might

measure the asset at an amount that approximates its fair value when allocating the fair value of the

asset group to the individual assets of the group. That might be the case if the valuation involves real

property and the fair value of improved property (ie an asset group) is allocated to its component

assets (such as land and improvements).

Fair value at initial recognition (paragraphs 57–60)

B4 When determining whether fair value at initial recognition equals the transaction price, an entity shall take into account factors specific to the transaction and to the asset or liability. For example, the transaction price might not represent the fair value of an asset or a liability at initial recognition if any of the following conditions exist:

(a) The transaction is between related parties, although the price in a related party transaction may be used

as an input into a fair value measurement if the entity has evidence that the transaction was entered

into at market terms.

(b) The transaction takes place under duress or the seller is forced to accept the price in the transaction.

For example, that might be the case if the seller is experiencing financial difficulty.

asset or liability measured at fair value. For example, that might be the case if the asset or liability

measured at fair value is only one of the elements in the transaction (eg in a business combination),

the transaction includes unstated rights and privileges that are measured separately in accordance

with another IFRS, or the transaction price includes transaction costs.

(d) The market in which the transaction takes place is different from the principal market (or most

advantageous market). For example, those markets might be different if the entity is a dealer that

enters into transactions with customers in the retail market, but the principal (or most advantageous)

market for the exit transaction is with other dealers in the dealer market.

Valuation techniques (paragraphs 61–66)

Market approach

B5 The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (ie similar) assets, liabilities or a group of assets and liabilities, such as a business.

B6 For example, valuation techniques consistent with the market approach often use market multiples derived from

a set of comparables. Multiples might be in ranges with a different multiple for each comparable. The selection

of the appropriate multiple within the range requires judgement, considering qualitative and quantitative

factors specific to the measurement.

B7 Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value some types of financial instruments, such as debt securities, without relying exclusively on quoted prices for the specific securities, but rather relying on the securities'

relationship to other benchmark quoted securities.

Cost approach

B8 The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

B9 From the perspective of a market participant seller, the price that would be received for the asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. That is because a market participant buyer would not pay more for an asset than the

amount for which it could replace the service capacity of that asset. Obsolescence encompasses physical

deterioration, functional (technological) obsolescence and economic (external) obsolescence and is broader than depreciation for financial reporting purposes (an allocation of historical cost) or tax purposes (using

specified service lives). In many cases the current replacement cost method is used to measure the fair value of tangible assets that are used in combination with other assets or with other assets and liabilities.

Income approach

B10 The income approach converts future amounts (eg cash flows or income and expenses) to a single current (ie discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those future amounts.

B11 Those valuation techniques include, for example, the following:

(a) present value techniques (see paragraphs B12–B30);

(b) option pricing models, such as the Black-Scholes-Merton formula or a binomial model (ie a lattice

model), that incorporate present value techniques and reflect both the time value and the intrinsic

value of an option; and

assets.

Present value techniques