A fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument is transferred to a market participant at the measurement date. The transfer assumes the following (IFRS 13.34):
- A liability remains outstanding and the market participant transferee is required to fulfil the obligation. In other words, it is not a price that would be paid to a current creditor to extinguish the liability.
- An entity’s own equity instrument remains outstanding and the market participant transferee takes on the rights and responsibilities associated with the instrument. In other words, it is not a price that would be paid to a current equity holder to extinguish the instrument.
If possible, the fair value of a liability or entity’s own equity instrument should be based on a quoted price for the transfer of an identical or a similar item (IFRS 13.37,40). This is however hardly ever possible as liabilities are rarely transferred. If there is no quoted price for transfer available, the requirements summarised in the following sections apply.
Examples 10-13 accompanying IFRS 13 illustrate the requirements relating to measuring liabilities covered below.
Liabilities and equity instruments held by other parties as assets
When a liability or entity’s own equity instrument is held by another party as an asset, the fair value should be measured from the perspective of a market participant that holds the identical item as an asset. In such cases, the fair value should be measured (IFRS 13.37-38):
- Using the quoted price in an active market for the identical item held by another party as an asset, if that price is available.
- 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.
- If the observable prices in a. and b. are not available, using another valuation technique, such as an income approach or market approach.
Quoted prices may need to be adjusted for factors specific to the asset and not applicable to the fair value measurement of the liability or equity instruments (examples are given in paragraph IFRS 13.39).
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Liabilities and equity instruments not held by other parties as assets
If a liability or entity’s own equity instrument is not held by another party as an asset (e.g. decommissioning liability), the fair value should be measured using appropriate valuation techniques from the perspective of a market participant that owes the liability or has issued the claim on equity. For example, the valuation technique can take into account (IFRS 13.40-41):
- 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 more discussion in paragraphs IFRS 13.B31–B33 and Example 11 accompanying IFRS 13).
- 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 (e.g. 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.
The fair value of a liability reflects the effect of non-performance risk which should be assumed to be the same before and after the transfer of the liability (IFRS 13.42). Non-performance risk is the risk that an entity will not fulfil an obligation. Non-performance risk includes mainly the entity’s own credit risk, but can include also other risks, e.g. operational risk. Therefore, an entity takes into account the effect of its credit risk and any other factors that might influence the likelihood that the obligation will or will not be fulfilled (IFRS 13.43).
It is important to treat non-performance risk consistently with the unit of account, e.g. to exclude from the fair value measurement any credit enhancements that are accounted for separately from the liability (IFRS 13.44). Generally speaking, credit enhancements provided by the issuer (e.g. collateral) will be included in the fair value measurement of a related liability, whereas credit enhancements provided by a third party (e.g. a financial guarantee) will be excluded.
See an example in paragraph IFRS 13.IE32 and Example 10 accompanying IFRS 13.
Restrictions preventing the transfer
As discussed in paragraphs IFRS 13.45-46, restrictions preventing the transfer of a liability or an entity’s own equity instrument are not treated as a separate input to fair value measurement.
Financial liability with a demand feature
The fair value of a financial liability with a demand feature (e.g. 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 (IFRS 13.47).
Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk
An entity that holds a group of financial assets and financial liabilities is exposed to market risks (currency risk, interest rate risk, other price risk) and to the credit risk 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 IFRS 13 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 (i.e. an asset) for a particular risk exposure or paid to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions (IFRS 13.48). An entity may use this exception if it meets the criteria set out in paragraph IFRS 13.49. See more discussion in paragraphs IFRS 13.50-56.
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