How to apply the fair value measurement framework under IFRS 13 and ASC 820

Fair value measurement plays a central role in modern financial reporting, influencing balance sheet presentation, income volatility, and disclosure transparency. The conceptual underpinnings of fair value are defined under IFRS 13 (Fair Value Measurement) and US GAAP ASC 820, both of which provide a converged, principle-based framework. These standards define how fair value should be measured—not when—and apply to both financial and non-financial items across multiple accounting topics.

Fair value is defined as an exit price in an orderly market transaction.

Both IFRS 13 and ASC 820 define 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. This definition emphasizes:

• Market-based measurement, not entity-specific

• Orderly transactions, excluding forced sales or distressed conditions

• Principal or most advantageous market, depending on accessibility and pricing

Fair value is therefore an exit price perspective—what the entity would receive or pay—not an entry price or replacement cost.

The fair value hierarchy categorizes inputs into three levels based on observability.

A key feature of both standards is the fair value hierarchy, which ranks valuation inputs into three levels to promote transparency and consistency:

Level	Input Type	Examples
Level 1	Quoted prices in active markets	Listed equity securities, government bonds
Level 2	Observable inputs (other than Level 1)	Interest rates, yield curves, FX rates
Level 3	Unobservable inputs (entity estimates)	Private equity, illiquid securities, complex derivatives

• Level 1 inputs are the most reliable.

• Level 3 inputs require significant judgment and are subject to enhanced disclosure.

• Reclassification between levels is required when the input observability changes materially.

Fair value is applied to both financial and non-financial items across various standards.

Although IFRS 13 and ASC 820 do not prescribe when fair value must be used, they provide the measurement methodology whenever another standard requires or permits fair value.

Common items measured at fair value:

• Financial instruments (e.g., derivatives, investments, trading securities)

• Investment property (under IFRS)

• Biological assets (IFRS only)

• Asset retirement obligations (initial measurement)

• Business combinations (PPA allocations)

• Impairment testing (e.g., fair value less cost of disposal)

Both frameworks stress the use of observable market data, calibrated valuation models, and highest-and-best-use principles for non-financial assets.

Valuation techniques must maximize observable inputs and reflect market assumptions.

Three valuation approaches are permitted:

1. Market approach: Uses prices and information from market transactions involving identical or comparable assets or liabilities.

2. Income approach: Converts future cash flows to a present value using discounting techniques (e.g., DCF models).

3. Cost approach: Estimates the amount needed to replace the asset, adjusted for obsolescence and depreciation.

Entities must select the most appropriate method based on the item being measured, the quality of available data, and prevailing market conditions.

Approach	Typical Use Cases
Market	Actively traded securities, real estate
Income	Intangible assets, derivatives, long-term contracts
Cost	Specialized equipment, internal-use assets

Models should be periodically calibrated against actual market transactions and inputs should reflect market participants’ assumptions, not management’s internal perspectives.

Specific rules apply to liabilities, non-performance risk, and counterparty credit risk.

When measuring the fair value of liabilities, entities must consider the price that would be paid to transfer the liability, not settle it. This includes the impact of:

• Non-performance risk (the entity’s own credit standing)

• Credit risk of counterparties (in derivative liabilities)

• Restrictions on transferability (only if such restrictions are market-based)

For liabilities without observable markets, valuation may be based on the quoted price of an identical or similar liability held as an asset by another party, or a present value technique.

Disclosure requirements highlight measurement levels, valuation techniques, and sensitivity.

Both IFRS 13 and ASC 820 require extensive disclosures to improve users’ understanding of fair value exposures and estimation uncertainty. Key disclosure elements include:

• Categorization within the fair value hierarchy (Level 1, 2, or 3)

• Valuation techniques and inputs used

• Quantitative sensitivity analysis for Level 3 measurements

• Transfers between levels, including reasons and effective dates

• Non-recurring fair value measurements, such as impairments or revaluations

Disclosure Focus	Required For
Fair value hierarchy levels	All recurring and non-recurring measurements
Valuation techniques	All levels, especially Level 3
Significant unobservable inputs	Level 3 only
Reconciliations of opening balances	Level 3 recurring fair value items

These disclosures are often presented in tabular format, especially for Level 3 rollforwards.

Key differences between IFRS 13 and ASC 820 in fair value measurement.

Topic	IFRS 13	US GAAP (ASC 820)
Definition of fair value	Exit price between market participants	Same
Highest and best use	Required for non-financial assets	Required
Unit of account	Guided by underlying standard	Defined more precisely in ASC 820
Day 1 gains	Generally prohibited for Level 3	Permitted in some cases
Portfolio exceptions	Available for certain instruments	More extensive (e.g., net positions for risk)
Sensitivity disclosures	Mandatory for Level 3 inputs	Required, but presentation can vary

IFRS 13 and ASC 820 provide a largely converged and robust framework for determining fair value. By emphasizing market-based measurements, transparency of inputs, and consistency in techniques, these standards aim to reduce subjectivity while enabling comparability across entities and industries. The alignment in their core principles makes global application more consistent, though minor procedural differences persist in areas like day 1 gains, portfolio-level measurement, and unit of account selection.

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