Year of Publication Title of Publication Edition Publisher Chapter Number Chapter Title

Module FAC4865
Year of Publication 2018
Title of Publication Descriptive Accounting |bIFRS Focus Chapter 21 21st ed /|cZ.R. Koppeschaar
Edition 21
Publisher Lexis Nexis
Chapter number 21
Chapter title Descriptive Accounting: IFRS Focus / Z.R. Koppeschaar
Page 580 - 597
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CHAPTER
21
Fair value measurement
(IFRS 13)
Contents
21.1 Summary of IFRS 13 Fair Value Measurement ................................................. 580
21.2 Background ....................................................................................................... 581
21.3 Meaning of fair value ......................................................................................... 581
21.3.1 Definition of fair value ......................................................................... 581
21.3.2 Price ................................................................................................... 582
21.3.3 Asset or liability................................................................................... 582
21.3.4 Orderly transaction ............................................................................. 583
21.3.5 Market participants ............................................................................. 583
21.3.6 Measurement date.............................................................................. 583
21.4 Application of fair value ..................................................................................... 584
21.4.1 Non-financial assets ........................................................................... 584
21.4.2 Financial assets .................................................................................. 585
21.4.3 Liabilities and own equity instruments ................................................ 585
21.5 Fair value at initial recognition ........................................................................... 588
21.6 Fair value techniques ........................................................................................ 589
21.6.1 Market approach................................................................................. 589
21.6.2 Cost approach .................................................................................... 590
21.6.3 Income approach ................................................................................ 591
21.7 Fair value hierarchy ........................................................................................... 593
21.8 Disclosure .......................................................................................................... 596
21.9 Comprehensive example ................................................................................... 597
579
580 Descriptive Accounting – Chapter 21
21.1 Summary of IFRS 13 Fair Value Measurement
Objective
IFRS 13 presents a framework for defining and measuring fair value and disclosing fair value
measurements.
Scope
All IFRSs that permit fair value measurement and disclosure except for:
 share-based payment transactions within scope of IFRS 2;
 leasing transactions within the scope of IFRS 16 Leases;
 measurement of net realisable value of inventories within the scope of IAS 2;
 measurement of value in use within the scope of IAS 36;
 disclosure of plan assets measured at fair value within the scope of IAS 19;
 disclosure of retirement benefit investments within the scope of IAS 26; and
 disclosure when recoverable amount is fair value less costs to sell within the scope of IAS 36.
Definitions Measurement and application
The price that would be  Non-financial assets: Fair value at highest and best use of
received to sell an asset or market participants.
paid to transfer a liability in  Liabilities and own equity: At quoted price and if not
an orderly transaction available:
between market – If held as assets by other parties: Measure from perspective
participants at the of market participant that holds the asset.
measurement date.
– If not held by other parties as assets: Measure from
 Asset or liability: perspective of market participant that owes the liability or
Consider characteristics issued the claim on equity.
of assets and liabilities.
Include non-performance risk and restrictions preventing the
 Transaction: Orderly transfer.
transaction in either the
principal or most  Application to financial assets and liabilities with offsetting
advantageous market options: Permits measurement of a group of assets and
liabilities on a net basis.
 Market participants:
Consider their  Application of fair value at initial recognition: Differences
assumptions. between transaction price and fair value are taken to profit or
loss.
 The price: Exit price,
before transaction costs  Valuation techniques:
that is directly – Market approach: Quoted prices.
observable, or by using – Cost approach: Adjusted replacement cost.
a valuation technique. – Income approach: Present value techniques.
 Fair value hierarchy
– Level 1 – Inputs: Quoted prices for identical items in an
active market.
– Level 2 – Inputs: Observable inputs. Quoted prices for
similar items in an active market, quoted prices for identical
items in an inactive market or observable interest rates and
yields.
– Level 3 – Inputs: Unobservable inputs or significant
adjustments to observable inputs.
Disclosure
Refer to IFRS 13.91 to .99.
Fair value measurement 581
21.2 Background
Fair value as a measurement basis is part and parcel of modern accounting practices. Many
international financial reporting standards currently permit entities to use fair value as a
measurement basis. In the past, there was no proper, consistent guidance on how fair value
should be determined. Some IFRSs contained limited information on how to measure fair
value, whereas others contained extensive information which was not always consistent
across the Standards. Without guidance on how to determine fair value, preparers of
financial statements followed their own methods, which sometimes resulted in unverifiable
gains and losses in the statement of profit or loss and other comprehensive income. Against
this backdrop, there was a growing need for a framework on fair value. IFRS 13 was a joint
project of the IASB and the USA‟s national Accounting Standard setter, the Financial
Accounting Standards Board (FASB). Having uniform measurement and disclosure
requirements for fair values will reduce diversity in application and will improve
comparability.
The purpose of IFRS 13 is to:
 define fair value;
 set out a framework for measuring fair value; and
 describe the related disclosure requirements.
The framework focuses on the the statement of financial position and the fair value
measurement of assets and liabilities as they are the primary elements of accounting
recognition and measurement. The statement of profit and loss and other comprehensive
income is directly influenced as a result of measurements and movements of assets and
liabilities.
This Standard is applicable to all IFRSs that require or permit fair value measurements or
disclosures for assets and liabilities. IFRS 3, IFRS 9, IAS 16, IAS 40, IAS 41 etc. are just a
few examples thereof.
This Standard does not apply to the following measurement and disclosure requirements
(IFRS 13.6):
 share-based payment transactions within scope of IFRS 2;
 leasing transactions within the scope of IFRS 16 Leases;
 measurement of net realisable value of inventories within the scope of IAS 2;
 measurement of value in use within the scope of IAS 36;
 disclosure of plan assets measured at fair value within the scope of IAS 19;
 disclosure of retirement benefit investments within the scope of IAS 26; and
 disclosure when the recoverable amount is the fair value less costs to sell within the
scope of IAS 36.
IFRS 13 is applicable to both initial and subsequent measurement of assets and liabilities
where fair value is required or permitted.
21.3 Meaning of fair value
21.3.1 Definition of fair value

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to
transfer or to extinguish a liability in an orderly transaction between market participants at
the measurement date.
Fair value is a market-based value and not an entity-specific value, which means that it is
the value that market participants would agree upon under market conditions existing on the
measurement date. This is a very important principle of this Standard, The result of this is
that the current use of an entity is seen as an input and that the anticipated use of market
participants is also taken into account. When the fair value is not observable, an entity will
use valuation techniques that maximise observable inputs and minimise unobservable
inputs.
In order to obtain a better understanding of this definition, it is necessary to understand the
different elements of this definition separately, namely price, asset and liability, orderly
transaction, market participants and measurement date. These elements will be discussed
in the following sections.
21.3.2 Price
The fair value is the price that would be received to sell an asset or paid to transfer or
extinguish a liability. This price is referred to the exit price between market participants in
an orderly transaction under market conditions existing at measurement date. The exit price
can therefore be seen as the deemed selling price for an asset and as the deemed
settlement amount for a liability. The exit price may be directly observable or estimated by
using other valuation techniques.
IFRS 13.11 identifies three characteristics that should be considered when fair value of an
item is determined, namely:
• condition;
• location; and
• restrictions.
Transaction cost is not a characteristic of an asset or a liability but rather a charcteristic of a
transaction to realise an asset or settling a liability. Therefore the fair value is not adjusted
for the effect of transaction costs upon a sale of an asset, but rather treated in accordance
with other IFRSs. Transaction costs do not, however, include transport costs. Location is a
characteristic of an asset and therefore the transport cost that would be incurred to transport
the asset from its current location to its principal market should be taken into account in
determining fair value. The condition, age and restrictions of an item will also affect the fair
value.
Example 21.1 Transaction costs and transport costs
John Ltd decided to revalue its imported machinery. The machinery was imported from Germany,
which is the principal and most advantageous market for new and used machinery. In order to sell
the machinery it should therefore be transported to Germany. It was determined that the exit price at
measurement date of such a used machine in Germany would be €150 000 before sales commission
of 5% is taken into account. It is also estimated that John Ltd would incur R35 000 transport costs to
transport the machine to Germany if it were to be sold. The exchange rate at measurement date is
R15,80 to €1.
Fair value
R
Exit price, before commission (150 000 × 15,80) 2 370 000
Transport cost (35 000)
2 335 000
Note that the transaction costs (commission) were ignored in the calculation of fair value as they
do not form part of the characteristics of the asset.
21.3.3 Asset or liability

Fair value may be determined for a specific asset or liability and will consider the characteristics
thereof as if the market participants would have taken these characteristics into account.
Such characteristics may include location of the asset and any restrictions on sale or use.
The asset or liability that is being measured at fair value could be a stand-alone asset or
liability, or within a group of assets or liabilities. The asset or liability will be disclosed and
presented in accordance with the unit of account, which is the level at which the asset is
aggregated or disaggregated as required by an IFRS for recognition and disclosure purposes.
21.3.4 Orderly transaction

The measurement at fair value assumes that an asset or liability is exchanged in an orderly
transaction between market participants. In an orderly transaction, no market participant
should act under force or be under liquidation that will result in a distress sale. An orderly
transaction is also a transaction that is exposed to the market for some period before the
measurement date. A transaction can take place either in the principal market, or in the
most advantageous market for the asset or the liability. The principal market is the market in
which the entity would normally enter into a transaction to sell an asset or transfer a liability.
In the absence of a principal market, an entity can choose the most advantageous market.
An entity does not have to perform extensive market research, but should take into account
information that is reasonably available.
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 by
using another valuation technique), even if the price in a different market is potentially more
advantageous at the measurement date (IFRS 13.18). This means that the most
advantageous market can only be used if a principal market does not exist or when an entity
does not have access to that principal market.
Example 21.2 Most advantageous market
Victor Ltd owns 10 000 shares in Matfield Ltd. The shares are listed on both the JSE Ltd and the
London Stock Exchange. The shares trade in equal volumes in both markets and Victor Ltd
normally enters into transactions in both these markets. The Matfield Ltd shares are traded at
R210,00 per share on the JSE and at £13,00 on the London Stock Exchange at
31 December 20.13. Transaction costs are normally 2% on the JSE and 3% on the London Stock
Exchange. The Pound Sterling is traded at R17,00 at 31 December 20.13.
Since there is no principal market as shares are traded in equal volumes, the most advantageous
market should be established. The net value on the JSE Ltd is R2 058 000 (10 000 × 210 × 0,98)
and on the London Stock Exchange R2 143 700 (10 000 × 13 × 17 × 0,97). Therefore the
investment in Matfield Ltd will be measured at the fair value of R2 210 000 ((10 000 × 13 × 17) –
according to the London Stock Exchange), which represents the most advantageous market
(before transaction costs).
21.3.5 Market participants

An entity shall consider all assumptions that would be made by the market participants when
the assets or liabilities are priced, assuming also that the market participants will act in their
economic best interest. An entity need not identify specific assumptions for specific market
participants, but rather those assumptions that market participants generally would consider.
Market participants should also be seen to be independent, knowledgeable, able and willing
to enter into a transaction.
21.3.6 Measurement date

This date is very important, as fair values may differ from day to day. The measurement
date is the date when an asset or liability should be measured according to the different
IFRSs, and is normally the date of initial recognition or the reporting date. The date of
acquisition is a good example of a measurement date in accordance with IFRS 3 Business
Combinations.
On measurement date, there might not be a sales transaction for a listed share investment.
IFRS 13.70 and.71 state that if an item has a bid price and an ask price, the price within the
bid-ask spread that is most representative of fair value in the circumstances shall be used to
measure fair value. The use of bid prices for asset positions and ask prices for liabilitiy
positions is permitted. The use of mid-market pricing is also allowed as it is commonly used
in practice.
21.4 Application of fair value

It is clear from the above that the general approach to fair value measurement is to
determine the price in an orderly transaction between market participants at the
measurement date. Fair value measurement requires an entity to determine all of the
following (IFRS 13.B2):
 the asset or liability that should be valued;
 for a non-financial asset, the measurement that is consistent with its highest and best
use (valuation premise for non-financial assets as referred to by IFRS 13);
 the principal market (or most advantageous market) for the asset or liability; and
 the valuation technique that is appropriate considering the availability of data that
represents assumptions that market participants will generally make.
Please refer to IFRS 13.48 to .56 for applications relating to financial assets and financial
liabilities with offsetting positions in market risks or counterparty risks. These paragraphs
permit financial assets and liabilities to be measured as a group and will not be covered in
this chapter. In the sections below, the fair value measurement applications for non-financial
assets, financial assets, liabilities and own equity instruments will be discussed.
21.4.1 Non-financial assets

The fair value measurement of a non-financial asset, for example property, plant and
equipment or investment property 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
(IFRS 13.27).
The highest and best use takes into account the use that is physically possible, legally
permissible and financially feasible. This is a very important consideration. Land, for
example, cannot be legally used for residential purposes if it is not zoned as such. When the
fair value is determined, the rezoning costs should be taken into account. If the land, for
example, is situated on a mountain slope, it may not be physically posssible to use it for
residential purposes and it may not be economically viable to use it for such a purpose.
The entity‟s current use or its intended manner of use of an asset is not necessarily the
highest and best use thereof. The highest and best use is determined with reference to the
different market participants that may intend to use the asset for a different purpose when
acting in their economic best interest. Fair value is therefore, as referred to in section 26.3.1,
the market-based price, rather than an entity-specific value.
The highest and best use of a non-financial asset might provide the maximum value to the
market participants through:
 its use in combination with other assets as a group or as a business; or
 on a stand-alone basis.
Example 21.3 Highest and best use
An entity acquired an entity in a business combination.

The computer software was developed by the acquiree and consists of an integrated billing
programme and an inventory software programme. The parent determines that the highest and
best use of the intangible asset is its current use. It is determined that the fair value of the software
in its current use is R611 000. Market participants that might buy such intangible assets include
both strategic buyers and financial buyers. Strategic buyers might buy it for competitive reasons,
while financial buyers might buy it for financial reasons, for example to develop the intangible
asset for disposal at a later stage. The fair value for the intangible assets is R890 000 for strategic
buyers and R670 000 for financial buyers.
The acquiree also has land that is developed for industrial use as a site for a factory. The current
use of the land is presumed to be the highest and best use. However, nearby sites have recently
been developed for residential use. It is determined that the fair value of the land as it is currently
used by the acquired entity is R1,3 million (taking into account related factory operations in
combination with other assets to generate cash flows). The value of the land as a vacant site for
residential use, taking into account the cost of demolishing a factory (if any), is R1,45 million.
The fair value of the computer software and land will be determined by the highest and best use
thereof by the various market participants. The fair value of the computer software will therefore
be R890 000, while the land‟s fair value will be R1 450 000.
Comment
 Assume that the land is currently zoned for factory/industrial purposes and the cost of rezoning
the land for residential purposes will cost the entity R45 000. The fair value of the land of
R 1 450 000 should therefore be adjusted to make it legally permissible. The fair value will then
be R1 405 000 (1 450 000 – 45 000).
21.4.2 Financial assets

In order to determine the fair value of financial assets for recognition or disclosure purposes
in terms of IFRSs 7 and 9, valuation techniques should be used that maximise the use of
observable inputs and minimise the use of unobservable inputs. Refer to section 26.6 for
more detail.
Entities that hold and manage a group of financial assets and are exposed to market and
credit risk should apply the guidelines in IFRS 13.48 to .56 on a net basis. This will not be
covered in this chapter.
21.4.3 Liabilities and own equity instruments

Fair value measurement assumes that a financial or non-financial liability (e.g. a provision)
or an entity‟s own equity instrument (e.g. equity interests issued as consideration in a
business combination) is transferred to a market participant at the measurement date
(IFRS 13.34). The transfer of a liability or an entity‟s own equity instrument assumes the
following:
 a liability will remain outstanding and the entity would be required to settle the obligation;
and
 the entity‟s own equity instrument would remain outstanding and the transferee would
take on the rights associated with the risks.
In all cases, valuation techniques should be used that maximise the use of observable
inputs and minimise the use of unobservable inputs. The fair value of a financial liability
reflects the effect of non-performance risk. Non-performance risk includes, but is not
limited to, the entity‟s own credit risk (credit standing) from the perspective of the market
participant holding the liability of the entity as an asset. Non-performance risk is the
likelihood that that the obligation might not be fulfilled.
Example 21.4 Non-performance risk
Bis Ltd and Mark Ltd entered into a contractual obligation to pay R1 000 cash to Bok Ltd in
5 years. Bis Ltd has an AAA rating and can borrow at 6%, while Mark Ltd has a BB credit rating
and can borrow at 12%. The risk-free rate is 5%. The differences between the interest rates
attributable to Bis Ltd and Mark Ltd, and the risk-free rate represent the non-performance risk
premiums of Bis Ltd and Mark Ltd.
In terms of IFRS 9, these liabilities should be recognised initially at fair value.
 Bis Ltd will recognise the liability at R748 (present value of R1 000 in 5 years at 6%) for its
obligation to pay R1 000 in 5 years.
 Mark Ltd will recognise the liability at R568 (present value of R1 000 in 5 years at 12%) for its
obligation to pay R1 000 in 5 years.
Comment
 The borrowing rates will be determined by the market participants holding the obligation as an
asset. This indicates how they perceived the risk of non-performance of Bis Ltd and Mark Ltd.
Liabilities and equity are classified in two categories, namely those that are carried as
assets by other entities (e.g. loans), and those that are not carried as assets by other
entities (e.g. provisions). These two categories will now be discussed:
21.4.3.1 Liabilities and equity held as assets by other entities or parties

When a quoted price for the transfer of an identical or similar liability or own equity
instrument is not available and the identical item is held by another party as an asset, the
fair value of the liability or equity shall be determined from the perspective of the market
participant that holds the identical item as an asset. It is important to emphasise that the
fair value is determined from the perspective of the party that holds the liability of the entity
as an asset and not from the perspective of the entity that issued the instrument. The fair
value of such a liability or equity instrument shall be measured as follows:
 quoted price for an identical item in an active market; or
 if quoted price is not available, use other observable inputs, for example a price in an
inactive market; or
 if neither of the above prices are available, other valuation techniques, for example the
present value of cash flows receivable (income approach) or quoted prices for similar
items (market approach) should be used. Refer to section 26.6 for more detail.
If a quoted price in an active market is available, the fair value will always be the quoted
price. An entity shall adjust the quoted price only when there are factors specific to the
assets that are not applicable to the measurement of fair value. Such adjustments may
occur when the asset relates to a similar (but not identical) asset or when the units of
account for the liability and the asset are not the same.
Loans with a demand feature are a financial liability (IAS 32.19). Note that interest-free
shareholders‟ loan accounts cannot be lower than the amount payable on demand, or the
present value from the date that the amount could be required to be paid (IFRS 13.47).
Example 21.5 Debt obligation (quoted price)
At the beginning of the reporting period, Hein Ltd issued 2 000 debentures of R1 000 each,
carrying interest at 10% per annum. The debentures are redeemable in five years‟ time. Hein Ltd
designated this liability as subsequently measured at fair value through profit or loss. At the end of
the first reporting period, the instrument is trading in an active market at R951 per debenture for
market participants that hold the debentures as assets.
At the reporting date, using the market approach, this liability will be measured at R1 902 000
(2 000 × 951) in the statement of financial position and will be disclosed within level 1 of the fair
value hierarchy (refer to section 26.7).
Example 21.6 Debt obligation (present value technique)
At the beginning of the reporting period, Toks Ltd issued 2 000 debentures of R1 000 each,
carrying interest at 10% per annum. The fair value of the debentures at initial recognition is
R2 million as the market-related interest rate also equals 10% initially. The debentures are
redeemable in five years‟ time and are not traded in the open market. Toks Ltd designated this
liability as subsequently measured at fair value through profit or loss. At the end of the first
reporting period, Toks Ltd‟s credit spread, from the perspective of the holder of the corresponding
asset, has deteriorated by 50 basis points because of the likelihood of non-performance.
At the reporting date, this liability will be measured at fair value using the income approach’s
present value technique. The present value of the future cash flows at 10,5% is R1 968 641.
Toks Ltd will disclose this within level 2 of the fair value hierarchy (refer to section 26.7).
The fair value of a financial liability with a demand feature, such as a shareholder‟s loan, is
not less than the amount payable on demand. This amount may be discounted from the first
date that the amount could be required to be paid. Such shareholder‟s loans shall be
presented as current liabilites if the entity does not have an unconditional right to defer the
payment for longer than one year.
21.4.3.2 Liabilities and equity not held as assets by other entities or parties
When a quoted price for the transfer of an identical or similar liability or own equity
instrument is not available and the identical item is not held by another party as an asset,
the fair value of the liability or equity shall be determined from the perspective of the
market participant that owes the liability or that has issued the claim on equity.
Provisions, for example decommissioning liabilities, provision for warranties and provision
for dismantling costs will fall into the category of liabilities not held by another party as an
asset. It is important to emphasise that the fair value is now determined from the perspective
of the entity that holds the liability or has the obligation to issue equity. The fair value
measurement of such a liability or equity instrument shall take the following into account:
 Future cash flows that the entity will incur to fulfil the obligation. The fair value represents
the expected present value of these cash flows.
 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.
Example 21.7 Decommissioning liability (expected present value technique)
Brian Ltd is legally required to dismantle its plant at the end of its useful life, which is estimated to
be in 10 years‟ time. The estimated cost will consist of labour of between R200 000 and R300 000
and overheads allocated at 60% of the labour cost. The probability assessments on the labour,
which include increases for inflation, are as follows:
R200 000 (30% probability), R250 000 (50% probability) and R300 000 (20% probability)
Additional information
Risk premium for uncertainty to be adjusted for in cash flows is 5%.
The risk-free rate of interest for a 10-year maturity is 6%.
The risk of non-performance of Brian Ltd is considered to be 1%.
The fair value of the obligation will be calculated as follows:
Expected cash flows
R
Labour (200 000 × 30% + 250 000 × 50% + 300 000 × 20%) 245 000
Overheads (245 000 × 60%) 147 000
Expected cost 392 000
Risk premium (392 000 × 5%) 19 600
411 600
Expected present value using a discount rate of 7% (6% + 1%) for 10 years 209 237
Brian Ltd will measure its decommissioning liability at its fair value of R209 237.
21.5 Fair value at initial recognition

All financial assets and financial liabilities should initially be measured at fair value
(IFRS 9.5.1.1). Sometimes, there is a difference between the transaction price and its fair
value. When an asset is acquired or a liability is assumed, the transaction price is the price
paid to acquire the asset or the amount received to assume the liability (an entry price). The
fair value, by contrast, is the price that would be received to sell an asset or paid to transfer
a liability (an exit price).
Entities do not acquire an asset just to sell it on the same day. Selling prices and buying
prices are not the same and therefore there might initially be differences between the
transaction price and fair value. However, in many cases the transaction price will still equal
the fair value.
An entity should consider all factors to determine whether the transaction price equals the
fair value. The transaction price and the fair value might differ for the following reasons
(IFRS 13.B4):
 the transaction might be between related parties;
 the transaction takes place under constraint or forced circumstances;
 the market in which the transaction took place is different from the principal market; or
 the unit of account represented in the transaction price might be different from the unit of
account of the asset or liability measured at fair value.
If the transaction price differs from the fair value at initial recognition, the financial asset or
liability shall be recognised at fair value and any differences shall be recognised in profit or
loss (IFRS 13.60).
Example 21.8 Fair value at initial recognition
At the beginning of the year, the board of directors decided to grant a three-year interest-free loan
of R300 000 to one of the directors. A market-related risk-free interest rate is considered to be 5%
and a systematic risk premium of 3% may be regarded as appropriate for any cash flow
uncertainties (in this instance, the risk of non-performance or credit risk).
Financial assets should initially be recognised at fair value in accordance with IFRS 9.
The income approach (refer to section 26.6.3) using the present value technique, should be used
in measuring the fair value of the loan. The difference between the fair value of R238 150 (FV =
300 000, n = 3, i 8% (5% + 3%), PV = ?) and the transaction price of R300 000 should be
recognised as a day one loss in profit or loss. The journal entry on initial recognition is as follows:
Dr Cr
R R
Financial Asset: Loan to director (SFP) 238 150
Day-one loss on financial liability (P/L) 61 850
Bank (SFP) 300 000
Initial recognition of loan and day one loss.
21.6 Fair value techniques

Various fair value techniques exist in the literature. An entity shall use valuation techniques
that are appropriate in the circumstances and for which sufficient data are available, by
maximising the use of relevant observable inputs and minimising the use of unobservable
inputs. The focus is to determine the price in an orderly transaction to sell an asset or to
transfer a liability by using observable inputs to the maximum. IFRS 13 defines fair value
and provides guidance on how to determine an appropriate fair value measure. Depending
on the nature of the item being fair valued, various valuation techniques may be used.
When a single valuation technique is not appropriate, multiple valuation techniques may be
used. In such cases, the results should be evaluated considering the reasonableness of the
range of values indicated by those results. A fair value measurement is the point at which
the value is the most representative in the circumstances.
If the transaction price is the 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 (IFRS 13.64).
Valuation techniques should be applied consistently from year to year, but sometimes it is
necessary to change the valuation technique to one that will result in a more representative
valuation. When a new valuation technique is used, it shall be accounted for as a change in
estimate in accordance with IAS 8.
There are three widely used valuation techniques, namely the market approach, the cost
approach and the income approach. These approaches to determine fair value are
discussed below.
21.6.1 Market approach

The market approach uses prices generated by market transactions in respect of identical or
similar assets, liabilities or groups of assets. The market can be active or inactive. An active
market is defined as a market in which transactions take place with sufficient frequency and
volume (IFRS 13 Appendix A). The exit price is therefore determined with reference to the
market. The market approach may use techniques such as market multiples (e.g. adjusted
or unadjusted earnings yields and price earnings multiples) and matrix pricing (valuation of
same type instruments without relying only on quoted prices). For more detail refer to
IFRS 13.B6 to B7.
Example 21.9 Market approach
At the beginning of the reporting period, Morné Ltd bought 5 000 listed ordinary shares at R44,40
each as an investment. Morné Ltd incurred a 2% transaction cost as well, on the same date.
Morné Ltd designates this investment as measured at fair value through other comprehensive
income. At the end of the reporting period, the shares were trading at R47,80. Transaction costs of
2% are normally incurred on all transactions.
At reporting date, this investment will be measured at fair value using the market approach, by
maximising the use of relevant observable inputs. At the end of the reporting period the investment
will be presented at R239 000 (R47,80 × 5 000) and will be disclosed within level 1 of the fair
value hierarchy. A gain of R12 560 will be recognised in other comprehensive income
(R239 000 – (5 000 × R44,40 × 1,02) at the end of the reporting period.
Note: Transaction costs were capitalised because the investment is classified as measured at fair
value through other comprehensive income. Transaction costs are ignored however when
measuring the fair value at the end of the reporting period.
21.6.2 Cost approach

The cost approach is often referred to as the replacement cost and represents the cost that
is currently required to replace the service capacity of an asset for current use (refer to
section 26.4.1). The value will represent the cost to acquire or to construct a substitute asset
of comparable utility, adjusted for obsolescence. Obsolescence will include adjustments for
physical deterioration, functional obsolescence and economic obsolescence and is broader
than depreciation for financial reporting purposes.
Example 21.10 Cost approach
On 1 January 20.12, Beast Ltd bought a machine for R800 000, and also incurred a cost of
R80 000 (10%) to install it. The machine is depreciated on a straight-line basis over its useful life
of 8 years and its residual value is considered to be immaterial. At 31 December 20.13, an
identical machine could be obtained at a cost of R950 000. This price was observable in the
market.
At 31 December 20.13, the depreciated replacement cost could be determined as follows:
R
Replacement cost 950 000
Installation cost (10%) 95 000
1 045 000
Depreciated replacement cost at 31 December 20.13 (1 045 000 × 6/8) 783 750
Beast Ltd will disclose this amount within level 2 of the fair value hierarchy.
Comment
 It is assumed in this example that depreciation includes consideration of adjustments for
physical deterioration, functional obsolescence and economic obsolescence.
21.6.3 Income approach

According to IFRS 13.B10, the income approach converts future cash flows to a single
discounted amount, which reflects the current market expectations about future amounts.
Refer to Example 21.6 above. The techniques under this approach are, for example, present
value techniques, option pricing models and multi-period excess earnings methods
(IFRS 13.B11).
21.6.3.1 Components of present value measurement
The present value technique is a tool used to link future amounts (e.g. cash flows or values)
to a present amount, using a discount rate. A fair value measurement of an asset or a
liability using a present value technique captures all the following elements from the
perspective of market participants at the measurement date:
 future cash flows;
 uncertainty in possible variations on cash flows;
 uncertainty regarding cash flows;
 time value of money represented by the risk-free interest rate;
 the risk premium inherent to the uncertainty in cash flows;
 in respect of a liability, the non-performance risk premium, which includes own credit
risk; and
 any other factors that market participants would consider.
21.6.3.2 General principles of present value techniques
The above elements should all be combined to calculate the present value by using the
following general principles (IFRS 13.B14):
 Assumptions of market participants should be reflected in the cash flows and discount
rates.
 Attributes of the asset or liability should be reflected in cash flows and discount rates.
 Double counting should be avoided, and the discount rate should not be adjusted if risks
are included in cash flows.
 Calculations should be consistent. Nominal amounts of cash flows that include inflation
should be discounted at rates that include inflation. Risk-free rates include effects of
inflation. By contrast, real amounts of cash flows that exclude inflation should be
discounted at rates that exclude inflation. Similarly, after tax cash flows should be
discounted at an after tax discount rate, and the opposite is also true.
 Discount rates should reflect the economic environment of the countries in which the
cash flows are dominant.
21.6.3.3 Risk and uncertainty
Future cash flows are based on estimates. The amounts of estimates and the timing thereof
are uncertain. Market participants generally seek compensation for these risks of uncertainty
and the fair value measurement should therefore include a risk premium. The estimation of
the risk premium is not easy to determine and is sometimes subjective, but this should not
be the reason for excluding a risk premium from the fair value measurement. Present value
techniques differ in how to incorporate risk in the fair value measurement (IFRS 13.B17).
The following are examples of how to incorporate risk in the present value calculation:
 The discount rate adjustment technique (refer to IFRS 13.B18 to .B22 and Example 26.11)
uses the „market-adjusted discount rate‟.
 The expected present value technique (refer to IFRS 13.B25) uses systematic risk-
adjusted expected cash flows, which are discounted at a „risk-free rate‟ (refer to
Example 26.12).
 The expected present value technique (refer to IFRS 13.B26) uses expected cash flows
that are not risk-adjusted and are discounted at a discount rate adjusted to include the
risk premium that market participants require (the systematic risk) (refer to Example 26.13).
That rate is different from the rate used in the discount rate adjustment technique and is
represented by the „risk-free plus rate‟.
According to the portfolio theory, there are two types of risk, namely unsystematic risk and
systematic risk. Unsystematic risk relates to the specific asset or liability and can be
diversified within a portfolio of assets or liabilities. Systematic risk relates to market risks and
cannot be diversified. The portfolio theory holds that market participants will only be
compensated for the systematic risk inherent in the cash flows and therefore risk-free rates
will only be adjusted for the systematic risk premium to be used in present value
calculations. For more information on the above methods, please refer to IFRS 13.B23 to
.B24 and IFRS 13.B27 to .B30.
Example 21.11 Discount rate: Market adjustment technique
An entity has a contract to receive R150 000 in a year‟s time. There is an established market with
price information for comparable assets. A comparable asset for a contract to receive R100 000 in
a year‟s time is trading in the market at R90 662. The nature of the cash flows is also contractual
and cash flows are likely to respond similarly to changes in economic conditions. All other factors
for example credit standing and liquidity, are also comparable.
The implied annual rate of return (market return) of the comparable asset is 10,30%
(FV = 100 000, PV = – 90 662 n = 1, i = ?). Using the 10,30% as a discount rate, the fair value of
the asset of the entity is R135 993 (FV = 150 000, n = 1, i = 10,30%, PV = ?).
Example 21.12 Expected present value technique: risk-free rate
An entity expects to receive R150 000 in two years‟ time. This expected cash flow includes an
amount for uncertainty in cash flows. If this uncertainty is eliminated, the entity can be certain that
it will receive at least R135 000. The risk-free interest rate is 5% and the market-related rate
(including risks of uncertainty) is considered to be 7%.
The risk premium for uncertainty in the cash flow is R15 000 (the difference between R150 000
and R135 000). This represents the certainty equivalent adjustment on cash flow. In order to
determine the fair value, the risk adjusted cash flow of R135 000 should be discounted at the
risk-free interest rate. Using the 5% as a discount rate, the fair value of the asset of the entity is
R122 449 (FV = 135 000, n = 2, i = 5, PV =?).
Example 21.13 Expected present value technique: risk-free plus rate
An entity expects to receive roughly R160 000 in two years‟ time. This expected cash flow includes
an amount for uncertainty in cash flow. The accountant believes that this estimate should
preferably be probability weighted. He expects that the cash flows (depending on different
outcomes) could be as follows:
Expected
Outcomes Probability
amount
R
Optimistic condition 30% 200 000
Normal condition 50% 150 000
Pessimistic condition 20% 120 000
The risk-free interest rate is 5% and the market-related rate (including risks of uncertainty) is
considered to be 7%.
continued
The expected cash flows are R159 000 and are determined as follows:
Cash flows Probability Weighted
R200 000 30% R60 000
R150 000 50% R75 000
R120 000 20% R24 000
R159 000
The above cash flows are not adjusted for systematic cash flow risk; therefore the discount rate
should also include a risk premium of 2% (7% – 5%). Using the 7% as a discount rate, the fair
value of the asset of the entity is R138 876 (present value of R159 000 for two years at a discount
rate of 7%).
21.6.3.4 Inputs to valuation techniques

It is apparent from the above that the valuation techniques should maximise the use of
observable inputs and minimise the use of unobservable inputs. These inputs should be in
harmony with the characteristics of the asset or liability being valued and aligned with what
the market participants will take into account. The level of inputs used in the measurement
will also determine the hierarchy of fair value that will be disclosed in the financial
statements (refer to section 26.7).
If an asset or liability has a quoted bid and ask price, the fair value is the price between the
bid-ask spread that is appropriate in the circumstances. Closing prices in exchange markets
are both readily available and are representative of the fair value. The use of bid prices for
asset positions and ask prices for liability positions is permitted, but is not required. For
more information on dealer markets, brokered markets and principal-to-principal markets,
please refer to IFRS 13.B34.
21.7 Fair value hierarchy

Valuation techniques may be based on different inputs. These inputs may be observable or
unobservable. The preceding sections indicate that it is better to use more observable
inputs, as this will enhance the reliability of the valuation. To increase the quality of
presentation and disclosure, IFRS 13 (as well as IFRS 7) establish a fair value hierarchy
that categorises the inputs to valuation techniques used to measure fair value into three
levels (refer to IFRS13.76 to .90). The fair value hierarchy with the highest priority consists
of unadjusted quoted prices (level 1) and the hierarchy with the lowest priority is based on
unobservable inputs (level 3). The user of the financial statements is therefore in a position
to assess the risk in relation to the fair value and to make decisions regarding that risk. The
information about fair value is more transparent.
Sometimes the fair value of an asset or liability may be classified into two hierarchy levels.
In such a case, the fair value measurement is categorised at the lowest applicable hierarchy
level.
The availability of relevant inputs and their relative subjectivity might affect the selection of
appropriate valuation techniques (refer to IFRS 13.61). However, the fair value hierarchy
prioritises the inputs to valuation techniques, not the valuation techniques used to measure
fair value. If observable inputs are materially adjusted with unobservable inputs, the fair
value measurement would be categorised within level 3.
The different hierarchy levels are as follows:

Level 1 inputs Level 1 inputs are unadjusted quoted prices in an active market, and
represent the most reliable evidence of fair value. If financial assets are
traded in multiple markets, emphasis should be placed on the principal
market. In the absence of a principal market, the most advantageous
market should be used in the fair value measurement. The principal or the
most advantageous market could be used if the entity can enter into that
market at measurement date. An entity shall not make an adjustment to a
level 1 input except for specific circumstances (as listed in IFRS 13.79).
Level 2 inputs Level 2 inputs are directly or indirectly observable inputs other than
the quoted prices referred to in level 1, and include the following:
 quoted prices for similar items in active markets;
 quoted prices for identical and similar items in inactive markets;
 other observable inputs, for example interest rates, yields, implied
volatilities and credit spreads; or
 any market-corroborated inputs.
Level 2 inputs will vary depending on the characteristics of the asset or
liability, for example condition, location, comparability and activity of the
market in which inputs are observed. When variations on the input
significantly influence the fair value measurement, the level 3 hierarchy will
be more appropriate. For more information on level 2 inputs for different
assets and liabilities, refer to IFRS 13.B35.
Level 3 inputs Level 3 inputs are unobservable inputs in situations where there is little or
no market activity. These unobservable inputs shall reflect the assumptions
that market participants would use when pricing the asset or liability,
including assumptions about risk, and would therefore meet the fair value
measurement objective. Risk adjustments are subjective and these inputs
are generally unobservable. The best information available should be used,
which might include the entity‟s own data that is adjusted for specific
circumstances. For more information on level 3 inputs for different assets
and liabilities, refer to IFRS 13.B36.
Example 21.14 Fair value hierarchy
Faf Ltd (Faf) has an end of reporting period of 30 September 20.17. Faf purchased a small
investment (less than 10% interest in equity shares) in the ordinary shares of Kohli (one of the
companies referred to in the news article below) on 1 December 2013. Faf accounts for these
shares at fair value through profit or loss.
From 2013 to 2014 the shares of Kohli were not formally listed on a formal exchange, but were
traded on the over-the-counter (OTC) market. Pricing information was actually available due to
recent trades.
In 2015, the FSB ruled that no more over the counter (OTC) share trading may take place without
a licence. This means their shares traded over an electronic platform on the web without a stock
exchange in place, no regulation and purely just matching trades of different investors through a
broker. Shares investments were left in a situation where investors couldn‟t buy or sell them any
longer, due to the regulatory issue. This situation continued during 2016.
After the FSB ruling in May 2015, due to the lack of market price information from OTC trades, Faf
estimated the fair value of the Kohli‟s shares based on a price-earnings (“PE”) multiple valuation
method. This typically involved using the PE multiple for similar listed companies, making entity
significant specific risk adjustments to this multiple, and multiplying the risk-adjusted PE by the
companies unadjusted audited earnings for the year.
continued
SMEX was introduced in January 2017 as South Africa‟s newest stock exchange, plans to give a
home to all these smaller companies. As listing on the JSE is expensive for small companies it
gives SMEX the perfect launching platform. SMEX obtained its licence during early 2017 and Kohli
immediately listed their shares on this exchange.
Since its listing on SMEX in February 2017, Kohli has been trading on a narrow band of between
R6.70 and R6.80 per share. The closing price at year end on 30 September 2017 was R6.75, based
on the most recently traded price (see below). Below is a screenshot from the SMEX website of the
5 most recent trades of Kohli shares prior to the end of reporting period of 30 September 2017.
Date Price Number of shares Amount

7 September 2017 6.75 1 000 R6 750
6 September 2017 6.75 3 600 R24 300
4 September 2017 6.77 4 500 R30 465
23 August 2017 6.76 10 100 R68 276
14 August 2017 6.74 13 000 R87 620
The fair value hierarchy over the past few years will be determined as follows:
Prior to 2015:
The shares of Kohli were not listed on a formal exchange, but were traded on an OTC market.
From this market, it appears that observable pricing information was available based on recent
trades etc. Although observable, the OTC market would not constitute a „quoted‟ price (not listed),
so the OTC observable price would constitute a level 2 in the fair value hierarchy.
2015 and 2016
Kohli‟s shares were no longer tradeable, and Faf resultantly valued its investment in Kohli using a
PE valuation method (income approach), as there was no market based measures/ approaches
available to get a price, which involves using a PE multiple of earnings. Significant unobservable
risk adjustments are made to adjust the PE ratio for the purposes of the valuation, making this
input a level 3 in the FV hierarchy. The audited earnings of Kohli is the other significant input into
the valuation model, which one would assume is observable (historic audited earnings) and then
one could argue in favour of a level 2. Where significant inputs into a valuation model are from
different levels in the fair value hierarchy, the overall level is the LOWEST level of the significant
inputs, i.e. 2015 and 2016 would constitute a level 3 in the hierarchy.
2017 and onwards
The shares of Kohli is listed on the SMEX exchange, which would constitute a „quoted price‟.
There is doubt around whether the SMEX market would consistute an „active market‟ - from the
trade history, there have only been 5 trades in the past (nearly) 45 days. Because of the lack of
activity (the most recent trade was nearly 3 weeks before year end), it is likely that adjustments to
the previous closing price would be required to arrive at a fair value estimate, and adjustments to
the closing price would downgrade the input to a level 2 in the fair value hierarchy.
However, it could also be argued that despite the lack of volume of activity, the price of R6.75
might not require adjustment, since the share had a very narrow trading range with little if any
change in price over the past month or more. If this is the case, and an unadjusted price of R6.75
is used (due to the narrow trading range), then it could be argued that the price would
nevertheless constitute a level 1 in the FV hierarchy (due to it being an „unadjusted‟ quoted price).
UJ adjusted.
21.8 Disclosure
An entity shall disclose information that helps users of its financial statements to assess
both of the following:
 the valuation techniques and inputs used to develop fair value measurements; and
 the effect of the measurements on profit or loss or other comprehensive income for the
period when using significant unobservable inputs (level 3). The information that is
disclosed for level 3, will contain more detail than, for example, level 1.
An entity shall consider the level of detail necessary to satisfy the disclosure requirements.
Emphasis should be placed on each of the various requirements, the aggregation or
disaggregation to be undertaken, and the need for additional information to evaluate the
quantitative information disclosed.
An entity shall disclose, as a minimum, the following information for each class of assets
and liabilities measured at fair value after initial recognition:
 for recurring and non-recurring fair value measurements, the fair value measurement at
the end of the reporting period;
 for non-recurring fair value measurements, the reasons for the measurement;
 for recurring and non-recurring fair value measurements, the level of the fair value
hierarchy;
 for assets and liabilities that are measured at fair value on a 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;
 transfers into each level shall be disclosed and discussed separately;
 for fair value measurements categorised within level 2 and level 3, a description of the
valuation technique(s) and the inputs used;
 if there has been a change in valuation technique, the entity shall disclose that change
and the reason(s) for making it;
 for level 3 of the hierarchy, an entity shall provide quantitative information about
significant unobservable inputs used;
 for level 3 of the hierarchy, a reconciliation from the opening balances to the closing
balances (for more detail refer to IFRS 13.93(e));
 for level 3 of the hierarchy, the amount of the total gain or loss recognised in profit or loss
that is attributable to the change in unrealised gains or losses and the line item(s) in
profit or loss in which those unrealised gains or losses are recognised;
 for level 3 of the hierarchy, a description of the valuation processes used by the entity;
 for level 3 of the hierarchy, a sensitivity analysis if unobservable inputs are changed
(refer to IFRS 13.93(h) for more detail); and
 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.
An entity shall determine appropriate classes of assets and liabilities on the basis of the
following:
 the nature, characteristics and risks of the asset or liability; and
 the level of the fair value hierarchy.
An entity shall disclose and consistently follow its policy for determining when transfers
between levels of the fair value hierarchy may occur. Examples of policies for determining
the timing of transfers include the following:
 the date of the event or change in circumstances that caused the transfer;
 the beginning of the reporting period; and

 the end of the reporting period.
An entity shall present the quantitative disclosures required by this IFRS in a tabular format
unless another format is more appropriate.
For detailed examples on the above disclosure requirements, please refer to
Illustrative Examples 15 to 19 in IFRS 13.
21.9 Comprehensive example

Cheetah Ltd has a reporting date of 31 December. The entity has several assets that are measured at
fair value and the following details in respect of the year ended 31 December 20.13 are available:
Investment properties
Cheetah Ltd has an office building that is rented out to third parties. The fair value of the building was
R5 600 000 at 31 December 20.12. In its current use, the present value of the net cash flows of future
earnings was calculated at R5 700 000 on 31 December 20.13. On 31 December 20.13, this building
could be sold in the open market for R6 100 000 before transaction costs of 2%. This open market
value was determined with reference to similar buildings, situated in the same location, that are
currently in the market.
Listed share investments
On 31 December 20.13, Cheetah Ltd‟s listed investments, consisting of equity investments, had a total
net market value of R2 623 500 after brokerage fees of 1% were deducted. These investments are
traded in an active market. The fair value of these investments was R2 510 000 at 31 December 20.12.
These investments were classified as measured at fair value through profit or loss.
Unlisted investments
Cheetah obtained a 10% interest in Bull (Pty) Ltd on 3 February 2010 for R1 521 000. The fair value
and carrying amount of the investment was R1 550 000 at 31 December 20.12. On 31 December
20.13, the accountant of Cheetah Ltd calculated the fair value of the investment in Bull (Pty) Ltd by
using a significantly adjusted after-tax earnings yield of 18% and sustainable before-tax earnings of
R401 000 as input variables in the measurement calculations. The tax rate is 28%. This investment
was designated as measured at fair value through other comprehensive income.
Foreign exchange contract
On 1 November 20.13, Cheetah Ltd entered into a foreign exchange contract to buy US$354 000 at
R7,60 per dollar on 31 January 20.14 in order to settle an existing foreign creditor. On 31 December
20.13, the spot exchange rate was R7,70 for US$1 and foreign exchange contracts expiring on
31 January 20.14 were quoted at R7,80.
Asset held for sale
On 31 December 20.13, Cheetah Ltd had a machine with a carrying amount of R350 000, that was
held for sale. The machine was written down to a fair value of R260 000, less costs to sell of 10%,
resulting in a loss, which was included in profit or loss for the year. The value in use was lower and was
calculated at R212 000.
Debentures
On 1 January 20.12, Cheetah issued 100 000 7% debentures of R10 each in the open market for
R961 000. The debentures are redeemable at nominal value on 31 December 20.16 and the interest is
payable annually in arrears. The market in which these debentures are traded became inactive and
one cannot rely on quoted prices or on the market prices of similar instruments. On
31 December 20.13, the risk-free rate was considered to be 7% and the risk premium for non-
performance was estimated to be 2%.
continued
The measurement of fair values will be as follows:

Investment property
This is a non-financial asset and should be valued at the highest best use.
Value in accordance with current use, namely to rent it out R5 700 000
Open market value if the asset is sold R6 100 000
Valuation
The highest best use therefore will be R6 100 000
Level of input = 2 (observable – unadjusted)
Note: Fair value is calculated before transaction cost is deducted (IFRS 13.25).
Listed share investment
This is a financial asset that should be valued using the market approach.
The market value of the shares before transaction cost is:
(R2 623 500/0,99) R2 650 000
Level of input = 1 (unadjusted quoted prices)
Note: Fair value is calculated before transaction cost is deducted (IFRS 13.25).
Unlisted investment
This is a financial asset that should be valued by using the income approach.
R
Sustainable earnings 401 000
Taxation (112 280)
Sustainable earnings after tax 288 720
The fair value of the unlisted shares:
(R288 729/0,18) R1 604 000
Level of input = 3 (significantly adjusted input variables (unobservable))
Note: After-tax earnings are used, as an after-tax earnings yield is provided
Foreign exchange contract
This is a financial asset that should be valued by using the market approach.
Quoted exchange rates are available
$354 000 × (7,80 – 7,60) R70 800
Level of input = 1 (quoted price)
Note: The foreign creditor will be measured at R2 725 800 using a spot rate of R7,70 to US$1.
Asset held for sale
This is a non-financial asset that should be valued by using the market approach.
According to IAS 36, it should be measured at the higher of
Fair value lest cost to sell (260 000 × 0,9), and R234 000
Value in use (not in the scope of IFRS 13) R212 000
Level of input = 3 (adjusted observable inputs)
Note: The calculation of the value in use is scoped out of IFRS 13 (IFRS 13.6(c)).
Debentures
This is a financial liability that should be valued by using the income approach.
This liability will be carried as an asset by a third party and should be valued from the perspective of
the market participants that hold these debentures as assets.
PV = ? (FV = 1 000 000, i = 9% (7 + 2), n = 3, PMT = R70 000) R949 374
Level of input = 3
continued
Disclosure requirements in terms of IFRS 13.93 (a), (b), (d) and (e) will be as follows:
Recurring fair value Fair Quoted Observ- Unobserv- Valuation
measurements values prices in able inputs able inputs techniques
active and inputs
markets
(level 1) (level 2) (level 3)
R 000 R 000 R 000 R 000
Non-financial assets
Investment properties 6 100 6 100 Inactive
market prices
Financial assets
Equity instruments:
Equity investments measured 2 650 2 650 Quoted prices
at fair value through profit or
loss (listed)
Equity investments measured 1 604 1 604 Earnings
at fair value through other adjusted
comprehensive income earnings
(unlisted)
Derivatives:
Foreign exchange contracts 71 71 Quoted FECs
Financial liabilities
Debentures measured at fair (949) (949) Present value
value through profit and loss at risk
adjusted rates
Foreign creditor (2 726) (2 726) Translated at
quoted spot
rate
Non-recurring fair value
measurements
Non-current assets held for 260 260 Adjusted
sale* market prices
* In accordance with IFRS 5, the non-current asset held for sale will be measured at R234 000.
Fair value measurements using significant unobservable inputs (level 3) (IFRS 13.93(e)):
Unlisted
equity investments
R 000
Opening balance 1 550
Purchases 0
Unrealised gains recognised
in other comprehensive 54
income
Closing balance 1 604

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Module FAC4865

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21.1 Summary of IFRS 13 Fair Value Measurement

21.3 Meaning of fair value

21.3.1 Definition of fair value

Example 21.1 Transaction costs and transport costs

21.3.3 Asset or liability

21.3.4 Orderly transaction

Example 21.2 Most advantageous market

21.3.5 Market participants

21.3.6 Measurement date

21.4 Application of fair value

21.4.1 Non-financial assets

Example 21.3 Highest and best use

An entity acquired an entity in a business combination.

21.4.2 Financial assets

21.4.3 Liabilities and own equity instruments

Example 21.4 Non-performance risk

21.4.3.1 Liabilities and equity held as assets by other entities or parties

Example 21.5 Debt obligation (quoted price)

Example 21.6 Debt obligation (present value technique)

Example 21.7 Decommissioning liability (expected present value technique)

21.5 Fair value at initial recognition

Example 21.8 Fair value at initial recognition

21.6 Fair value techniques

21.6.1 Market approach

Example 21.9 Market approach

21.6.2 Cost approach

Example 21.10 Cost approach

21.6.3 Income approach

Example 21.11 Discount rate: Market adjustment technique

Example 21.12 Expected present value technique: risk-free rate

Example 21.13 Expected present value technique: risk-free plus rate

21.6.3.4 Inputs to valuation techniques

21.7 Fair value hierarchy

The different hierarchy levels are as follows:

Example 21.14 Fair value hierarchy

Date Price Number of shares Amount

 the beginning of the reporting period; and

21.9 Comprehensive example

The measurement of fair values will be as follows:

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