IFRS 13 fair value measurement and the fair value hierarchy

Fair value appears throughout IFRS: financial instruments, investment property, revalued property, business combinations and impairment tests all use it. IFRS 13 gives them one definition and one framework, so a fair value means the same thing wherever it appears. This guide explains what IFRS 13 covers, the fair value hierarchy, how the market is chosen, works through an asset traded in two markets, and covers highest and best use, valuation techniques, disclosures and how IFRS 13 compares with ASC 820.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 4 minute read.

Short answer

IFRS 13 Fair Value Measurement 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: an exit price. It does not decide when fair value is required, which other standards do, but how to measure and disclose it. Fair value is measured in the principal market for the item or, if there is none, the most advantageous market, using the assumptions market participants would use; transaction costs are not deducted, but the costs of transporting the item to that market are. Non-financial assets are valued at their highest and best use. Companies use a market, income or cost approach, maximising observable inputs, and classify each measurement in the fair value hierarchy: Level 1 for quoted prices in active markets for identical items, Level 2 for other observable inputs, and Level 3 for unobservable inputs, which need the most disclosure. In this guide's example, an asset traded in two markets has a fair value of 24 in its principal market.

At a glance

Fair value is
An exit price
Market
Principal market first
Non-financial assets
Highest and best use
Techniques
Market, income, cost
Hierarchy
Levels 1, 2 and 3
US GAAP
ASC 820, mostly the same
IFRS 13 fair value measurement and the fair value hierarchyFair value is: An exit price; Market: Principal market first; Non-financial assets: Highest and best use; Techniques: Market, income, cost; Hierarchy: Levels 1, 2 and 3; US GAAP: ASC 820, mostly the same.KEY FACTS AT A GLANCEIFRS 13 fair value measurement and the fair valuehierarchyFair value isAn exit priceMarketPrincipal market firstNon-financial assetsHighest and best useTechniquesMarket, income, costHierarchyLevels 1, 2 and 3US GAAPASC 820, mostly the sameTax BakersIFRS 13 fair value measurement and the fair value hierarchyFair value is: An exit price; Market: Principal market first; Non-financial assets: Highest and best use; Techniques: Market, income, cost; Hierarchy: Levels 1, 2 and 3; US GAAP: ASC 820, mostly the same.KEY FACTS AT A GLANCEIFRS 13 fair value measurement andthe fair value hierarchyFair value isAn exit priceMarketPrincipal market firstNon-financial assetsHighest and best useTechniquesMarket, income, costHierarchyLevels 1, 2 and 3US GAAPASC 820, mostly the sameTax Bakers
Key facts at a glance, as set out in this guide.

What does IFRS 13 cover?

IFRS 13 applies whenever another standard requires or permits fair value, or disclosure of it, for example for financial instruments under IFRS 9, investment property, revalued property under IAS 16 and assets acquired in a business combination. It does not apply to share-based payments under IFRS 2 or to leases under IFRS 16, and it does not cover measures that resemble fair value but are not, such as net realisable value under IAS 2 and value in use under IAS 36. See value in use and the IAS 16 revaluation model.

What is the fair value hierarchy?

The IFRS 13 fair value hierarchyThe IFRS 13 fair value hierarchyLevel 1Quoted prices in active markets for identical itemsListed sharesLevel 2Other observable inputs, such as yield curvesInterest rate swapLevel 3Unobservable inputs: the company's own assumptionsUnlisted equity
The lowest level input that is significant decides the level.

The level is set by the lowest level input that is significant to the whole measurement. A swap valued from observable yield curves is Level 2; the same swap with a significant unobservable credit adjustment is Level 3. The hierarchy ranks the inputs, not the valuation technique, and Level 1 prices must be used without adjustment whenever they are available.

How is the market chosen?

Fair value assumes the sale takes place in the principal market, the market with the greatest volume and level of activity for the item, or, where there is no principal market, the most advantageous market, the one that maximises the amount received after transaction and transport costs. A company normally takes the market it usually trades in as the principal market. Transaction costs are used to identify the most advantageous market but are not deducted from fair value; transport costs are deducted, because they change the item's location.

IFRS 13 in practice: an asset traded in two markets

An asset is traded in two active markets.

Market AMarket B
Price2625
Transaction costs(3)(1)
Transport costs(2)(2)
Net amount received2122
Fair value if this is the market used2423

If Market A is the principal market, fair value is 26 less transport costs of 2, 24, even though Market B would give a higher net amount. If neither market is principal, the most advantageous market is B, because it gives the highest net amount, 22, after both kinds of cost; fair value is then 25 less transport costs, 23. Transaction costs help pick the market but never reduce the fair value itself.

What is highest and best use?

A non-financial asset is valued at the use by market participants that would maximise its value and is physically possible, legally permissible and financially feasible, even if the company uses it differently. Land used for a factory in an area rezoned for housing is valued as housing land, less the costs of conversion, if that gives a higher value. Highest and best use does not apply to financial assets or liabilities.

Which valuation techniques are used?

  • Market approach: prices and other information from market transactions in identical or comparable items, such as multiples.
  • Income approach: discounted future cash flows or income, such as a discounted cash flow model or an option pricing model.
  • Cost approach: the current replacement cost of an asset's service capacity, adjusted for obsolescence.

Companies choose the techniques that suit the item and for which enough data is available, maximise observable inputs, apply them consistently and calibrate them to transaction prices. Liabilities are measured as if transferred, including the company's own credit risk. See purchase price allocation and climate and fair value.

What must be disclosed?

For each class of asset and liability measured at fair value: the level in the hierarchy, transfers between levels and the policy for recognising them, the valuation techniques and inputs used, and, for Level 3, a reconciliation of opening and closing balances, quantitative information about significant unobservable inputs, and a narrative description of the sensitivity to changes in those inputs. Fair values disclosed but not recognised, such as for loans at amortised cost, also need their hierarchy level.

How does IFRS 13 compare with ASC 820?

The IASB and FASB developed the two together, and they share the exit price definition, the principal market, highest and best use and the three-level hierarchy. Differences are mostly in disclosures and a few practical expedients, such as ASC 820's option to measure certain investments in funds at their net asset value. See IFRS 9 classification and ASC 820 fair value measurement.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is fair value under IFRS 13?

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: an exit price.

What are Level 1, 2 and 3 fair values?

Level 1 uses quoted prices for identical items in active markets, Level 2 other observable inputs, and Level 3 unobservable inputs.

Are transaction costs deducted from fair value?

No. They are used to identify the most advantageous market, but transport costs are deducted.

Is IFRS 13 the same as ASC 820?

Largely: they share the definition, market rules and hierarchy, with differences mainly in disclosures and practical expedients.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 13 Fair Value Measurement
  2. Financial Accounting Standards Board: Accounting Standards Codification

Rules and fees change. If you are reading this long after October 21, 2026, confirm the figures with the source before you rely on them.

IAS 36Calculating value in useIFRS 3Purchase price allocationIFRS 9Classification and measurement under IFRS 9: business model and SPPI

More in IFRS 13

TopicThe IFRS 13 topic page

This guide is general information. It is not tax or legal advice for your situation.