IFRS 13: Measurement techniques and measurement inputs

IFRS 13: The standard around fair value

IFRS 13 is a central component of international accounting. This is because it provides a comprehensive framework for determining fair value.

This standard is of fundamental importance as it provides clarity on the measurement of assets and liabilities that must be recognized at fair value in the balance sheet.

Fair value is defined as the amount for which an asset could be sold - or a liability settled - in an orderly transaction between market participants. It therefore reflects the current market price and provides an objective basis for the valuation of assets and liabilities.

The provisions of IFRS 13 apply extensively. In principle, it applies to all IFRSs and IASs that require measurement at fair value or disclosures in this regard.

However, there are some exceptions, such as:

• IFRS 2 (share-based payment): Specific measurement rules for employee shareholdings apply here.
• IFRS 16 (Leases): This standard contains separate regulations for the measurement of leases.

If a corresponding IFRS requires measurement at fair value or corresponding disclosures, the application of IFRS 13 is mandatory. This means that companies must take the requirements of IFRS 13 into account when measuring assets and liabilities that fall under the scope of another standard.

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The "at-arms-length principle": at the heart of the definition of fair value

IFRS 13 requires that a fair value reflects the price that would be received in an arm's length transaction between independent market participants. This principle is often referred to as the "at-arms-length principle".

The term "at-arms-length" implies a transaction in which the parties involved act independently of each other and neither party has undue influence over the other. It is assumed that both parties have sufficient information and negotiating power to achieve a price in line with market conditions.

IFRS 13 defines fair value by the following characteristics:

• Price: This is the actual amount paid or received in a transaction.
• Asset or liability: The fair value relates to both assets and liabilities.
• Transaction: The transaction must take place under the conditions of an orderly business transaction.
• Market participants: The parties involved must have sufficient knowledge of the market and act independently of each other.
• Valuation date: The fair value refers to a specific point in time.

The "at-arms-length principle" is of crucial importance because it ensures that a fair value corresponds to an objective and fair value. By focusing on transactions between independent market participants, distorted values that could be influenced by personal relationships or dependencies can be avoided.

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IFRS 13 measurement techniques

Various valuation techniques are available to companies to determine the fair value of an asset or liability. IFRS 13 divides these techniques into three main approaches:

• Market approach: Here, the value of an asset or liability is derived directly from the market. Observable prices for identical or similar assets or liabilities are used for this purpose. The more similar the comparable asset or liability is, the more reliable the valuation is.
• Cost approach: The cost approach is based on the assumption that the value of an asset is determined by the cost of its production or acquisition. These costs are adjusted for depreciation and other adjustments in order to determine the current value. The cost approach is often used for internally generated intangible assets.
• Income approach: Here, the value of an asset is derived from the future economic benefits that the asset will generate. These future cash flows are discounted to the present in order to determine the current value. The income approach is often used for assets with a long useful life, such as real estate or licenses.

Companies should be consistent in the application of valuation techniques. The valuation technique chosen should be the most appropriate for the asset or liability in question and should be retained over time unless circumstances change fundamentally. A change in the valuation technique must be justified and disclosed.

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Measurement inputs of IFRS 13

The valuation techniques are based on certain valuation inputs. These inputs can be divided into three different levels:

• Level 1: Observable, unadjusted market prices - Level 1 represents the highest level of reliability. These are observable prices for identical assets or liabilities that are traded on active markets. Examples of this are listed shares or fixed-interest securities. Their prices are directly observable and do not require any adjustments.
• Level 2: Observable data that are not market quotations - Level 2 comprises observable data that do not originate directly from active markets. This includes
  • Prices for similar assets or liabilities on markets that are not active,
  • Prices for identical assets or liabilities that require adjustments due to specific characteristics,
  • Prices for derivatives that can be derived from observable market prices.
• Level 3: Unobservable inputs - Level 3 includes unobservable inputs, so estimates must be made to determine fair value. Examples of Level 3 inputs are
  • Discount rates for future cash flows if no observable market prices are available,
  • Estimates of future cash flows themselves,
  • Assumptions about the volatility of prices.

Companies should proceed consistently when selecting the measurement inputs and choose the level that is most suitable for the respective asset or liability. In general, the higher the level, the more reliable the valuation input.

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The fair value hierarchy of IFRS 13

IFRS 13 has introduced a fair value hierarchy to increase the transparency and comparability of measurements. It classifies the measurement inputs used into three levels, which differ in terms of their reliability (see previous section).

The fair value hierarchy enables the users of the financial reports to better assess the quality of the valuations. The higher the proportion of Level 1 inputs, the more reliable the valuation.

In their notes to the financial statements, companies must disclose in detail which measurement inputs were used for the individual assets and liabilities and in which level they fall.

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Conclusion - IFRS 13: Measurement techniques and inputs

IFRS 13 has fundamentally changed the measurement of assets and liabilities. By providing a uniform framework for determining fair value, it ensures greater transparency, comparability and reliability in financial reporting.

The standard offers companies flexible instruments for determining fair value, such as various valuation techniques and a three-level valuation hierarchy. The so-called "at-arms-length principle" ensures that the valuations are based on objective market conditions.

The consistent application of IFRS 13 is of great importance for companies. This is because it enables a realistic presentation of the financial position, increases the comparability of financial reports and strengthens confidence in the capital markets.

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