The measurement of fair value under IFRS 13 is based on a hypothetical transaction between the reporting entity and market participants. The assumptions used as inputs into the valuation process are those made by the market participants, not those made by the entity itself.
Hence the measurement of fair value under IFRS 13 is not an entity-specific measure. However, even though this is the intent of the standard-setters, the question is whether in practice, measurement of fair value will not be based on entity-specific information:
– a reporting entity is not required to identify specific market participants, so any assumptions made will not relate to the circumstances facing any entity currently operating in practice.
– In an endeavor to make the inputs more reliable, an entity may rely on information generated within itself rather than less reliable, hypothetical information concerning some non-existent market participant.
– If the market participant buyer steps into the shoes of the entity that holds those specialized assets, then potentially the market participant is assumed to be the same as the reporting entity and entity-specific factors are used in the valuation.
– Where an income valuation approach is used, and a net present value method applied, it is hard to see that entities will not insert the entity-specific information into the present value calculations.
– Similarly where level 3 non-observable inputs are used, non-market data is not readily available for in-use assets carried by other entities.
– Simple cost-benefit considerations will encourage an entity to use in-house data rather than model what a market participant might hypothetically do.
In accounting, fair value is used as a certainty of the market value of an asset or a liability for which a market price cannot be determined.