IFRS guidelines on Fair Value Measurement
The definition of fair value measurement prior to the issue of IFRS13 was as follows:
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction.
Paragraph BC30 provides three reasons for the change in the definition on fair value measurement:
- the current definition does not specify whether an entity is buying or selling the asset. It is then uncertain whether fair value is an exit [selling] price or an entry [buying] price. The proposed definition requires the use of an exit price.
- in the current definition, it is unclear what is meant by “settling” a liability. Who are the knowledgeable parties? Does this mean the creditor, or other parties? The proposed definition requires fair value measurement by reference to the transfer of a liability to a party who may not be the creditor.
- there is no explicit statement in the current definition whether the exchange or settlement takes place at the fair value measurement date or at some other date. The proposed definition specifies that the fair value is the price at the measurement date.