Key Points
- Fair value reflects a market-participant exit price, not the amount the entity expects to realise through continued use or a forced liquidation.
- IFRS 13 establishes a three-level hierarchy: Level 1 (quoted prices), Level 2 (observable inputs), Level 3 (unobservable inputs).
- Over 80% of audit inspection findings on fair value relate to insufficient disclosure of Level 3 inputs and valuation techniques.
- The standard applies identically whether the measurement is required by IFRS 9, IAS 36, IFRS 3, IFRS 16, or any other standard that references fair value.
What is Fair Value (IFRS 13 Definition)?
IFRS 13.9 defines fair value as an exit price. The auditor and the preparer both need to understand what that means in practice: the price a market participant would pay, not the price the entity would accept under duress or the price that reflects entity-specific synergies. IFRS 13.22 requires the entity to identify the principal market (the market with the greatest volume and level of activity for the asset or liability) or, in its absence, the most advantageous market. The measurement assumes the transaction occurs in that market, even if the entity normally transacts elsewhere.
The fair value hierarchy in IFRS 13.72–90 ranks inputs by observability. Level 1 inputs are unadjusted quoted prices in active markets for identical items. Level 2 uses observable inputs for similar items, or quoted prices in inactive markets. Level 3 relies on unobservable inputs developed using the best information available, including the entity's own data. The classification follows the lowest-level input that is significant to the entire measurement. ISA 540.13(a) requires the auditor to evaluate whether the entity's method (including the selection of inputs and the valuation technique) is appropriate for the item being measured. The higher the hierarchy level, the less estimation uncertainty the auditor faces.
Worked example: Schäfer Elektrotechnik AG
Client: German electronics manufacturer, FY2025, revenue €310M, IFRS reporter. Schäfer holds a 12% equity stake in a privately held Danish sensor manufacturer acquired for €8,400,000 in 2022. The investment is classified at fair value through profit or loss under IFRS 9. No quoted price exists. The entity must measure fair value at 31 December 2025.
Step 1 — Identify the valuation technique
Schäfer's finance team selects a market approach using comparable listed transactions. Two acquisitions of Nordic sensor businesses occurred in 2025 at EV/EBITDA multiples of 9.2x and 10.1x. The Danish investee reported EBITDA of €2,900,000 for FY2025.
Step 2 — Apply adjustments to the multiple
Schäfer applies a 15% discount for lack of marketability (the investee is private and the stake is a minority position with no put option). The adjusted multiple range is 7.8x to 8.6x. Management selects 8.2x as the point estimate, reflecting the investee's smaller scale relative to the comparable targets.
Step 3 — Calculate fair value
EBITDA of €2,900,000 multiplied by 8.2x produces an enterprise value of €23,780,000. Schäfer's 12% stake is valued at €2,853,600. Deducting the investee's net debt of €4,100,000 allocated pro rata (€492,000) gives an equity value for the stake of €2,361,600.
Step 4 — Assess reasonableness and record
The prior-year carrying amount was €2,580,000. The decrease of €218,400 is consistent with a compression in sector multiples observed during H2 2025. The auditor corroborates the multiple range against an independent industry report and tests the sensitivity by applying the endpoints of the range (7.8x and 8.6x), producing a fair value band of €2,221,200 to €2,502,000.
Conclusion: the fair value of €2,361,600 for Schäfer's 12% stake is defensible because the market approach rests on two recent comparable transactions, the marketability discount is supported by external studies, and the sensitivity analysis confirms the point estimate sits within a reasonable range.
Why it matters in practice
Teams classify a measurement as Level 2 when a significant unobservable input (such as a marketability discount or an entity-specific growth assumption) drives the calculation. IFRS 13.73 requires classification based on the lowest-level input that is significant to the entire measurement. Misclassifying Level 3 measurements as Level 2 understates the disclosure requirements under IFRS 13.93 and masks estimation uncertainty from users of the financial statements.
Entities measure fair value using a single valuation technique without considering whether a second technique would corroborate the result. IFRS 13.63 states that the entity shall use valuation techniques consistent with one or more of the market approach, the income approach, and the cost approach. ISA 540.18 requires the auditor to evaluate the reasonableness of the point estimate, and a single-technique measurement with no cross-check makes that evaluation harder to support.
Fair value vs. fair market value
| Dimension | Fair value (IFRS 13) | Fair market value (tax/legal usage) |
|---|---|---|
| Definition source | IFRS 13.9: exit price in an orderly transaction between market participants | Varies by jurisdiction; often defined in tax codes or legal precedent |
| Perspective | Market participant (hypothetical buyer with knowledge of the asset) | Hypothetical willing buyer and willing seller, both with reasonable knowledge |
| Highest and best use | IFRS 13.28 requires the measurement to reflect the highest and best use from a market-participant perspective, which may differ from current use | Not always required; some jurisdictions measure based on current use |
| Transaction costs | Excluded from fair value under IFRS 13.25 (they are not a characteristic of the asset) | Treatment varies; some tax valuations include or deduct transaction costs |
| Regulatory context | Financial reporting under IFRS | Tax assessments, legal disputes, insurance claims, regulatory filings |
The terms are not interchangeable. An entity reporting under IFRS that substitutes a tax-authority fair market value appraisal for an IFRS 13 fair value measurement risks misstating the financial statements if the appraisal uses a different definition, excludes highest-and-best-use analysis, or includes transaction costs that IFRS 13 prohibits.
Related terms
Frequently asked questions
How do I document a Level 3 fair value measurement?
Record the valuation technique, every significant input (both observable and unobservable), the sensitivity of the measurement to changes in unobservable inputs, and the process for selecting the point estimate within the range. IFRS 13.93(d) requires quantitative disclosure of unobservable inputs, and IFRS 13.93(h) requires a narrative description of the sensitivity. The audit file should contain evidence supporting each of those disclosures.
Does IFRS 13 apply when another standard requires fair value?
Yes. IFRS 13.5 states that the standard applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements. Whether the item is a financial instrument under IFRS 9, an acquired asset under IFRS 3, or a biological asset under IAS 41, the measurement follows IFRS 13's hierarchy and principles. The only exceptions are share-based payments under IFRS 2 and leases under IFRS 16 (which use fair value but with measurement guidance in their own standards).
When does fair value differ from value in use?
Fair value reflects a market-participant exit price. Value in use reflects entity-specific cash flows discounted at a rate reflecting risks specific to the asset. The two diverge when management's projections differ from what a buyer would assume, or when entity-specific synergies inflate the cash flow forecast. IAS 36.BCZ17 confirms that fair value for impairment testing follows IFRS 13, while value in use follows IAS 36.30–57 with entity-specific assumptions.