Key Takeaways
- The market approach derives fair value from actual transaction prices or quoted multiples, not from internal cash flow forecasts.
- Common techniques include comparable company analysis, precedent transaction analysis, matrix pricing for debt instruments, and market multiples applied to earnings or revenue.
- Inspection findings on valuation most frequently cite inadequate documentation of why selected comparables are sufficiently similar to the subject asset.
- The approach produces Level 2 or Level 3 hierarchy classifications depending on how much adjustment the practitioner applies to the observable inputs.
What is Market Approach?
IFRS 13.62 requires an entity to use valuation techniques consistent with one or more of three approaches: market, income, or cost. The market approach prices an asset or liability by reference to what market participants have actually paid in comparable transactions. IFRS 13.B5 identifies two common techniques within this approach: matrix pricing (used primarily for debt instruments where the bond is not actively traded but observable data exists for similar bonds) and the use of market multiples derived from a set of comparables.
Selecting comparables is where the judgment concentrates. The entity identifies transactions involving assets or businesses with similar risk profiles, cash flow characteristics, growth prospects, and industry positioning. IFRS 13.B6 requires that the comparables be adjusted for differences between them and the item being measured. Those adjustments (for size, liquidity, geographic exposure, contractual terms) determine the hierarchy classification. When the adjustments are minor and the inputs remain observable, the measurement sits at Level 2 under IFRS 13.81. When adjustments are significant or rely on entity-specific data, the measurement drops to Level 3. ISA 540.13(a) requires the auditor to evaluate whether the entity's choice of technique and the comparables selected are appropriate for the item being measured.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY2025, revenue €67M, IFRS reporter. Rossi acquired a 25% stake in a Spanish olive oil producer for €4,200,000 in 2023. The investment is classified at fair value through profit or loss under IFRS 9. No active market exists for the shares. Management elects the market approach to measure fair value at 31 December 2025.
Step 1 — Identify comparable transactions
Rossi's finance team identifies four acquisitions of Southern European olive oil producers completed during 2024 and 2025. The transaction enterprise values ranged from €14M to €52M, with EV/EBITDA multiples of 7.4x, 8.1x, 8.9x, and 9.3x. The Spanish investee reported EBITDA of €2,100,000 for FY2025.
Step 2 — Adjust the multiples for differences
Two of the four targets were vertically integrated (owning bottling and distribution), while the investee operates only at the production stage. Rossi applies a 10% downward adjustment to those two multiples, producing an adjusted range of 6.7x to 9.3x. The interquartile range is 7.5x to 8.7x. Management selects 8.0x as the point estimate, reflecting the investee's above-average EBITDA margin but smaller scale.
Step 3 — Calculate fair value of the stake
EBITDA of €2,100,000 multiplied by 8.0x produces an enterprise value of €16,800,000. The investee's net debt at 31 December 2025 is €3,400,000, giving equity value of €13,400,000. Rossi's 25% stake is valued at €3,350,000.
Step 4 — Cross-check and sensitivity analysis
The auditor tests the endpoints of the interquartile range (7.5x and 8.7x), producing fair values of €3,131,250 and €3,568,750 for the 25% stake. The point estimate of €3,350,000 falls within this band. As an additional cross-check, the auditor compares the implied EV/revenue multiple (8.0x applied to the investee) against the revenue multiples observed in the same four transactions, confirming directional consistency.
Conclusion: the fair value of €3,350,000 for Rossi's 25% stake is defensible because the market approach rests on four recent comparable transactions in the same sector and geography, adjustments for structural differences are documented, and the sensitivity analysis confirms the point estimate sits within the interquartile range.
Why it matters in practice
- Teams select comparables based on industry classification alone without adjusting for differences in size, leverage, growth rate, or business model. IFRS 13.B6 requires adjustments for factors that market participants would consider, and ISA 540.13(b) requires the auditor to evaluate whether those adjustments are appropriate. Accepting an unadjusted median multiple from a screening database without documenting why the comparables are sufficiently similar to the subject entity is the most common documentation gap on market-approach valuations.
- Entities apply the market approach using stale transaction data (multiples from deals completed two or three years prior) without adjusting for changes in market conditions. IFRS 13.B7 requires the entity to consider whether the transaction occurred under conditions consistent with the measurement date's market environment. A 2022 acquisition multiple applied to a December 2025 measurement date without a documented adjustment for intervening interest rate shifts or sector re-rating weakens the defensibility of the estimate.
Market approach vs. income approach
| Dimension | Market approach (IFRS 13.B5–B7) | Income approach (IFRS 13.B10–B11) |
|---|---|---|
| Primary data source | Prices from actual market transactions involving comparable items | Entity's projected cash flows discounted to present value |
| Key judgment | Selecting and adjusting comparables | Discount rate, growth rate, terminal value assumptions |
| When strongest | Recent transactions exist for similar assets in similar markets | Asset is unique or no comparable transactions are available |
| Common hierarchy level | Level 2 (minimal adjustment) or Level 3 (significant adjustment) | Typically Level 3 due to reliance on unobservable cash flow projections |
| Audit focus | Source and relevance of comparables; size and basis of adjustments | Discount rate build-up; reasonableness of cash flow forecasts; terminal value |
The choice between the two is not binary. IFRS 13.63 encourages the use of multiple techniques to corroborate a measurement. An entity that relies solely on the market approach when only two comparable transactions exist, neither closely matching the subject asset, faces a harder time defending the estimate than one that cross-checks against a discounted cash flow model.
Related terms
Frequently asked questions
When should I use the market approach instead of the income approach?
The market approach works best when recent comparable transactions or quoted prices exist for similar assets. IFRS 13.61 requires the entity to use techniques appropriate for the circumstances with sufficient available data. If observable market data is scarce or the asset is highly entity-specific (such as a specialised intangible), the income approach may produce a more reliable measurement. Many practitioners use both and reconcile the results.
How do I document comparable selection for a market approach valuation?
Record each comparable transaction, including the date, the parties, the deal value, and the multiple derived. State the selection criteria (industry, geography, size range, deal type) and explain why each comparable is sufficiently similar to the subject asset. IFRS 13.91(a) requires disclosure of the valuation technique used, and ISA 540.13(a) requires the auditor to evaluate whether the technique and data are appropriate.
Does the market approach always produce a Level 2 measurement?
No. A market approach measurement qualifies as Level 2 under IFRS 13.81 only when the inputs are observable and adjustments are minor. When significant adjustments rely on unobservable data (a liquidity discount derived from entity-specific analysis, or a control premium estimated without observable benchmarks), the measurement falls to Level 3 under IFRS 13.86.