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• 3 Fair value measurement

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• How do many accounting standards define the term 'fair value'?

  Many accounting standards defined the term fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length.

• When measuring faire value, paragraph B2 of IFRS requires an entity to determine all of the following:

  - the particular asset or liability that is the subject of the measurement (consistent with its unit of account)
  - for a non-financial asset, the valuation premise that is appropriate for the measurement (consistent with its highest and best use)
  - the principle (or most advantageous) market for the asset or liability
  - the valuation technique(s) appropriate for the measurement, consideration the available inputs that represent market participants assumptions and their categorization within the fair value hierarchy.

• Which of the key questions that need to be asked when terminating the asset or liability to be measured?

  - What is the unit of account? Is the asset a stand-alone asset or is it a group of asset?
  - Are there any restrictions on sale or use of the asset or transfer of the liability?
  - What is the condition of the asset?
  - What is the location of the asset?

• When measuring fair value an equity si required to assume that the hypothetical transaction to sell the asset or transfer the liability takes place either:

  A. In the principal market for the asset or liability
  B. In the absence of a principal market, in the most advantageous market for the asset or liability

• Who are the market participants?

  - They are independent of each other. That is, they are not related parties.
  - The are knowledgeable, having a reasonable understanding about the asset or liability using all available information.
  - The are able and willing to enter into a transaction for the asset or liability

• According to appendix A of IFRS 13, inputs are:

  The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as following:
  
  - the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model)
  - the risk inherent in the inputs to the valuation technique

• How are the inputs prioritized?

  Into three levels; level 1, level 2 and level 3

• What is the fair value hierarchy?

  The fair value hierarchy gives the highest priority to quoted market prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs.

• A market may no longer be considered active if:

  - There has been a significant decrease in the volume and level of activity for the asset or liability then compared with normal market activity
  - The are few recent transactions
  - Price quotations are not based on current information
  - Price quotations vary substantially over time or among market-makers

• Examples of level 2 inputs

  - Finished goods inventory at a retail outlet
  - Building held and used
  - Cash-generating unit