Section 11: Fair Value Measurement (AASB1061_04-26)

This section applies when another section requires or permits fair value measurements or disclosures about fair value measurements.

The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date under current market conditions (ie, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, it is measured using the assumptions that market participants would use when pricing the asset or liability at the measurement date, taking into account the characteristics of the asset or liability that market participants would take into account. Such characteristics include, for example: 

(a) the condition and existing location of the asset; and 

(b) legal restrictions, if any, on the sale or use of the asset (see paragraph 11.6(b)).

The market price used to measure the fair value of the asset or liability shall not be adjusted for transaction costs (ie costs directly attributable to selling an asset or transferring a liability, such as brokerage fees). Transaction costs are not a characteristic of an asset or a liability; rather, they are specific to a transaction.

If location is a characteristic of the asset, the asset’s market price shall be adjusted for transport costs.

A fair value measurement of a non-financial asset (eg property, plant and equipment) assumes a market participant would use the asset for its highest and best use, which takes into account: 

(a) the asset’s physical characteristics (eg the location or size of a property); 

(b) any legal restrictions affecting the market participant’s use of the asset (eg the zoning regulations applicable to a property); and 

(c) whether the use makes financial sense (eg whether a particular use would generate an adequate rate of return for market participants or deliver sufficient goods or services to beneficiaries).

An entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that it is highly probable that a different use by market participants would maximise the value of the asset. This exception would occur only when it is highly probable that, within one year of the asset’s measurement date, the asset will either be sold to a buyer who would use the asset for a different use or be redeployed by the entity.

When a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique. The entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

Three widely used valuation techniques are the market approach, the cost approach and the income approach. An entity shall use valuation techniques consistent with one or more of these approaches to measure fair value: 

(a) the market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. This would often be the case for financial assets and non-financial assets such as land, non-specialised buildings and non-specialised motor vehicles; 

(b) the cost approach reflects the amount that would be required currently to replace an asset's service capacity (often referred to as current replacement cost); and 

(c) the income approach discounts future cash flows or income and expense items to their present value.

The cost approach considers that from the perspective of a market participant seller, the price that would be received for an asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. That is because a market participant buyer would not pay more for an asset than the cost of replacing its service capacity. Obsolescence encompasses physical deterioration (eg reflecting the asset’s age and condition), functional (technological) obsolescence and economic (external) obsolescence. One reason the current replacement cost method may be used is that the asset is specialised and without readily observable market evidence.

The fair value of an asset is reliably measurable if: 

(a) a market price of an identical asset or a similar asset is observable close to the measurement date; or 

(b) either: 

(i) the variability in the range of reasonable fair value measures is insignificant for that asset; or 

(ii) the probabilities of the various measures within the range can be reasonably assessed and used in estimating fair value.

For assets for which a market price of an identical asset or a similar asset is not observable, there are many situations in which the variability in the range of reasonable fair value measures is likely to be insignificant. Normally it is possible to estimate the fair value of an asset that an entity has acquired recently from an outside party. However, if the range of reasonable fair value measures is significant and the probabilities of the various measures cannot be reasonably assessed, the entity is precluded from measuring the asset at fair value.