Fair Value Measurement under IFRS 13 – How Markets, Models and Management Define Truth

Last Updated on 10/10/2025 by 75385885

Part I – The Rise of Fair Value: From Illusion to Discipline

Fair Value Measurement under IFRS 13 – When markets heat up, balance sheets glow with confidence.
During the late 1990s, as the internet bubble inflated, companies discovered that the fastest way to impress investors was not by selling products but by valuing expectations. Dot-com start-ups capitalised on “eyeballs” and “clicks,” Enron revalued its own energy contracts, and auditors learned—too late—that optimism can be modelled just as easily as cash.

Those years changed accounting forever. They showed that value was not an objective fact but a story told in numbers. When the bubble burst and Enron collapsed, the lesson was brutal: markets can lose faith faster than companies can rebuild it.

IFRS 13 was born from that realisation. It was not designed to stop optimism, but to discipline it—to make every estimate traceable to evidence, every assumption visible to users. If IFRS 7 and IFRS 9 tell us what to measure, IFRS 13 tells us how to think about measurement itself. This is the IFRS 13 Summary.

1. A Short History: From Enron to Lehman

Fair value had always existed in financial reporting—banks marked securities to market long before IFRS—but until the early 2000s, each standard defined it differently. IAS 39 used “fair value” for derivatives; IAS 16 applied “revalued amount” to property; IAS 40 talked about “market value” for investment property. There was no single compass.

Then came a chain of crises: Enron (2001), WorldCom (2002), Lehman Brothers (2008). Each failure showed that valuation without transparency is theatre. Enron’s internal “mark-to-model” system priced long-term contracts using unverified assumptions. When energy markets shifted, management kept the values but not the doubts.

Regulators responded by demanding one coherent language for value. The IASB’s answer arrived in 2011: IFRS 13 Fair Value Measurement, effective from 2013. It consolidated two decades of fragmented guidance into one universal framework.

Its philosophy was radical for its time:

“Fair value is not what management thinks an asset is worth—it is what a market participant would pay.”

That single shift—from entity view to market view—turned subjectivity into accountability.

Read more in our blog: Corporate Failures as Governance Lessons: From Enron to Carillion.

2. Fair Value as the Nervous System of Capitalism

In modern capitalism, fair value acts like the nervous system: it transmits signals of confidence and fear through every balance sheet.

When equity markets rise, fair value lifts investment portfolios.

When bond yields fall, liabilities swell as discount rates compress.

When commodities fluctuate, energy firms see volatility flow through OCI.

For companies like Shell, Siemens, and Unilever, this isn’t theoretical. Their financial statements pulse with market data—oil prices, credit spreads, yield curves—each feeding the IFRS 13 machine.

But IFRS 13’s goal was never volatility for its own sake. It aimed to translate market reality into disclosure language, so investors could see not only the results but the reasoning. In that sense, it is less an accounting rule than a governance discipline: a code of conduct for how to handle uncertainty.

Read more on two close IFRS definitions: Fair value (the general overall IFRS 13 defintion) and Fair value less costs to sell (from IFRS 13 in respect of IAS 36 Impairment of assets-calculations.

3. The Architecture of IFRS 13

IFRS 13 built three pillars that together define the fair-value ecosystem:

Pillar	Concept	Key Judgments

Definition

Fair value as an exit price between market participants at the measurement date.

Identifying the principal or most advantageous market.

Hierarchy

Levels 1 – 3 based on input observability.

Assessing whether a market is “active”; deciding when data become unobservable.

Disclosure

Explain techniques, inputs, and sensitivities.

Choosing how much uncertainty to reveal and how to narrate it.

These three pillars structure the rest of the standard. Everything else—valuation techniques, calibration, sensitivity analysis—follows logically from them.

4. Why the World Needed IFRS 13

The 2008 financial crisis revealed an uncomfortable truth: in stressed conditions, markets themselves lose clarity. Banks could no longer price their own assets because trades vanished; auditors didn’t know whether to trust models or waiting buyers.

Without a framework, “fair value” became a floating concept, manipulated or misunderstood. IFRS 13 imposed order:

1. Hierarchy discipline – always prefer observable inputs.
2. Disclosure discipline – quantify the effect of unobservable ones.
3. Governance discipline – document every choice.

In short, it turned valuation from alchemy into method.

5. Markets as Mirrors

Fair value is often criticised for “making volatility visible.” Yet that visibility is its virtue. IFRS 13 holds up a mirror to the market’s mood swings.

When Meta Platforms revalued its share-based acquisitions after tech-market corrections, investors saw losses—but also saw honesty. When Landsec disclosed a 15 % drop in London office valuations during COVID, the share price dipped briefly, then recovered as transparency rebuilt confidence.

Markets forgive bad news faster than they forgive opacity.

6. The Three Lenses of Truth

Every fair-value estimate can be examined through three lenses:

1. The Market Lens – what does the world of observable prices tell us?
2. The Model Lens – what do we assume when the world goes silent?
3. The Management Lens – how do we justify and govern those assumptions?

IFRS 13 doesn’t rank them morally, but hierarchically. The closer to the market, the less subjective the truth; the further away, the more we rely on professional faith.

This hierarchy is both a measurement rule and a psychological map. At Level 1, you report what everyone can see; at Level 3, you reveal what only you believe.

7. The Market Lens: Where Observability Ends

Level 1 and Level 2 are deceptively simple.

• Level 1: identical assets, active markets, no adjustment. Examples: Apple shares, government bonds.
• Level 2: similar assets or indirect data—credit spreads, yield curves, implied volatilities.

Judgment arises when activity fades. IFRS 13 requires assessing whether transactions are “orderly.” A panic sale does not define fair value; a thin market may still be “active.”

When BP faced an oil-price collapse in 2020, its derivative valuations relied on sparse forward-curve data. Were those still observable? Management had to triangulate between broker quotes, exchange data, and internal models. The decision to stay at Level 2 rather than move to Level 3 was a governance call, not a mathematical one.

8. From Market to Model: The Turning Point

The moment data become uncertain, models take over. IFRS 13 recognises three families of valuation technique:

1. Market Approach – using prices from comparable assets.
2. Income Approach – discounting future cash flows to present value.
3. Cost Approach – estimating replacement cost minus obsolescence.

Each approach can yield a different truth. The standard’s genius is not in choosing one, but in forcing transparency about why you chose it.

Example:
During the pandemic, Landsec switched from market comparables to income approach because too few deals occurred. Disclosing that switch—and explaining its impact—was a model application of IFRS 13 discipline.

9. The Psychology of Numbers

Valuation is not purely analytical; it’s emotional arithmetic. Discount rates reflect fear; growth rates reflect hope. IFRS 13 forces management to translate those feelings into disclosures.

When Siemens valued its digital-industry ventures, it disclosed discount rates between 8 % and 12 %, growth rates 2–3 %. That table of numbers is really a map of confidence.

The standard makes emotions auditable.

Part II – The Mechanics of Truth: How Markets, Models and Management Interact

If Part I showed why the world needed IFRS 13, Part II explains how it actually works.
Fair value is not one number — it’s a negotiation between data and belief. Markets give the signals; models translate them; management decides whether to trust the translation.

Valuation as a System of Instruments

Think of fair value measurement as an orchestra.

• The violin section is the market approach: quick, responsive, echoing current prices.
• The brass is the income approach: loud, long-term, projecting expected cash flows.
• The percussion is the cost approach: solid, conservative, marking the rhythm of replacement cost.

The conductor — management — chooses which instrument leads, when to blend, and when to stop the music altogether.

The Market Approach

Relies on observable comparables. Used heavily in property, private equity, and listed securities.

Example: Landsec benchmarks each London office against recent transactions, adjusting for location, quality, and tenancy. When markets freeze, they disclose fewer comparables and shift to DCF — a visible change of tune.

Read more in our blog on the Market approach-valuation techniques.

The Income Approach

Builds a discounted-cash-flow model (DCF) based on expected inflows and outflows. Critical parameters:

• Discount rate (WACC) — cost of capital reflecting risk;
• Terminal growth rate — sustainable long-term expectation;
• Timing of cash flows — pattern and probability.

Example: Vodafone values its spectrum licences using projected revenues per region, discounted at rates reflecting regulatory risk and country spread. Every assumption — customer churn, data usage, inflation — shapes fair value more than the model formula itself.

Read more in our blog on the Income approach-valuation techniques.

The Cost Approach

Used for specialised assets: manufacturing lines, power plants, defence technology.

Fair value = current replacement cost – physical and functional obsolescence.

Example: Siemens Energy applies this method to turbines where no active market exists; replacing a 2018 design requires adjusting for efficiency gains and new emission standards.

Each approach is legitimate — IFRS 13 only demands that management explain which logic fits market behaviour.

Read more in our blog on the Cost approach-valuation techniques.

2. Parameters: The DNA of Valuation Models

Even the best technique fails if its assumptions drift from reality. IFRS 13 pushes entities to expose the DNA of their valuations — the parameters that silently move results by millions.

Discount Rate

The discount rate is the market’s measure of impatience.
A 1 % shift can alter value by 10 – 20 %.
Companies derive it from CAPM or WACC, adjusted for country, currency, and asset risk.

Example: Unilever uses regional WACCs from 6 % to 11 % for brand valuations; those numbers are back-tested annually against external capital-market data.

Volatility

Essential for derivative valuations and embedded options.
Market-implied volatility is preferred (Level 2). When not observable, entities extrapolate from similar assets or historical data (Level 3).

Example: Shell’s long-dated commodity options use 10-year volatility extrapolated from shorter maturities — disclosed transparently in the sensitivity table.

Liquidity and Credit Spreads

Liquidity discounts capture the friction of selling large or illiquid positions. Credit spreads reflect counterparty risk.
IFRS 13 instructs preparers to maximise observable inputs — hence spreads are typically taken from secondary markets, not management judgment alone.

Example: Siemens prices intercompany loans using external BBB+ yield curves plus a small internal adjustment; the disclosure explains both components.

Correlation and Diversification

For portfolios, correlation drives total risk. Many corporates forget that diversification itself can be an unobservable input. IFRS 13 allows portfolio-level adjustments if market participants would price them that way.

Example: BP’s carbon-credit portfolio values offsets with a correlation factor to oil prices, recognising that emission-credit demand rises when fossil-fuel output grows.

3, Calibration: Keeping Models Honest

Calibration is IFRS 13’s built-in lie detector. Paragraph 64–65 require models to reconcile with observable transaction prices when available. The logic: if you bought something last month for €10 million, a model that now values it at €14 million demands evidence, not enthusiasm.

Case – Vodafone Ventures:
Vodafone invests in start-ups providing digital infrastructure in Africa. The last funding round valued one entity at €40 million. Six months later, internal forecasts doubled expected cash flows. The valuation team recalibrated: half the uplift went to new performance data, half to market re-rating. Auditors accepted the first but challenged the second — prompting a 10 % sensitivity disclosure.

Calibration doesn’t forbid optimism; it forces it to be explainable.

4. Level 3: The Deep Ocean of Estimation

When markets provide no soundings, companies sail by starlight — Level 3 inputs.
Here, IFRS 13 asks for quantitative disclosure of key unobservable variables and their impact.

Typical Level 3 parameters:

• long-term growth rate (g);
• discount rate (r);
• probability of scenarios;
• yield or capitalisation rate for property;
• expected volatility for unlisted equity.

Example – Siemens Energy CleanTech Ventures
Discount rate = 13 %, terminal growth = 3 %. A ±1 % change in either moves value ±€25 million.
Disclosed transparently in the 2024 report, it demonstrates how a sensitivity note converts model risk into investor insight.

Example – Landsec Property Yields
A 25 bps yield move = £280 million swing in NAV.
Rather than hide behind the number, Landsec’s disclosure walks readers through how independent valuers challenge the in-house assumptions.

Example – Shell Decommissioning Liabilities
Valued using expected cash-outflows discounted at market rates reflecting own credit risk.
IFRS 13 requires incorporating non-performance risk — a counter-intuitive notion that credit deterioration can reduce liability fair value.

Shell discloses both nominal and risk-adjusted measures, turning accounting theory into public governance.

5. Fair Value of Liabilities – The Mirror Turns Inward

Assets look outward; liabilities look inward.
Fair value of a liability is the price a market participant would require to assume it. That includes:

• time value of money;
• own credit risk;
• transfer costs.

Example: BP’s decommissioning obligations for North-Sea rigs include a credit-spread adjustment of 80 bps. During the 2022 energy crisis, spreads tightened, increasing liability fair value by £90 million — disclosed through OCI under IFRS 9.

The judgment lies in choosing the right spread source and proving that a transfer market (even hypothetical) exists.

6. Sensitivity Analysis – Making Uncertainty Visible

IFRS 13.93 (h) demands sensitivity disclosure for significant unobservable inputs.
Best practice is dual-axis sensitivity: one for key assumptions, one for scenario probability.

Case – Unilever Brand Valuations:
Discount rate 8–9 %, terminal growth 2–3 %. A 1 % increase in r ⇒ €220 million loss; a 1 % increase in g ⇒ €180 million gain.
Presented graphically, it teaches readers where the value’s fault lines lie.

Transparency here is strategic: investors price risk better when they understand it.

7. Data Hierarchy in Practice – The Siemens Example

Input	Source	IFRS 13 Level	Control Process

FX rates, yield curves

Bloomberg

2

Automated daily feed

Private-equity peer multiples

PitchBook

3

Quarterly benchmarking

Discount rates

Internal WACC model

3

Reviewed by Treasury

Commodity forward prices

ICE / EEX

2

Reconciled by Risk Control

Customer churn assumptions

Management plan

3

Sensitivity tested

This table, extracted from Siemens AG’s disclosures, shows IFRS 13 hierarchy at work: maximise observable, justify the rest.

8. Models That Failed – Lessons from the Past

The most famous valuation failures were not due to lack of data but to over-confidence in models.

Enron (2001) – The Original Sins
Enron’s energy-contract models used projected margins for 20 years, discounted at arbitrary rates. Gains were booked day-one (“mark-to-model”), never revisited. When markets shifted, values stayed frozen — until they collapsed. IFRS 13’s calibration rule was written precisely to prevent that.

Lehman Brothers (2008) – Liquidity Illusion
Lehman marked complex mortgage portfolios using dealer quotes that were “observable” only in name. IFRS 13 would now force an assessment of whether those quotes represented active, orderly transactions — and a move to Level 3 if not.

Greensill Capital (2021) – Supplier-Finance Opacity
Though post-IFRS 13, the lesson is governance: off-balance-sheet valuations with no transparency destroy trust faster than credit risk itself. The Guardian analysis (Greensill Capital collapse shows City watchdog needs shake-up, say MPs) reads like a case study in why IFRS 13’s disclosure regime matters.

Market Reality vs. Accounting Reality

Critics argue that fair value exaggerates volatility. IFRS 13’s defenders reply: volatility existed anyway — fair value just shows it sooner.
Markets correct; models reveal; management interprets. The danger is not transparency but denial.

Fair value is the accountant’s equivalent of daylight: harsh, but healthy.

Part III – The Governance of Valuation: Building Trust in a Market World

If the first two parts showed that fair value is born in the market and modelled in spreadsheets, this part shows where it actually lives: in judgment, documentation, and dialogue.

IFRS 13 was not written for accountants alone. It was written for the entire ecosystem that turns market data into decisions — the boards, CFOs, auditors, and investors who must decide what to believe.

1. Disclosure: Turning Estimation into Explanation

Every number in a fair-value table is a potential conversation. IFRS 13.91-99 requires entities to explain valuation techniques, hierarchy levels, and sensitivities — not as a checklist but as a narrative of how uncertainty is handled.

A good disclosure answers three questions:

1. What was measured? (the asset or liability)
2. How was it measured? (technique, inputs, hierarchy)
3. Why does it matter? (impact and uncertainty)

Dull disclosure

“The fair value of investment properties was determined using a discounted cash-flow model.”

Effective disclosure

“The €3.4 billion portfolio of urban logistics parks was valued using a DCF model with discount rates between 6 % – 7 % and terminal yields of 4 % – 5 %. A 25 bps change in yield would change fair value by ± €210 million. Independent external valuers challenged the model quarterly.”

The second paragraph educates instead of hiding. It transforms a compliance note into a signal of competence.

2. The Judgment Ecosystem

Behind a credible fair value sits a network of checks and balances — a judgment ecosystem.

Function	Role	Typical Evidence

Valuation team

Builds models and gathers data

Model files, parameter sources

Finance / Controlling

Reviews consistency with forecasts

Bridge analyses, recalibrations

Risk management

Tests sensitivity and scenario design

Stress tests, PD/LGD overlays

Internal audit

Validates process integrity

Audit trails, approvals

Audit committee

Interprets disclosures and investor impact

Dashboards, external appraiser reports

When these functions operate in harmony, fair value becomes an organisational capability, not an annual ritual.

3. Fair Value under Pressure – ESG and the New Intangibles

Markets are no longer pricing only cash; they’re pricing carbon, data, and trust.

Carbon and environmental assets

Under IAS 41 and IFRS 13, carbon credits and emission rights are valued at market prices if active trading exists.
But when regulation shifts, markets fragment — moving measurements from Level 1 to Level 3 overnight.
Example: Shell and BP both disclose sensitivity of carbon-credit portfolios to regulatory changes. A 10 % drop in assumed carbon price reduced asset values by USD 120 million at Shell’s 2024 reporting date.

Digital assets and AI models

A tech company like Meta can value acquired data sets or algorithmic platforms through discounted cash flows of future ad impressions or licence fees. Those are Level 3 by nature: no market, uncertain life, high correlation with macro sentiment.
The governance challenge is not the model itself but ensuring that assumptions age faster than ambitions — frequent recalibration.

ESG and “Fair Value 2.0”

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IFRS 13 doesn’t yet quantify sustainability, but its spirit—market-participant perspective—already applies. ESG risk changes discount rates, obsolescence assumptions, and cash-flow horizons. In practice, fair value is becoming the bridge between financial and non-financial reporting.

External read: Climate Disclosure Standards Board – Accounting for climate.

4. Internal Control Over Valuation

Strong companies treat fair value the way airlines treat maintenance:
continuous, documented, and non-negotiable.

Best practices emerging across IFRS reporters:

• Model inventory: every model registered, owned, version-controlled.
• Assumption log: parameters, sources, rationale, approval date.
• Back-testing: compare past estimates with realised outcomes.
• Change-control: document every formula or parameter adjustment.
• Governance link: tie valuation adjustments to risk appetite statements.

This is where IFRS 13 meets COSO: control, evidence, and review cycles.
It’s not bureaucracy — it’s how credibility compounds.

6. The Communication Imperative

Fair value is not just measurement; it’s communication. Investors read it the way linguists read tone of voice.
Two companies may use the same discount rate, yet one sounds confident and the other evasive. The difference lies in how transparently they narrate uncertainty.

Consider Siemens AG (2024):

“We recognise that Level 3 measurements depend on assumptions about long-term industrial demand and discount rates between 7 % – 9 %. We monitor sensitivity to GDP and capex cycles.”
It acknowledges vulnerability without apology — a mark of maturity.

6. How Leadership Shapes the Fair-Value Conversation

Leadership doesn’t determine the number; it determines the culture that produces it.

CFOs

Set the tone by insisting that valuation models are living systems, not one-off exercises. A good CFO asks, “What would change this assumption?” more often than “Is this the right number?”

Boards and Audit Committees

Should treat the fair-value note as a governance mirror:

• Does it reflect challenge and independence?
• Does it connect valuation to strategy?
• Is sensitivity disclosed in plain language?

Auditors

Are not enemies of management; they’re translators between confidence and credibility. The best auditors test process before numbers — how assumptions are sourced, reviewed, and documented.

Investors

Read fair value as a narrative of trust. Specificity breeds confidence; opacity breeds discount.

7. Fair Value and the Rhythm of the Market

Because IFRS 13 uses exit price logic, reported values move with markets.
This volatility is often misunderstood: it’s not distortion; it’s information.
When rates rise, discounted values fall — the numbers are telling the truth of opportunity cost.
Fair value doesn’t create risk; it reveals it.

The art of financial leadership is to absorb that rhythm without panic.
Markets breathe; accounting should exhale with them, not hold its breath.

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8. The Future – From Data to Dialogue

Next-generation fair value will rely on:

• AI-assisted valuations (faster data ingestion, scenario modelling).
• Blockchain-verified market inputs (for carbon and tokenised assets).
• Integrated ESG discounting (carbon-adjusted WACC).

But the principle remains timeless: transparency beats precision.
Users don’t demand perfect numbers — they demand to understand the assumptions that drive them.

9. Reflections for Boards, CFOs, and Auditors

• Fair value is not optional truth – it’s the shared language of global capital.
• Transparency is strategy – markets reward clarity faster than they punish losses.
• Governance equals valuation quality – numbers follow culture.
• Consistency over quarters builds trust – disclosure volatility hurts more than market volatility.
• The narrative matters – every assumption tells a story; make sure it’s coherent.

Fair value will keep evolving, but one idea will endure:

Markets price what they believe. Accounting’s job is to make that belief traceable.

FAQs Fair Value Measurement under IFRS 13

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