FAIR VALUE MEASUREMENTS

Valuation bases under CF (1)

 (a) Historical cost. Assets are recorded at the amount of cash or
cash equivalents paid or the fair value of the consideration given
to acquire them at the time of their acquisition. Liabilities are
recorded at the amount of proceeds received in exchange for the
obligation, or in some circumstances (for example, income
taxes), at the amounts of cash or cash equivalents expected to be
paid to satisfy the liability in the normal course of business.

 (b) Current cost. Assets are carried at the amount of cash or cash
equivalents that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at
the undiscounted amount of cash or cash equivalents that would
be required to settle the obligation currently.
Valuation bases under CF (2)
 (c) Realisable (settlement) value. Assets are carried at the
amount of cash or cash equivalents that could currently be
obtained by selling the asset in an orderly disposal. Liabilities are
carried at their settlement values; that is, the undiscounted
amounts of cash or cash equivalents expected to be paid to
satisfy the liabilities in the normal course of business.

 (d) Present value. Assets are carried at the present discounted

value of the future net cash inflows that the item is expected to
generate in the normal course of business. Liabilities are carried
at the present discounted value of the future net cash outflows
that are expected to be required to settle the liabilities in the
normal course of business.
Objectives
 (a) defines fair value;
 (b) sets out in a single MFRS a framework for
measuring fair value; and
 (c) requires disclosures about fair value
measurements.
Scope
The measurement and disclosure requirements of this MFRS do
not apply to the following:
 (a) share-based payment transactions within the scope of
MFRS 2 Share-based Payment; (i.e. equity instruments)
 (b) leasing transactions within the scope of MFRS 117 Leases (Fair
value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction);
 (c) measurements that have some similarities to fair value but
are not fair value, such as net realisable value in MFRS 102
Inventories or value in use in MFRS 136 Impairment of Assets (PV
of estimated cash f lows expected from continuing use of the asset and from its disposal
at the end of the useful life) .
The disclosures required by this MFRS are not required for the
following:
 (a) plan assets measured at fair value in accordance with MFRS
119 Employee Benefits;
 (b) retirement benefit plan investments measured at fair value in
accordance with MFRS 126 Accounting and Reporting by
Retirement Benefit Plans; and
 (c) assets for which recoverable amount is fair value less costs of
disposal in accordance with MFRS 136.
Definition
 Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an
orderly transaction in the principal (or most
advantageous) market at the measurement date
under current market conditions (i.e. an exit
price) regardless of whether that price is directly
observable or estimated using another valuation
technique.
Valuation Techniques
 Market Approach
 The market approach uses prices and other relevant
information generated by market transactions involving
identical or comparable (i.e. similar) assets, liabilities or
a group of assets and liabilities, such as a business.
 Cost Approach
 The cost approach reflects the amount that would be
required currently to replace the service capacity of an
asset (often referred to as current replacement cost).
 Income approach
 The income approach converts future amounts (e.g. cash
flows or income and expenses) to a single current (i.e
discounted) amount. When the income approach is used, the
fair value measurement reflects current market expectations
about those future amounts.
 Those valuation techniques include, for example, the following:
(a) present value techniques (see paragraphs B12–B30);
(b) option pricing models, such as the Black-Scholes-Merton
formula or a binomial model (i.e. a lattice model), that incorporate
present value techniques and reflect both the time
value and the intrinsic value of an option; and
(c) the multi-period excess earnings method (i.e. abnormal earnings
method), which is used to measure the fair value of some intangible
assets.
Input to the valuation techniques
 General principle
 Valuation techniques used to measure fair value
shall maximise the use of relevant observable
inputs and minimise the use of unobservable
inputs.
Level 1 inputs
 Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the entity
can access at the measurement date.

 A quoted price in an active market provides the most

reliable evidence of fair value and shall be used
without adjustment to measure fair value whenever
available, except as specified in paragraph 79.
Level 2 inputs
 Level 2 inputs are inputs other than quoted prices
included within Level 1 that are observable for the
asset or liability, either directly or indirectly.
 If the asset or liability has a specified (contractual) term, a Level 2
input must be observable for substantially the full term of the asset
or liability. Level 2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active
markets.
(b) quoted prices for identical or similar assets or liabilities in
markets that are not active.
(c) inputs other than quoted prices that are observable for the
asset or liability, for example:
(i) interest rates and yield curves observable at commonly
quoted intervals;
(ii) implied volatilities; and
(iii) credit spreads.
(d) market-corroborated inputs.
Level 3 inputs
 Level 3 inputs are unobservable inputs for the asset or
liability.

 Unobservable inputs shall be used to measure fair value to

the extent that relevant observable inputs are not available,
thereby allowing for situations in which there is little, if
any, market activity for the asset or liability at the
measurement date.

 unobservable inputs shall reflect the assumptions that

market participants would use when pricing the asset or
liability, including assumptions about risk.