Quick answer
AASB 13 sets out how fair value is measured in Australian financial reporting. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Inputs are ranked in three levels, from quoted prices to unobservable data, and valuers use market, cost or income approaches.
AASB 13 Fair Value Measurement, often written AASB13, is the accounting standard that explains how to measure fair value once another standard says fair value is required or allowed. It is the Australian version of IFRS 13. This guide is a plain-English summary, and it explains where a valuation for financial reporting fits.
We are certified registered valuers, not accountants or auditors, so we stick to what the standard asks of the valuation. Your finance team and auditor decide the accounting policy. Our property valuers and plant and equipment valuers prepare values that follow the standard.
In this guide
What AASB 13 does and does not do
AASB 13 defines fair value, sets out one framework for measuring it and lists what has to be disclosed. It does not decide which assets are carried at fair value. That comes from other standards. For example, an entity that uses the revaluation model in AASB 116 for property, plant and equipment, or the fair value model in AASB 140 for investment property, measures fair value using AASB 13.
The definition of fair value
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. It is an exit price. It is based on the market, not on what the current owner intends to do with the asset.
For non-financial assets such as land, buildings and equipment, the standard asks the valuer to consider the highest and best use: the use that a market participant would put the asset to that is physically possible, legally permissible and financially feasible.
The three-level hierarchy of inputs
The inputs used in a valuation are ranked by how observable they are. The higher the level, the more judgement and disclosure.
| Level | What the inputs are | Example |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets | Shares listed on an exchange |
| Level 2 | Other inputs that can be observed, directly or indirectly | Sales of similar properties, or quoted prices for similar equipment |
| Level 3 | Inputs that cannot be observed and rest on assumptions | A specialised plant item with no comparable sales, valued from cost |
Many property, plant and equipment valuations sit in Level 2 or Level 3. The level is decided by the least observable input that matters to the result.
The valuation approaches
The standard describes three approaches. A valuer uses one or a combination, depending on the asset and the information available:
- Market approach: uses prices from sales of identical or comparable assets
- Cost approach: the cost to replace the asset with an equivalent one, adjusted for age, wear and obsolescence
- Income approach: converts expected future income or cash flows into a present value
What an auditor looks for in the report
Your auditor decides what evidence is enough, so speak to them early. In general, a good report shows:
- The measurement date, the asset and the basis of value (fair value under AASB 13)
- The approach used and why it suits the asset
- The key inputs and assumptions, and where they came from
- The level of the hierarchy, and the reasons for it
- Consistency with earlier years, so a change in value can be explained
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Mistakes to avoid
Common mistakes:
- Using market value and fair value as if they were the same. They are close, but the standard has its own definition and disclosure rules.
- Ignoring highest and best use. Land and buildings are valued for the use a market participant would adopt, not only the current use.
- Leaving the valuation until the audit. Inputs and evidence are easier to gather early.
- Changing the approach without a reason. If the method changes from year to year, the movement in value is hard to explain.
Key terms explained
- Fair value
- The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
- Exit price
- The price at which an asset would be sold, as opposed to the price at which it was bought.
- Market participants
- Buyers and sellers in the principal market for the asset, who are independent, knowledgeable and willing to transact.
- Highest and best use
- The use of a non-financial asset by a market participant that is physically possible, legally permissible and financially feasible, and gives the highest value.
- Fair value hierarchy
- A ranking of the inputs to a valuation from Level 1 (quoted prices) to Level 3 (unobservable inputs).
- Measurement date
- The date as at which fair value is measured, usually the reporting date.
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Sources and further reading
- Australian Accounting Standards Board: AASB 13 Fair Value Measurement (compiled)
- RSM Australia: AASB 13 and fair value, key ASIC findings
This is general information, not tax advice. Speak to your accountant or tax adviser about your own position. A valuation sets out market value at a stated date. It does not work out your tax.