What Is Fair Value

2. THE DEFINITION OF FAIR VALUE

2.1 What is Fair Value?

The definition of fair value per AASB 13 Fair Value Measurement below incorporates a number of concepts.

Figure 1: Definition of Fair Value

Exit price

This is the price that would be received if the entity sold the asset.

Orderly transaction

A transaction is orderly if it allows sufficient time for the usual marketing activities for the asset. Therefore, orderly transactions do not include those transactions that are forced, such as liquidations.

Market participants

Fair value measurements are based on transactions that occur between market participants who are:

• independent of each other;

• knowledgeable about the asset and the transaction; and

• able and willing to enter into a transaction for the asset i.e. not being compelled to do so.

Measurement date

Fair value is...

based on a market participant’s expectations

an exit price

based on transactions that allow the customary time to sell an asset

determined at the measurement date

adjusted for the condition and location of the asset (where the asset would need to be moved to the market)

adjusted for restrictions on the sale and/or use of an asset that would apply to market participants

based in the market with the greatest volume or level of activity for an asset, where one exists*

based on the use of the asset by a market participant that would maximise the value of the asset or the group of assets and liabilities within which the asset would be used (non-financial assets)

generally the more relevant measure even if it involves estimates and judgements

Fair value is not...

based on the entity’s expectations

necessarily the cost to the entity to replace the asset

based on transactions that are rushed

determined at times convenient to the entity

measured ignoring the condition and location of the asset

adjusted