AASB 13: Fair Value Measurement and Its Implications

This report offers a detailed analysis of AASB 13: Fair Value Measurement, an accounting standard issued by the Australian Accounting Standards Board. The report defines fair value, emphasizing its market-based approach and its application to various assets and liabilities. It explores key concepts such as exit and entry prices, market participants, and valuation techniques. The report highlights the standard's implications for financial reporting, including the importance of considering asset characteristics and market conditions. Furthermore, it examines the disclosure requirements and the scope of the standard, clarifying which transactions are covered and excluded. By providing a comprehensive overview, this report aims to clarify the significance of AASB 13 in the accounting of assets and liabilities.

Running Head: Fair Value Measurement
AASB 13: Fair Value Measurement

Fair Value Measurement 1
The Australian Accounting Standard Board has introduced AASB 13 Fair Value
Measurement with the aim of providing guidance on fair value accounting. The said standard
has been issued wide section 334, Corporations Act, 2001. This accounting standard was
made applicable to the entities for the annual reporting periods commencing from 1st January,
2013. However, it can also be applied to the reporting periods after 1st January, 2005. If entity
applies this standard during the reporting periods between the years 2005-2013, then it shall
make a disclosure of this fact in its financial reports. AASB 13 provides the definition of fair
value. It is the amount which is received on sale of an asset or paid on transferring a liability
as a result of a transaction that takes place between the market participants, on the
measurement date.
The accounting standard on fair value measurement prescribes that the said measurement is
done for the particular asset and liability. Hence, while measuring their fair values entities
must take into consideration the features of those assets and liabilities that market participants
would have considered while pricing them at the date of measurement. Those characteristics
include: asset’s condition and location and the restrictions on disposal of asset (AASB
Standard, 2011).
Fair value measurement is based on market conditions and hence it is not entity specific. In
case of certain assets and liabilities, similar market transactions or relevant information is
available in the market but for the other assets and liabilities similar market transactions or
relevant market information is not available. However, in either cases, the basic objective
behind fair value measurement remains same i.e. the determination of the value at which an
order transaction of asset sale or liability transfer will take place between the market players
on the date of measurement under the given market conditions. In those cases where the price
of alike asset or liability is not available, another valuation techniques are used which can
maximise the use of evident inputs and lessen the use of unrealistic input. An entity must use

Fair Value Measurement 2
only those valuation techniques which are most adequate in the given situation and for which
necessary data is available for the measurement of fair value. Since, fair value is the market
based approach, it is determined on the basis of the assumptions that will be used by the
market players while pricing the assets and liabilities and the assumptions related to risk. Due
to this, the intention of entity to retain an asset in the business or to settle down the liability is
irrelevant at the time of measuring the fair value (Barth, Landsman & Lang, 2008).
AASB 13 focuses on the assets and liabilities mainly because these items are the basic
subject in the areas of accounting measurement. Along with the assets and liabilities, this
standard is also applicable on the equity instruments of the entity and hence such assets are
also measured at their fair prices. However, the requirement of measurement as well as
disclosure under this accounting standard does not apply to certain transactions such as
transactions related to share-based payments which fall in the purview of AASB 2: Share
based payments, leasing transactions which fall in the purview of AASB 117: Leases and the
measurements which are although observed to be similar to fair value yet are not the fair
values actually such as net realisable value approach under AASB 102: Inventories or the
value in use under AASB: 136 Impairment of Assets.
As per this standard, the assets or liabilities of the entity whose measurement is undertaken
under the fair value approach can either be a stand-alone balance sheet item such as financial
instrument, non-financial asset or the collection of assets or the collection of liabilities or the
group of both assets and liabilities such as cash generating unit. It depends upon the unit of
account, that whether to classify the asset or liability as a stand-alone item or assets or
liabilities group or assets and liabilities group for the recognition and disclosure purposes.
The unit of account of an asset or liability must be determined as per the standard which
requires or allows their measurement on the fair value basis except in the situation which is
provided in AASB 13.

Fair Value Measurement 3
The fair value measurement approach works on the assumption that the transactions in
relation to the disposal of asset or settling a liability occurs either in principal market relevant
to the entity’s asset or liability or in the best advantageous market related to entity’s assets or
liabilities. An entity which is undertaking the use of fair value measurement approach does
not require carrying an exhaustive search of all the potential markets for the purpose of
identification of primary market, but it shall consider all the available information (Hu, Percy
& Yao, 2015). The price in principle market must not be adjusted for transaction cost for the
purpose of determination the asset or liability’s fair value.
When asset is purchased or a liability is assumed in the transaction of exchange nature in
relation to such asset or liability, the transaction price implies the amount paid for the
purchase of such asset or obtained to assume liability. It is also called as entry price (Dunbar
& Laing, 2017). In contrast to the transaction price, fair value of asset or liability is the
amount that would be involved in the sale of an asset or in the settlement of liability. It is
called as exit price. However, in certain cases transaction value is equal to the fair value.
The disclosures that are to be made in compliance with standard are not required in certain
cases such as plan assets that are measured under AASB 119: Employee Benefits and the
assets whose recoverable amount is calculated as fair value net of disposal costs under AASB
136. From the above examination of AASB 13: Fair Value Measurement, it can be concluded
that this standard has great significance in the accounting of assets and liabilities and hence it
must complied in stricter sense.

Fair Value Measurement 4
References:
AASB Standard (2009) AASB 136: Impairment of Assets. [online]. Available from
https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf [accessed 23
September 2018]
AASB Standard (2011) AASB 13: Fair Value Measurement. [online]. Available from
https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf [accessed 23
September 2018]
Barth, M.E., Landsman, W.R. and Lang, M.H. (2008) International accounting standards and
accounting quality. Journal of accounting research, 46(3), 467-498.
Dunbar, K. and Laing, G.K. (2017) Deconstructing the Accounting Standard AASB 13 Fair
Value: Exit vs Entry Price for Assets. Journal of New Business Ideas & Trends, 15(2).
Hu, F., Percy, M. and Yao, D. (2015) Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), 930-939.