Fair Value Measurement Under AASB 13 in Corporate Accounting

This report provides an analysis of fair value measurement (FVM) under AASB 13, as released by the IASB. It defines fair value as the price received from selling an asset or paid for transferring a liability in an orderly transaction among market participants. The report emphasizes that FVM is asset- or liability-specific, considering characteristics like restrictions and location. It discusses transaction assumptions, including principal markets and the highest/best use of non-financial assets. The document further explores the relationship between transaction value and fair value, highlighting scenarios where they may differ. It outlines various valuation techniques such as market, cost, and income approaches, including the present value approach. Finally, the report details the required disclosures for assisting financial report users in assessing valuation inputs and the impact of measurements on financial performance. The report includes references to various accounting and finance journals and standards.

Running head: CORPORATE FINANCE AND ACCOUNTING
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Fair value measurement
AASB 13 fair value measurement (FVM) was released by IASB (international
accounting standard board). AASB 13 defines the term fair value, requires the
disclosures regarding fair value measurement and sets out framework for the
purpose of measurement of fair value in the single standard. AASB 13 defined the
fair value as the amount that is expected to be received from sell of an asset or that
is paid for transferring the liability under orderly transaction at the date of
measurement among the market participants (Aasb.gov.au 2019).
FVM is for specific liability or asset and hence, while measuring the fair
value the firm must consider the characteristics of the liability or asset. The
characteristics are considered if the market participants consider the characteristics
while valuing the liability or asset at date of measurement. For instance, the
characteristics include – (i) any restriction implied on use or sale of asset and (ii)
location as well as condition of asset. FVM presumes that liability or asset is
swapped under orderly transaction at the date of measurement among the market
participants (McInnis, Yu and Yust 2018). The transaction is for transferring the
liability or selling the asset at the date of measurement under the present market
scenario. Further, the FVM presumes that transaction for transferring the liability or
selling the asset are carried out either in principal market for the liability or asset or in
case where the principal market is not in existence, in the market that is most
advantageous for the liability or asset. The FVM for the non-financial asset considers
the ability of the market participants regarding generation of economic benefits
through using the asset at its best or highest use or through selling the asset to
another participant from the market that will use the asset in the best and highest
use (Suzuki and Kochiyama 2017).

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While the liability is presumed or the asset is obtained under exchange
transaction value is the value paid for obtaining the asset or received for presuming
the liability. On the contrary, fair value of liability or asset is the value that is expected
to be received from selling the asset or paying for transferring the liability. However,
the firm is not required to sell the asset at the value at which it was acquired. In the
same way, the firms are not required to transfer the liabilities at the value that was
received for presuming them (Aasb.gov.au 2019). In various instances the
transaction value is equal to the fair value such as while on the transaction date the
transaction for purchasing the asset is carried out under the market where the asset
will be sold. Valuation technique used by the entity shall be appropriate considering
the circumstances and adequate data for which are available for FVM. It shall be
made through optimising the usage of relevant identifiable inputs and minimising the
usage of irrelevant un-identifiable inputs. Further, the valuation technique used for
FVM shall be able to maximise the usage of relevant identifiable inputs and
minimising the usage of irrelevant un-identifiable inputs (Vergauwe and Gaeremynck
2019).
While determining that whether the fair value equals the price of the
transaction at initial recognition, the firm shall consider the particular factors related
with the transaction and to the liability or asset. Fair value and the transaction price
will not be equal if – (i) transaction is among the related parties, though value under
the related party transaction can be used as the input for FVM if the firm has
evidence regarding the fact that transaction was entered into under the market terms
(ii) transaction taken place under any pressure or the seller was forced for accepting
the value in transaction. (iii) market under which transaction tool place varies from
principal market (iv) account unit represented by transaction price varies with the

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account unit for liability or asset measured at the fair values (Magnan, Menini and
Parbonetti 2015).
Different valuation techniques used by the FVM are – (a) market approach
that uses the prices and other applicable information generated through market
transaction that involves comparable or identical liabilities, assets or group of
liabilities or assets, for instance a business (b) cost approach that reveals the value
that is currently expected to be required for replacing the service capacity of the
asset (c) income approach that converts the future amounts that is the incomes and
expenses or cash flow to the single current amount or the discounted amount
(Huffman 2018). Under this approach FVM represents the expectation from present
market regarding the future values (d) present value approach that is used for linking
the future value to the present amount using the appropriate discount rate. FVM of
the liability or asset through present value approach considers various elements like
– (1) projection of future cash flows for the liability or asset (2) expectation with
regard to likelihood of variations in the timing and cash flow that represent the
inherent risk of uncertainty (3) time value of the money that is represented by risk
free rate of monetary asset having maturity duration or date that coincides with the
period of cash flows (4) value for bearing the inherent uncertainty in cash flows (5)
various other factors those will be considered by market participants (Sellhorn and
Stier 2018).
Any organisation is required to disclose the information that may assist the
users of financial reports to assess – (i) for liabilities and assets those are valued at
fair value on non-recurring or recurring basis in financial reports after the initial
recognition, valuation inputs and approach used for developing the valuation and (ii)
for the recurring FVM through considerable unobservable inputs, impact of

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measurement on los or profit or on other comprehensive income for the period. For
meeting these objectives company shall consider – (i) details required for fulfilling the
requirement of disclosures (ii) how much importance is to placed on each
requirements (ii) how much disaggregation or aggregation to be undertaken (iv)
whether users of financial report require any additional information for analysing the
disclosure of quantitative information (Barker and Schulte 2017).

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Reference
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed 25
Jan. 2019].
Barker, R. and Schulte, S., 2017. Representing the market perspective: Fair value
measurement for non-financial assets. Accounting, Organizations and Society, 56,
pp.55-67.
Huffman, A., 2018. Asset use and the relevance of fair value measurement:
evidence from IAS 41. Review of Accounting Studies, 23(4), pp.1274-1314.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information
or confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-
591.
McInnis, J.M., Yu, Y. and Yust, C.G., 2018. Does Fair Value Accounting Provide
More Useful Financial Statements Than Current GAAP For Banks?. The Accounting
Review.
Sellhorn, T. and Stier, C., 2018. Fair value measurement for long-lived operating
assets: Research evidence. European Accounting Review, pp.1-31.
Suzuki, T. and Kochiyama, T., 2017. Impact Of Fair Value Measurement On
Corporate Investment: Other Comprehensive Income. Hitotsubashi Journal of
commerce and management, pp.17-37.

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Vergauwe, S. and Gaeremynck, A., 2019. Do measurement-related fair value
disclosures affect information asymmetry?. Accounting and Business
Research, 49(1), pp.68-94.