HKFRS 13 - Fair Value Measurement

1. OBJECTIVE AND SCOPE

1.1 Objective (Paragraphs 1-4)

HKFRS 13 has three primary objectives:

Key Principle: Fair value is a market-based measurement, NOT an entity-specific measurement. The entity's intention to hold an asset or settle a liability is irrelevant when measuring fair value.

"The objective of a fair value measurement in both cases is the same—to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability)." (Paragraph 2)

1.2 Scope (Paragraphs 5-8)

HKFRS 13 applies when another HKFRS requires or permits:

Exclusions from Measurement and Disclosure Requirements (Paragraph 6):

Exclusions from Disclosure Requirements Only (Paragraph 7):

2. MEASUREMENT - DEFINITION AND CORE CONCEPTS

2.1 Definition of Fair Value (Paragraphs 9-10)

Fair Value Definition (Paragraph 9): "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."

Critical Characteristics:

2.2 The Asset or Liability (Paragraphs 11-14)

Characteristics to Consider When Measuring Fair Value:

Unit of Account: Determined by the HKFRS requiring or permitting the fair value measurement, not by HKFRS 13 itself.

2.3 The Transaction (Paragraphs 15-21)

Principal Market vs. Most Advantageous Market:

Key Rules:

Paragraph 18: "If there is a principal market for the asset or liability, the fair value measurement shall represent the price in that market (whether that price is directly observable or estimated using another valuation technique), even if the price in a different market is potentially more advantageous at the measurement date."

2.4 Market Participants (Paragraphs 22-23)

Characteristics of Market Participants:

"An entity need not identify specific market participants. Rather, the entity shall identify characteristics that distinguish market participants generally." (Paragraph 23)

2.5 The Price (Paragraphs 24-26)

Transaction Costs vs. Transport Costs:

Exit Price Focus: Fair value is always an exit price - the price to sell an asset or transfer a liability.

3. APPLICATION TO NON-FINANCIAL ASSETS

3.1 Highest and Best Use (Paragraphs 27-30)

Paragraph 27: "A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use."

Three Criteria for Highest and Best Use:

Presumption: Current use is highest and best use unless market or other factors suggest otherwise.

Defensive Use: Even if entity plans not to use an asset actively (e.g., acquired intangible used defensively), fair value must assume highest and best use by market participants.

3.2 Valuation Premise (Paragraphs 31-33)

Two Valuation Premises:

Key Point: The fair value measurement assumes the asset is sold consistently with the unit of account specified in other HKFRSs, even when assuming in-combination use.

4. APPLICATION TO LIABILITIES AND EQUITY INSTRUMENTS

4.1 General Principles (Paragraphs 34-36)

Fair Value Measurement Assumptions for Liabilities/Equity:

4.2 Liabilities and Equity Held by Other Parties as Assets (Paragraphs 37-39)

Hierarchy for Measurement When Identical Item is Held as Asset:

Adjustments to Quoted Price: Only if factors specific to the asset are not applicable to the liability/equity measurement.

4.3 Liabilities and Equity NOT Held by Other Parties as Assets (Paragraphs 40-41)

Measurement Approach:

4.4 Non-Performance Risk (Paragraphs 42-44)

Paragraph 42: "The fair value of a liability reflects the effect of non-performance risk. Non-performance risk includes, but may not be limited to, an entity's own credit risk."

Key Points:

4.5 Restriction Preventing Transfer (Paragraphs 45-46)

Rule: Do NOT include a separate input or adjustment for a restriction preventing transfer of a liability or equity instrument. The effect is already implicitly or explicitly included in other inputs.

4.6 Financial Liability with Demand Feature (Paragraph 47)

Paragraph 47: "The fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid."

5. PORTFOLIO EXCEPTION FOR FINANCIAL ASSETS AND LIABILITIES

5.1 Scope and Conditions (Paragraphs 48-52)

Exception: Permits measuring fair value of a group of financial assets and liabilities on the basis of net exposure to market risks or credit risk.

Conditions for Using Exception (Paragraph 49):

Accounting Policy Decision: Must be made in accordance with HKAS 8 and applied consistently.

5.2 Market Risk Exposure (Paragraphs 53-55)

Requirements:

5.3 Credit Risk Exposure (Paragraph 56)

Requirements:

6. FAIR VALUE AT INITIAL RECOGNITION

6.1 Transaction Price vs. Fair Value (Paragraphs 57-60)

Key Point: Transaction price often equals fair value, but not always.

Situations Where Transaction Price May NOT Equal Fair Value (Paragraph B4):

Recognition of Difference: If another HKFRS requires initial measurement at fair value and transaction price differs, recognise gain or loss in profit or loss unless specified otherwise.

7. VALUATION TECHNIQUES

7.1 General Principles (Paragraphs 61-66)

Paragraph 61: "An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs."

7.2 Three Valuation Approaches

7.3 Consistency and Changes

Rule: Valuation techniques shall be applied consistently.

Permitted Changes (if result is equally or more representative of fair value):

Accounting Treatment: Changes in valuation technique accounted for as change in accounting estimate under HKAS 8.

7.4 Present Value Techniques (Paragraphs B12-B30)

Components of Present Value Measurement (Paragraph B13):

Two Main Present Value Techniques:

General Principles for Present Value (Paragraph B14):

8. INPUTS TO VALUATION TECHNIQUES

8.1 General Principles (Paragraphs 67-69)

Paragraph 67: "Valuation techniques used to measure fair value shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs."

Types of Markets (Paragraph B34):

8.2 Bid-Ask Spread (Paragraphs 70-71)

Rule: Use price within bid-ask spread that is most representative of fair value. Use of bid prices for assets and ask prices for liabilities is permitted but not required. Mid-market pricing is also permitted.

8.3 Premiums and Discounts (Paragraph 69)

Permitted: Premiums/discounts consistent with unit of account (e.g., control premium for controlling interest)

NOT Permitted: Blockage factors - adjustments reflecting size of entity's holding relative to normal trading volume

9. FAIR VALUE HIERARCHY

9.1 Overview (Paragraphs 72-75)

Paragraph 72: "The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs)."

Hierarchy Summary:

Categorisation Rule (Paragraph 73): Fair value measurement categorised in its entirety based on the lowest level input that is significant to the entire measurement.

9.2 Level 1 Inputs (Paragraphs 76-80)

Definition: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Key Rules:

Blockage Factor: NOT permitted for Level 1. Fair value = quoted price × quantity held, even if normal daily trading volume insufficient.

9.3 Level 2 Inputs (Paragraphs 81-85)

Definition: Inputs other than quoted prices in Level 1 that are observable for the asset/liability, directly or indirectly.

Examples:

Term Requirement: For specified (contractual) term, Level 2 input must be observable for substantially the full term.

Adjustments: May be necessary for condition/location, comparability, or volume/activity level. Significant adjustments using unobservable inputs may result in Level 3 categorisation.

9.4 Level 3 Inputs (Paragraphs 86-90)

Definition: Unobservable inputs for the asset or liability.

Key Requirements:

Risk Adjustment: Must be included if market participants would include one. A measurement without risk adjustment does not represent fair value.

10. DISCLOSURE REQUIREMENTS

10.1 Overall Objectives (Paragraphs 91-92)

Disclosure Objectives:

10.2 Minimum Disclosure Requirements (Paragraph 93)

For Each Class of Assets and Liabilities:

10.3 Determining Classes (Paragraph 94)

Basis for Determining Classes:

10.4 Transfer Policy (Paragraph 95)

Policy for Determining When Transfers Occur: Must be disclosed and consistently followed. Same policy for transfers into and out of levels.

Examples of Timing Policies:

10.5 Additional Disclosures

For Assets/Liabilities NOT Measured at Fair Value but Fair Value Disclosed (Paragraph 97):

For Liabilities with Third-Party Credit Enhancement (Paragraph 98):

Format (Paragraph 99): Quantitative disclosures in tabular format unless another format is more appropriate.

11. EFFECTIVE DATE AND TRANSITION

11.1 Effective Date (Paragraph C1)

11.2 Transition (Paragraphs C2-C3)

KEY TAKEAWAYS SUMMARY

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