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Fair value accounting measures certain assets and liabilities at the price they would fetch, or cost to transfer, in an orderly market transaction at the reporting date. It is not the price a company paid for an item, and it is not the price the company hopes to get. Under IFRS, the measurement rules sit in IFRS 13, and under US GAAP they sit in ASC 820. Neither standard decides on its own which items must be measured at fair value; other accounting rules make that call, and IFRS 13 or ASC 820 then explains how to measure the figure.
What fair value means in accounting
The IFRS Foundation summarises the definition this way: IFRS 13 defines fair value as 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 (an exit price). The standard itself adds that fair value is a market-based measurement, not an entity-specific measurement. These are official statements from the standard and its publisher, not quotations from any named individual.
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Four phrases in that definition do most of the work:
- Exit price. The figure is what the item would sell for, or what it would cost to hand a liability to someone else, not what the company paid for it.
- Orderly transaction. The sale is assumed to happen with time for normal marketing, not as a forced or distressed sale.
- Market participants. The buyer and seller are assumed to be informed, independent and motivated, and the price reflects their assumptions, including assumptions about risk.
- Measurement date. The value reflects market conditions on that date, so it can change from one reporting date to the next even if nothing about the item has physically changed.
Fair value is an exit price, not a plan
A company’s intention to keep an asset or settle a liability does not change its fair value. The question is what a market participant would pay or accept today, not what the company will do with the item. An entity that plans to hold a bond to maturity still reports the bond at a fair value reflecting current market prices and interest rates, if the applicable standard calls for fair value for that bond.
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1Repair Windows errors before they cause bigger problems2Fix the driver behind crashes, sound loss and screen glitches3Clear out junk files and repair common Windows errorsHere is an illustrative example, not a reported case. Suppose a company bought a listed share for 100 and at the reporting date a market quote for the same share is 130. An exit-price measure uses the 130 quote, because that is the amount a market participant would pay. The company’s decision to hold the share for ten years does not change that number. Equally, the measurement does not promise that the company can sell at 130; actual sale prices depend on volume, timing and conditions on the day the sale happens.
Fair value is not a blanket rule
A common misunderstanding is that IFRS 13 requires every asset and liability to be shown at fair value. It does not. IFRS 13 provides a measurement framework and requires related disclosures when another IFRS standard requires or permits fair value measurement or disclosure, subject to specified exceptions. The IFRS Foundation’s examples of matters governed by other standards include share-based payment transactions, leases and impairment of assets. Those standards decide whether a fair-value-type measure applies and when.
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The IASB issued IFRS 13 in May 2011. Because IFRS standards are amended over time, check the current issued text and its effective dates before relying on a specific rule for a live compliance question. The ICAEW’s tracker of issued standards covers amendments issued through 31 December 2025, and some of those amendments have mandatory effective dates after 1 January 2026.
How fair value is estimated
The measurement objective stays the same whatever the item: an orderly-transaction price at the measurement date under current market conditions. What changes is the quality of the evidence available. A practical way to think about the process is the following sequence.
- Identify the item and the measurement date. Fair value applies to a specific asset or liability at a specific date, so the valuation has to be tied to both.
- Look for a quoted price for an identical item. If an active market quotes the same asset or liability, that quote is generally the most direct evidence of fair value.
- If no identical price exists, use observable market data. Prices for similar items, interest rates, yield curves or other observable inputs can support a valuation technique.
- If key inputs are not observable, use the best available unobservable assumptions. IFRS 13 directs entities to valuation techniques that maximise relevant observable inputs and minimise unobservable inputs.
- Document the method and disclose it. Fair value disclosures show the level of the inputs and the techniques used, so readers can judge how much of the number rests on judgement.
Risk assumptions remain part of the market-participant view, so a valuation of a risky loan should reflect the discount a buyer would demand, not a figure based on the company’s own optimism about repayment.
The three levels of inputs
Fair value disclosures often refer to Level 1, Level 2 and Level 3. These labels describe the inputs used to measure fair value, not three separate definitions of fair value. ASC 820 places the greatest weight on quoted prices in active markets and assigns a measurement to the lowest-level input that is significant to it. IFRS 13 uses a similar three-level input structure.
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| Level | Type of input | Illustrative example | What it signals to a reader |
|---|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets or liabilities | A listed share priced on an exchange on the measurement date | Most direct market evidence; least room for estimation |
| Level 2 | Observable inputs other than Level 1 quotes, such as prices of similar items or observable interest rates | A corporate bond valued from recent trades in similar bonds | Market-based, but adjusted for differences from the item being measured |
| Level 3 | Unobservable inputs, based on the entity’s own assumptions about what market participants would use | A private company stake valued using internal cash-flow forecasts and a discount rate | Greater judgement; results are more sensitive to assumptions |
A measurement can draw on several levels. Under ASC 820, the whole measurement is categorised by the lowest-level input that is significant to it, so one significant Level 3 input can move an entire balance into Level 3.
Why Level 3 deserves closer reading
Level 3 measurements are not inherently wrong, but they depend more on assumptions that are hard for an outside reader to test. When a company reports Level 3 balances, the disclosures for those balances are usually where the valuation technique and the unobservable inputs are explained. Read them alongside the balance itself.
Best Value
Fair value compared with book value
Book value, usually called carrying amount in accounting standards, is the amount at which an item appears on the balance sheet under the applicable measurement rules. For many assets that is historical cost less depreciation and impairment. Fair value is a different reference point, and the two can diverge widely.
| Feature | Fair value | Book value (carrying amount) |
|---|---|---|
| Reference point | Price in an orderly market transaction at the measurement date | Amount determined by the applicable measurement rules, often historical cost |
| Changes over time | Can change at each measurement date with market conditions | Often changes through depreciation, amortisation, impairment or revaluation, depending on the item and standard |
| Depends on the holder’s plans | No; measured from a market-participant perspective | Can depend on the measurement basis the standard requires |
| Typical use | Items the applicable standard requires or permits to be measured at fair value | Items measured on a cost-based or other basis |
Because the two bases answer different questions, a balance-sheet figure labelled fair value is not a correction of a book figure. It is a different measurement of the same item at a different date.
IFRS 13 and ASC 820 compared
IFRS 13 is the IFRS measurement standard, and ASC 820 is the US GAAP topic for fair value measurement. Both describe fair value as a market-based exit-price concept and both use a three-level input structure. They are not identical in every application. ASC 820 places more weight on quoted active-market prices than on unobservable inputs, and the way each framework is applied to a specific item can differ. This article does not walk through the clause-by-clause differences, so check the relevant standard or a qualified adviser before assuming the frameworks produce the same answer for a given transaction.
Quick Recap
What fair value does not guarantee
- It does not guarantee a sale price. The figure is a measurement based on assumed market conditions. An actual sale can produce more or less.
- It does not always raise or lower reported earnings. Whether a fair value change reaches profit or loss, or another component of equity, depends on the applicable accounting requirements for the item.
- It does not automatically improve transparency. Its usefulness depends on how observable the inputs are and how clearly the disclosures explain them.
- It is not the same as fair market value in legal or tax contexts. The phrase “fair market value” is used in other rules with their own definitions. Do not assume an accounting fair value figure satisfies a tax valuation or a legal valuation requirement.
What to check when you read a fair value figure
- Which standard requires or permits fair value for the item, and whether the figure is a balance-sheet value, a profit-and-loss effect or both.
- The measurement date, since the figure is tied to market conditions on that day.
- The level of the inputs and whether any significant input is Level 3.
- The valuation technique and the main unobservable assumptions, such as discount rates or growth assumptions.
- Whether the company’s disclosures show how sensitive the figure is to changes in those assumptions.
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