Fair value
Fair value is 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.
Fair value reflects the perspective of market participants—participants in a
market to which the entity has access. The asset or
liability is measured using
the same assumptions that market participants would use when pricing the
asset or liability if those market participants act in their economic best
interest.
In some cases, fair value can be determined directly by observing prices in an
active market.
In other cases, it is determined indirectly using measurement
techniques, for example, cash-flow-based measurement techniques (see
paragraphs 6.91–6.95), reflecting all the following factors:
(a)
estimates of future cash flows.
(b)
possible variations in the estimated amount or timing of future cash
flows for the asset or liability being measured,
caused by the
uncertainty inherent in the cash flows.
(c)
the time value of money.
(d)
the price for bearing the uncertainty inherent in the cash flows (a risk
premium or risk discount). The price for bearing that uncertainty
depends on the extent of that uncertainty. It also reflects the fact that
investors would generally pay less for an asset (and generally require
more for taking on a liability) that has uncertain cash flows than for
an asset (or liability) whose cash flows are certain.
(e)
other factors, for example, liquidity, if market
participants would take
those factors into account in the circumstances.
The factors mentioned in paragraphs 6.14(b) and 6.14(d) include the possibility
that a counterparty may fail to fulfil its liability to the entity (credit risk), or
that the entity may fail to fulfil its liability (own credit risk).
Because fair value is not derived, even in part, from the price of the
transaction or other event that gave
rise to the asset or liability, fair value is
not increased by the transaction costs incurred when acquiring the asset and
is not decreased by the transaction costs incurred when the liability is
incurred or taken on. In addition, fair value does
not reflect the transaction
costs that would be incurred on the ultimate disposal of the asset or on
transferring or settling the liability.
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