8.3.2. Fair value hierarchy (2024)

As noted in section 3.6.5, fair value measurements in IFRS 13 are categorised into a three-level hierarchy. The hierarchy is based on the type of inputs and is defined as follows:

• Level 1 inputs are unadjusted quoted prices in active markets for items identical to the asset being measured. An entity uses that price without adjustment when measuring fair value. A quoted price in an active market is a Level 1 input.
• Level 2 inputs are inputs other than quoted prices in active markets included within Level 1 that are directly or indirectly observable.
• Level 3 inputs are unobservable inputs that are usually determined based on management’s assumptions. However, Level 3 inputs have to reflect the assumptions that market participants would use when determining an appropriate price for the asset.
• Fair value measurements of real estate are usually categorised as Level 2 or Level 3 valuations, with Level 3 being the most common categorisation. This is because of:
  • the nature of real estate assets, which are often unique and not traded on a regular basis; and
  • the lack of observable input data for identical assets.

Certain IFRS 13 disclosures are only required for fair value measurements categorised as Level 2 or Level 3. For example, Level 3 disclosures include a description of the valuation techniques used, how decisions are made in relation to valuation procedures and for recurring fair value measurements, the sensitivity of fair value measurements to significant unobservable inputs.