Important changes to fair value measurement under revised FRS 102

The revised requirements apply to accounting periods beginning on or after 1 January 2026. This article outlines the key changes, practical considerations, and steps entities should take to prepare. 

The Key Changes to Fair Value Measurement

Designed to deliver a more consistent framework for measuring fair value across all asset and liability classes, as well as align FRS 102 more closely with IFRS 13, Section 2A applies the following amendments: 

Updated definition of fair value

The new definition of 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.” 

This replaces the earlier definition based on “the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s-length transaction.”

This applies a noticeable shift from entry value determined in an “arm’s length” deal to an exit price in an “orderly market transaction”.

Introduction of market participant assumptions

Section 2A also introduces the concepts of the principal market, the one with the greatest volume and activity, and (where no such market exists) the most advantageous market, which maximises the price received or minimises the price paid.

Shift from entity-to-market-specific measurement

Previously, many fair values reflected the reporting entity’s own assumptions. Section 2A requires valuations to reflect market conditions instead, using observable data wherever possible.

Clearer guidance on valuation techniques and inputs

The new section formalises three valuation approaches:

• Market approach: based on prices from market transactions.
• Income approach: based on discounted future cash flows.
• Cost approach: based on current replacement cost.

Businesses must prioritise quoted prices in active markets, then recent transactions, and finally valuation models where necessary.

Essentially, this update shifts the emphasis from using internal estimates or judgement to anchoring fair value in observable market evidence wherever possible. 

Clarified treatment of transaction costs and liabilities

Transaction costs are excluded from fair value itself but must be disclosed separately where relevant. The revised guidance also enhances how liabilities are measured, requiring an entity’s own credit risk to be reflected in fair value estimates.

In short, the new guidelines set a tone for businesses to measure fair value in terms of what the market would pay for an item, rather than what it is worth to the business, replacing internal valuations with market-tested metrics. 

Highest and Best Use

For non-financial assets such as land, buildings, or equipment, fair value must now reflect the asset’s highest and best use from a market participant’s perspective, even if the business currently uses it differently.

For example, a parcel of land used for storage may carry a higher fair value if it could feasibly be redeveloped for commercial or residential use. This reinforces the principle that fair value is not based on how an entity uses an asset today, but on how the market would price its potential.

Understanding the Fair Value Hierarchy

Section 2A also introduces a clearer Fair Value Hierarchy, closely aligned with IFRS 13. The principles therein are not new, but the practice is now formalised to improve consistency and comparability.

The hierarchy ranks the reliability of valuation inputs, requiring businesses to use observable market data whenever possible and to disclose the techniques and assumptions used, especially for Level 3 estimates.

• Level 1: Quoted prices in active markets for identical or comparable assets or liabilities.
• Level 2: Price from recent orderly transactions between market participants for identical or comparable assets or liabilities, provided there have been no major changes in market conditions.
• Level 3: Valuations based on unobservable inputs or models when market data is limited.

Businesses must maximise the use of market-based evidence (Levels 1–2) before resorting to internal estimates (Level 3), and clearly explain how those valuations were derived.

Fair Value in Practice

Consider an investment company that holds a portfolio of quoted shares, corporate bonds and an unquoted private company investment. The new fair value framework requires management to maximise the use of observable market inputs and minimise the use of unobservable inputs whenever measuring fair value.

• Level 1 inputs – Quoted shares

The company holds investments in a number of listed companies traded on active stock exchanges. Fair value is determined using the quoted market price available at the reporting date. Because these prices are directly observable and readily available, they provide the most reliable evidence of fair value.

• Level 2 inputs – Corporate bonds

The company also holds a portfolio of corporate bonds that are not actively traded every day. While a quoted price for the exact bond may not be available, fair value can be determined using observable market data, such as quoted prices for similar bonds, yield curves, credit spreads and other market-based inputs. These inputs are observable, but require some adjustment and analysis before arriving at a valuation.

• Level 3 inputs – Unquoted investment

The company owns a strategic stake in a privately owned technology business. As there is no active market for the investment, management must use valuation techniques such as discounted cash flow models or earnings multiples. Significant assumptions may be required regarding future cash flows, growth rates, profitability and risk. Under the new framework, these assumptions should reflect those that market participants would use when pricing the investment, and the entity must provide appropriate disclosures explaining the valuation technique and significant inputs used.

Enhanced Disclosures

While Section 2A primarily introduces a framework for measuring fair value, it also brings enhanced disclosure expectations where fair value measurements are used elsewhere in FRS 102. Entities should provide sufficient information for users to understand the valuation techniques applied, the inputs used in determining fair value, and the extent to which those inputs are based on observable market data or management assumptions. The objective is to improve transparency and consistency in how fair value measurements are determined and reported.

Whom Do These Fair Value Changes Affect Most?

Although the changes are not perhaps as seismic as other FRS 102 updates on revenue recognition or lease accounting [ADD INTERNAL LINKS], these new Section 2A additions will impact businesses that hold significant investment properties, financial instruments, or other assets measured at fair value. 

The new framework reduces management’s autonomy over valuation decisions, anchoring fair value more firmly in observable market activity than in entity-specific estimates. As a result, some businesses may see movement in how assets and liabilities are valued.

What Should Businesses Do Next?

Review valuation methodologies

Take stock of how assets and liabilities are currently valued and make sure those approaches align with the new market-based framework.

Determine where your valuations sit in the hierarchy

Assess which level of the Fair Value Hierarchy each major asset or liability falls under, from quoted prices (Level 1) to model-based estimates (Level 3). The basis and inputs for disclosures must be included within the financial statements.

Revisit market and participant assumptions

Confirm that your fair-value assessments are made from the perspective of informed, independent market participants, and that the market you’ve identified is either the principal or most advantageous one available.

Strengthen supporting documentation

Make sure all fair-value judgements are well-supported by evidence, including data sources, valuation techniques, and key assumptions.

How Crowe Can Help

With limited time available to prepare for the fair value measurement changes under FRS 102, businesses should not hesitate to seek professional advice to review valuation methodologies and disclosure requirements. Experienced professional support reaps dividends, and with over 80 years of experience in advisory and accounting services in Ireland, Crowe is uniquely positioned to support you. Engage now with our professional advisors to complete any last-minute preparations for the new requirements. Contact us today to make sure you and your business are fully prepared.