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Why Fair Valuation of Financial Assets and Liabilities Must Strictly Comply with IFRS 13

Understanding the importance of disciplined, market-based fair value measurement, governance and disclosure under IFRS 13

Jomon George
9/10/2026
ifrs 13 crowe kuwait

Fair value can materially affect profit or loss, other comprehensive income, equity, financial ratios and the decisions of investors, lenders and regulators. IFRS 9 determines when a financial asset or financial liability is measured at fair value; IFRS 13 establishes how that fair value must be measured and disclosed. It defines fair value as an exit price: 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.

The measurement is therefore market-based, not based on management intention, internal forecasts alone or the amount at which the entity expects to settle the instrument.

01

Why strict compliance is important

Strict application of IFRS 13 produces relevant, comparable and auditable information. It reduces the risk that values are influenced by optimism, unsupported assumptions, stale quotations or inappropriate models. It also ensures that current market conditions, liquidity, counterparty credit risk and, for liabilities, the entity's own non-performance risk are reflected when market participants would consider them.

Weak valuation practices can overstate assets, understate liabilities, distort reported performance and cause incorrect fair value hierarchy disclosures. These errors may affect covenant compliance, regulatory reporting, capital allocation, remuneration measures and stakeholder confidence.

Compliance is especially important for Level 2 and Level 3 instruments, where observable prices are limited and professional judgement is significant.

02

A disciplined IFRS 13 valuation process

1
Confirm the scope and unit of account. Identify the Standard that requires or permits fair value, normally IFRS 9 for financial instruments, and determine the asset, liability or group being measured. The unit of account is generally established by the relevant IFRS, not by IFRS 13. The portfolio exception for qualifying groups of financial assets and liabilities may be used only when all IFRS 13 conditions are met. Purpose: to prevent valuing the wrong item, combining instruments inappropriately or applying fair value where another measurement basis is required.
2
Define the instrument and measurement date. Document contractual cash flows, currency, maturity, seniority, embedded features, collateral, restrictions and other characteristics that market participants would price. Use information available at the reporting date and distinguish orderly transactions from forced or distressed sales. Purpose: to ensure the valuation reflects the actual rights, obligations and market conditions at the measurement date.
3
Identify the market and market participants. Use the principal market - the market with the greatest volume and level of activity that the entity can access - or, if none exists, the most advantageous market. Apply assumptions that independent, knowledgeable and willing market participants would use. Purpose: to establish a consistent market-based exit price rather than an entity-specific value.
4
Select an appropriate valuation technique. Use techniques consistent with the market, income or cost approach. For financial instruments, quoted prices, comparable instruments, discounted cash flow models and option-pricing models are common. A Level 1 unadjusted quoted price in an active market for an identical instrument must be used when available, subject only to IFRS 13's limited exceptions. Purpose: to use the method that best represents how the market would price the instrument.
5
Use supportable inputs and market-consistent adjustments. Maximise relevant observable inputs and minimise unobservable inputs. Consider interest-rate curves, credit spreads, volatility, liquidity, prepayment, default, recovery, correlations and bid-ask spreads as applicable. For liabilities, measure the transfer of the obligation and include non-performance risk, including own credit risk. Avoid double-counting risks already captured elsewhere in the model. Purpose: to produce a neutral estimate grounded in market evidence.
6
Calibrate, validate and apply consistently. When a model using unobservable inputs is used after initial recognition, calibrate it to the transaction price when that price represents fair value. Reassess models and inputs each reporting date, perform independent price verification, back-testing and sensitivity analysis, and investigate significant movements. Change a technique only when the revised approach is equally or more representative of fair value, and document the reason. Purpose: to maintain accuracy, consistency and responsiveness to changing markets.
7
Classify the measurement in the fair value hierarchy. Classify the entire measurement as Level 1, Level 2 or Level 3 based on the lowest-level input that is significant to the measurement. An observable input adjusted by a significant unobservable factor may move the whole measurement to Level 3. Purpose: to communicate the degree of observability, estimation uncertainty and judgement in the reported amount.
8
Establish governance, evidence and disclosures. Maintain approved valuation policies, clear model ownership, competent personnel, reliable data controls, review of third-party prices, change controls and timely escalation of exceptions. Disclose the valuation techniques, significant inputs, hierarchy level and transfers; for Level 3 measurements, provide the required reconciliation, valuation-process information and sensitivity disclosures. Purpose: to make the valuation reproducible, reviewable and transparent to users of the financial statements.

Conclusion

IFRS 13 compliance is not a mechanical exercise or merely a year-end disclosure requirement. It is a disciplined process for converting market evidence and professional judgement into a defensible exit price. When scope, market, technique, inputs, credit effects, hierarchy and disclosures are addressed together under strong governance, fair values become more reliable, comparable and useful - and the risk of material misstatement is substantially reduced.

Need support with IFRS 13 fair value requirements?

Fair value measurement can become increasingly complex where observable market information is limited and significant professional judgement is required.

Crowe Kuwait can support organisations in navigating IFRS 13 requirements, reviewing valuation approaches, assessing inputs and assumptions, and strengthening governance and financial reporting processes to support reliable and transparent fair value measurements.

Get In Touch
Jomon George
Jomon George
Director - Audit & Assurance
+965 99774841