AASB 13 valuation for financial reporting
AASB 13 valuation sets out how entities measure fair value for financial reporting. The standard does not prescribe what to value. Instead, it defines how value must reflect the market. As a result, fair value measurement plays a central role in:
- financial reporting
- audit evidence
- valuation analysis
In many situations, especially where markets are not active, a structured valuation is required.
Understanding fair value
Fair value is defined as: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This definition establishes a consistent measurement framework:
- Market participant assumptions. Valuations must reflect market behaviour rather than entity‑specific intentions. Therefore, internal expectations often need adjustment to align with external evidence.
- Exit price concept. Fair value reflects an exit price, not a historical or entry price. In other words, it represents the value achievable in the market at the measurement date.
- Highest and best. For non‑financial assets, value is based on the most advantageous use. This use must be legally permitted, physically possible, financially viable
The AASB 13 hierarchy
A hierarchical framework is used to assess input reliability. As input observability decreases, judgement increases:
- Level 1 inputs are: directly observable, quoted in active markets and for identical assets. Example include listed securities. These involve minimal judgement.
- Level 2 inputs include: observable data for similar assets, market‑based parameters, publicly available benchmarks. Adjustments are usually required, which introduces judgement.
- Level 3 inputs are: unobservable, based on internal assumptions and model‑driven. Examples include: business valuations, intangible assets and impairment calculations. At this level, estimation risk is highest. Lotus Amity reports are typically prepared for Level 3 inputs.
Valuation approaches used in practice
The framework allows different valuation approaches where appropriate. These approaches align with international valuation practice.
- Income approach. Future cash flows are converted into present value. This approach is commonly used in: impairment testing and valuations of operating businesses.
- Market approach. Market data is used to estimate value. This includes: comparable companies and transaction multiples. Reliability depends on the quality of comparables.
- Cost approach. Value is based on replacement or reproduction cost. This approach is relevant where income or market data is limited.
Reliable outputs depend on consistent inputs. Common inputs include:
- discount rates
- forecast cash flows
- growth assumptions
- market comparables
Because these inputs interact, consistency is critical.
Common practical issues with AASB 13
In practice, issues rarely arise from the model itself. Instead, problems often relate to assumptions. Typical challenges include:
- inconsistencies between forecasts and valuation inputs
- unsupported discount rates
- inappropriate selection of comparables
- failure to reflect market behaviour
- incomplete documentation
Therefore, most valuation issues are evidence and judgement issues.
AASB 13 audit considerations
Fair value measurement is closely linked to audit requirements. Under auditing standards:
- ASA 540 requires assessment of estimates against the reporting framework
- ASA 500 focuses on evidence quality
- ASA 620 addresses reliance on experts
Together, these standards require auditors to evaluate:
- whether the approach is appropriate
- whether assumptions are reasonable
- whether conclusions are supported
Relationship with valuation standards
Financial reporting requirements sit alongside valuation frameworks.
- Accounting standards define what the value must represent
- Valuation standards define how that value is determined
In practice, International Valuation Standards support:
- structured valuation approaches
- transparent assumptions
- consistent documentation
As a result, robust valuations require alignment between reporting, methodology and evidence
When fair value measurement is required
Valuation is typically required where:
- no active market exists
- assets are complex or unique
- financial instruments require modelling
- impairment assessments are performed
In these cases, valuation becomes central to both reporting and audit outcomes.
A practical perspective
From a practical standpoint, successful outcomes depend on alignment. Valuations must:
- reflect market‑based assumptions
- use appropriate methodology
- be supported by evidence
- be clearly documented
If one of these elements is missing, issues often arise.
Further valuation support
Find out more about how valuations support financial reporting here or see how valuation applies in tax related transactions: