Level 3 inputs, discount rate build-ups and fair value policies your auditor and your regulator can both follow.
IFRS 13 hasn’t changed. The Post-implementation Review closed in 2018 and there’s no active amendment project, so it sits outside the standards taking effect in 2026. What’s changed is how hard the inputs get tested.
Regulators across the Gulf and Europe now ask for the fair value policy itself, not just the number it produced. Level 3 measurements draw the most scrutiny because they rest on inputs nobody can observe.
So the work shifted. Producing a number is the easy half; producing the file behind it is where engagements now spend their time.
| Level | Input | Evidence required |
|---|---|---|
| Level 1 | Quoted price in an active market for an identical asset | The quote itself. IFRS 13 requires you to use it without adjustment. |
| Level 2 | Observable inputs other than a Level 1 quote, directly or indirectly | Source of each observable input, plus justification for any adjustment made. |
| Level 3 | Unobservable inputs | Derivation of every input, sensitivity analysis, and disclosure of the effect on profit or loss. This is where challenges land. |
| Component | What it reflects | How it gets evidenced |
|---|---|---|
| Risk-free rate | Time value of money | Government yield curve at the measurement date, tenor matched to the cash flows |
| Credit spread | Counterparty credit risk | Observable spreads for comparable credit quality and tenor |
| Liquidity premium | Compensation a market participant would demand for holding an asset that cannot be sold quickly | Derived from observable spreads between liquid and illiquid instruments of similar credit quality, not asserted as a flat percentage |
| Non-performance risk | For liabilities, the risk the obligation isn't fulfilled, including own credit risk | Entity-specific credit data, reassessed at each measurement date |
| Adjustment | Permitted? | Basis |
|---|---|---|
| Premium or discount reflecting a characteristic of the asset or liability, such as a control premium | Yes | It's a characteristic of what is being measured |
| Premium or discount reflecting a characteristic of the entity's holding, such as a blockage factor for position size | No. Prohibited. | IFRS 13.69 and 13.80. Size of a holding is a characteristic of the holder, not the asset. |
| Adjusting a Level 1 quoted price | No | Where a Level 1 input exists it must be used without adjustment |
What teams need: a written fair value policy and an evidence file for every unobservable input.
How Prima solves it: we document the derivation of each Level 3 input, the sensitivity of the measurement to it, and the governance around who approves changes.
What teams need: a liquidity premium derived from market data rather than picked.
How Prima solves it: we build it from observable spreads between liquid and illiquid instruments of comparable credit quality and tenor.
What teams need: a component build a reviewer can rebuild independently.
How Prima solves it: risk-free rate, credit spread, liquidity premium and non-performance risk each sourced and evidenced separately.
What teams need: transfers identified, timed and disclosed.
How Prima solves it: we set a transfer policy, apply it consistently, and draft the disclosure that goes with each movement.
What teams need: technical responses that engage with the specific point rather than restating the model.
How Prima solves it: we review the difference, identify which input drives it, and prepare the response.
What teams need: a defensible measurement where no observable price exists.
How Prima solves it: we apply the technique the asset actually supports, then calibrate it back to the transaction price at initial recognition. Where the number you need is value in use under IAS 36 or grant date fair value under IFRS 2, a different standard governs the measurement.
Two tracks. Track A measures. Track B reviews what someone else measured.
| Service | What it means for your reporting |
|---|---|
| Fair value measurement | An exit price for the asset or liability, using the technique it supports, with every input traced to a source. The market, income and cost approaches are set out separately. |
| Discount rate build-up | Risk-free rate, credit spread, liquidity premium and non-performance risk evidenced separately, so a reviewer can challenge one component without reopening all of them. |
| Hierarchy classification | Every input assigned to Level 1, 2 or 3 with the reasoning recorded, and a transfer policy that holds across reporting periods. |
| Fair value policy drafting | The written policy a regulator asks for, covering technique selection, input sourcing, approval and review. |
| Sensitivity analysis and disclosure | The effect of each significant unobservable input quantified, drafted ready for the notes. |
| Level 3 reconciliation | Opening to closing movement, split by gains, losses, purchases, sales and transfers, prepared for disclosure. |
| Service | What it means for your reporting |
|---|---|
| Fair value file review | An independent read of the model, inputs and disclosure against IFRS 13 before your auditor sees it. |
| Audit and regulator response support | Technical responses on hierarchy classification, discount rate components and input evidence, prepared with your team. |
| Second opinion on an external valuation | A read of a third party report, useful when the auditor's expert and your provider disagree. |
| Fair value assurance | Independent comfort over disclosed fair values, where the board or an investor wants it. |
| Finance team training | Practical sessions on hierarchy classification, input evidence and disclosure, so next period runs in-house. |
Five stages. At each one you know what has been completed and what comes next.
| Step 1: Scope |
We confirm which assets and liabilities require fair value, and which standard triggers it. | OUTPUT: Scoping memo naming each item and its triggering standard. |
| >>> | ||
| Step 2: Source |
We identify available inputs and classify each into the hierarchy. | OUTPUT: Input inventory with Level 1, 2 or 3 assigned and reasoned. |
| >>> | ||
| Step 3: Measure |
We select the technique, build the discount rate from components and run the measurement. | OUTPUT: Valuation model, rate build-up and assumption register. |
| >>> | ||
| Step 4: Test |
We calibrate to observable transactions and run sensitivity on each significant unobservable input. | OUTPUT: Calibration note and sensitivity table. |
| >>> | ||
| Step 5: Document |
We draft the disclosure, the Level 3 reconciliation and the fair value policy. | OUTPUT: Disclosure draft, reconciliation and written policy. |
A fair value measurement that fails review rarely fails cleanly. The auditor questions one input, the entity can’t evidence it, and the conversation widens to every other Level 3 input in the same class.
For regulated funds the exposure runs further. A regulator asking for the fair value policy expects a document, and “we apply judgement consistently” isn’t one. What follows is usually a remediation plan with a deadline attached.
There’s a quieter cost as well. Where the discount rate has no build-up, nobody inside the business can explain why the number moved between periods, so the board approves a valuation it doesn’t understand.
Fair value measurement isn’t a modelling exercise. It’s the record showing that the numbers on your balance sheet reflect what a market participant would actually pay.
Five working days gives you a written view of which inputs would be challenged and what evidence each one needs. Send the model and last year's disclosure.
The measurement, the evidence file behind every unobservable input, the hierarchy classification with its reasoning recorded, the sensitivity analysis, and the disclosure drafted for the notes. On Level 3 assets the evidence file is the deliverable that matters, because the number on its own will not survive a regulator or an auditor’s valuation expert.
A file review runs about five working days. A first measurement with policy drafting typically runs three to five weeks depending on asset count and data availability.
The existing model if there is one, the asset or contract terms, any observable market data already gathered, and last period's disclosure. Where nothing exists yet, we start from the asset terms.
Yes. Our file review reads the model, inputs and disclosure against IFRS 13 and flags what an auditor is likely to challenge. This is the most common first engagement where the auditor's expert has already raised a difference.
Yes, where a market participant would demand compensation for illiquidity. It has to be derived rather than asserted, normally from observable spreads between liquid and illiquid instruments of comparable credit quality and tenor. A flat percentage with no derivation is the single most challenged input in Level 3 measurements.
From components: a risk-free rate matched to the cash flow tenor, a credit spread for counterparty risk, a liquidity premium where illiquidity is priced, and non-performance risk for liabilities. Each component is sourced and dated separately. Building it as one number means every challenge reopens the whole rate.
Three things: a written fair value policy covering technique selection and input sourcing, a derivation file for each unobservable input, and sensitivity analysis showing the effect of each significant one. Regulators ask for the policy document first. Consistent judgement that was never written down doesn't satisfy the request.
Level 2 inputs are observable for the asset or liability, either directly or indirectly, without being a quoted price in an active market. Level 3 inputs are unobservable. The classification decides the evidence burden: Level 3 measurements require sensitivity disclosure and a reconciliation of opening to closing balances.
When the observability of the inputs changes, most often because a market stops being active or a comparable transaction appears. Transfers need a consistent policy on timing and must be disclosed, with the reason stated. An unexplained transfer is a disclosure breach as well as a measurement question.
No. Where a Level 1 quoted price exists in an active market for an identical asset, IFRS 13 requires you to use it without adjustment. That holds even where you believe the quote understates value.
A price from a transaction that wasn't orderly isn't determinative of fair value. IFRS 13 requires an assessment of whether the transaction was orderly, considering factors such as marketing period and whether the seller was compelled. Where it wasn't orderly, that price carries little or no weight.
Share-based payment transactions under IFRS 2, leasing transactions under IFRS 16, and measurements that resemble fair value without being it, such as net realisable value in IAS 2 and value in use in IAS 36. Separately, IAS 19 plan assets and IAS 26 retirement benefit plan investments are measured under IFRS 13 but exempt from its disclosure requirements.
No. IFRS 13 prohibits premiums or discounts that reflect the size of the entity's holding rather than a characteristic of the asset or liability. A large position doesn't change the illiquidity of the individual instrument. Adjustments reflecting a characteristic of the asset itself, such as a control premium, are permitted.
Prima delivers IFRS 13 fair value measurement services across Saudi Arabia, the UAE, Pakistan, Ireland and Germany. The framework is identical everywhere. What differs is which regulator or auditor tests it and how hard.
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