Fair Value Of Financial Instruments - Key IFRS Reminders

As market turbulence and uncertainty continue, estimating fair value will continue to be a significant challenge for many companies. In this memorandum, we provide key reminders about the fair value requirements of IAS 39, Financial Instruments: Recognition and Measurement and IFRS 7, Financial Instruments: Disclosures.

1. Don't forget that fair value of assets and traded liabilities is a current market price! More properly, it's the price at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. Many non-accountants confuse an asset's fair value with its so-called "fundamental value" – the value of the future cash flows that management expects to derive from the asset. This value will be very different than fair value when management's expectations about future cash flows differ from those of market participants.