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  • Writer's pictureSara White

Fair value disclosures need to be more transparent

Updated: Mar 21

The challenging economic environment and climate change risks may increase the degree of estimation uncertainty and management judgment about fair value under IFRS 13

Sara White, Editor, Accountancy Daily


The Financial Reporting Council (FRC) has warned companies that they will need to make better disclosures about fair value exposure in future to make them clearer and more transparent.


The latest FRC thematic review of IFRS 13 Fair Value Measurement focused on the accounting treatment of fair value reporting.


One of the overriding issues stressed that companies should use fair value measurements based on market participants’ rather than the company’s own assumptions.


Companies should consider using specialist third party advice when valuing a material item and where there is no internal expertise.


While the transaction price usually reflects fair value, there may be circumstances where this is not the case, for example, in transactions with related parties. Companies should ensure that appropriate adjustments are made to the transaction price to ensure it reflects fair value in such cases.


The FRC stressed that there was scope for improvement of the disclosures provided by many companies. The transparency of reporting about the valuation approach, underlying assumptions, management judgment and estimation uncertainty, is critical.


Companies should address the overall disclosure objective of the standard, not only the specific requirements. For example, the following additional information may be relevant to users: the nature of the item being measured at fair value and the characteristics of the item that are considered in the determination of the relevant inputs.


Fair value measurements should reflect market participant assumptions about current market conditions at the measurement date. The FRC said it would challenge companies where historical data was used instead.


It is also important to avoid boilerplate and immaterial information.


Information should also be consistent across the annual report and accounts. Management commentary should complement and further explain fair value measurements as this will enhance users’ understanding.


The FRC also stressed that climate-related matters are becoming increasingly important for investment decisions across different sectors of the economy, and investors are starting to factor these considerations into their valuations.


‘This is a fast-evolving area and there are challenges with both the availability of data and the degree of judgment involved in assessing and quantifying the effects of climate change,’ the review stated.


‘Where climate-related matters are material for fair value measurement, we expect companies to explain how the impact has been incorporated into fair value measurement and significant estimation uncertainty to be quantified. Simply stating that the risk has been incorporated into the fair value measurement is insufficient in such cases.’


To encourage improvement in the general quality of company disclosures, the review also includes examples of good practice, each of which demonstrates a particular characteristic of a better disclosure.



Croner-i Navigate provides guidance, commentary and tools to assist with international financial reporting requirements. See the IFRS Quick Link and Navigate IFRS Accounting for a selection of these resources.


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