b.i Three-Level Hierarchy for Fair Value Measurement

IFRS 13 sets out a valuation approach that includes three techniques: the market, income, and cost approaches.

When measuring fair value, the entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs. To this end, the standard introduces a fair value hierarchy, which prioritizes the input into the fair value measurement process.

• Level 1 Inputs:
  Quoted prices (unadjusted) in active markets for items identical to the assets or liabilities without adjustments when measuring the fair value. An example of this will be prices quoted on the stock exchange. The entity needs to be able to access the market at the measurement date.
  Active markets are those where transactions take place with sufficient frequency and volume for pricing information to be provided. An alternative method may be used where it is expedient.
• Level 2 Inputs:
  Inputs other than the quoted prices in Level 1 that are directly or indirectly observable for the assets or liabilities. They are quoted assets or liabilities for similar items in active markets or supported by market data (e.g., interest rates, credit spreads, or yield curves). Adjustments may be needed to Level 2 inputs, and if these adjustments are significant, then it may require the fair value to be classified as Level 3.
• Level 3 Inputs:
  Unobservable inputs. The use of this input should be kept to the minimum. However, situations may occur where relevant inputs are not observable, and therefore these inputs must be developed to reflect the assumptions that market participants would use when determining an appropriate price for the assets and liabilities. The entity should maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

The general principles of using an existing price remain, and IFRS 13 does not preclude an entity from using its own data (e.g., cash flow forecasts may be used to value an entity not listed).

b.ii Valuation for Bakatari Plc Under IFRS 13

Since Bakatari Plc. already sells in market ‘C,’ the cost of entering the market will be NIL as this will no longer be incurred. The N3 per unit cost of entering the market is therefore ignored.

• Principal Market:
  The principal market will be Market A because it has the highest level of activity (i.e., the volume of units sold).
• Most Advantageous Market:
  The most advantageous market is Market C because it returns the best profit per unit.

If the information about the market is reasonably available, then Bakatari Plc. should base its fair value on the price in Market A due to the fact that Market A is the principal market. Therefore, the potential fair value will be N17 per unit.

Otherwise, the most advantageous market information from Market C will be used, and the fair value will be N22 per unit.