AASB 13 Fair Value Measurement — A Plain-English Summary

AASB 13 Fair Value Measurement is the standard that decides how fair value is measured once some other standard has decided that it must be. It is short on property-specific rules and long on principles — which is exactly why it is so often misapplied. This is the plain-English summary we give our financial reporting clients, with the load-bearing paragraphs cited so you can check them against the standard yourself.

All references are to Compiled AASB 13 (Compilation No. 3, compilation date 31 December 2023), which applies to annual periods beginning on or after 1 January 2024 and, as at July 2026, remains the current compilation on the Federal Register of Legislation.

What is AASB 13?

AASB 13 defines fair value, sets out a single framework for measuring it, and requires disclosures about it (para 1). Its definition, at para 9, is one sentence: fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

Three words in that sentence do most of the work. Sell — this is an exit price, not what you paid. Market participants — not you; the standard says an entity’s own intention to hold an asset “is not relevant when measuring fair value” (para 3). Orderly — a transaction with normal marketing exposure, explicitly “not a forced transaction (eg a forced liquidation or distress sale)” (Appendix A).

AASB 13 does not require anything to be measured at fair value

This is the most common framing error. AASB 13 “applies when another Standard requires or permits fair value measurements” (para 5). The triggers live elsewhere: AASB 116 if you elect the revaluation model for owner-occupied property, AASB 140 for investment property, AASB 5 for assets held for sale, AASB 136 for impairment. Leasing transactions accounted for under AASB 16 sit outside AASB 13’s measurement and disclosure requirements (para 6(b)), and the standard is careful to note that net realisable value and value in use “have some similarities to fair value but are not fair value” (para 6(c)).

The asset you are actually measuring

Para 11 is the paragraph a valuer reads first, because it is where the property itself enters the standard. Fair value must take into account the characteristics of the asset that market participants would price in — and it names two by way of example: “the condition and location of the asset”, and “restrictions, if any, on the sale or use of the asset.”

Whether the asset is measured on its own or as part of a group depends on its unit of account, which AASB 13 does not generally set — it is determined by whichever standard required the fair value measurement, except as AASB 13 itself provides (para 14).

Which market, and which price

Fair value assumes a sale in the principal market — defined in Appendix A as the market with the greatest volume and level of activity — and only where there is no principal market does the most advantageous market apply (para 16). Para 18 is emphatic that this ordering holds “even if the price in a different market is potentially more advantageous at the measurement date.” You need access to that market, and because different entities access different markets, the principal market is considered from the entity’s perspective (para 19).

Then a distinction that catches people out. The price is not adjusted for transaction costs — those are a feature of a transaction, not of the asset, and are dealt with by other standards (para 25). But it is adjusted for transport costs where location is a characteristic of the asset (para 26). Note the asymmetry: both costs are considered when choosing the most advantageous market (Appendix A), but only transport costs adjust the price.

Highest and best use — the property core of the standard

For non-financial assets, fair value takes account of a market participant’s ability to generate benefits by using the asset in its highest and best use, or by selling it to someone who would (para 27).

Para 28 sets three tests, in the standard’s own order — a use must be physically possible, legally permissible and financially feasible — and its own examples are drawn from property: physically possible refers to characteristics such as “the location or size of a property”, and legally permissible to restrictions such as “the zoning regulations applicable to a property.” Financially feasible asks whether that use produces the investment return market participants would require.

Two consequences matter in practice:

• Current use is presumed to be highest and best use unless market or other factors suggest a different use would maximise value (para 29). Highest and best use is judged from the market’s perspective, not the owner’s — even where the entity intends something else (para 29, reinforced for defensively held acquired assets at para 30).
• Highest and best use sets the valuation premise (para 31): whether the asset delivers maximum value in combination with other assets (as installed or configured, with complementary assets assumed available to market participants) or on a stand-alone basis. Valuers often call these the “in-use” and “in-exchange” premises; note that AASB 13 itself uses neither term.

Appendix B adds a specifically real-property illustration: where the fair value of improved property is allocated to its component assets, “such as land and improvements” (para B3(e)).

The three approaches

Para 62 names three widely used valuation techniques — the market approach, the cost approach and the income approach — and requires techniques appropriate to the circumstances, maximising observable inputs and minimising unobservable ones (paras 61, 67). Appendix A and paragraphs B5–B11 describe them:

• Market approach — uses prices and other information generated by market transactions in identical or comparable assets (B5). This is comparable-sales valuation.
• Cost approach — “reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost)” (B8). Para B9 explains the logic: a buyer would not pay more than the cost of a substitute of comparable utility, “adjusted for obsolescence.”
• Income approach — converts future amounts to a single discounted present amount, reflecting current market expectations (B10). This is the capitalisation and discounted-cash-flow family.

Para B9 is the one worth bookmarking, because it is where the standard decomposes obsolescence into physical deterioration, functional (technological) obsolescence and economic (external) obsolescence — and states that this is “broader than depreciation for financial reporting purposes.” Accounting depreciation and valuation obsolescence are not the same concept, and B9 says so.

Where multiple techniques are used, the result is “the point within that range that is most representative of fair value” (para 63). Techniques must be applied consistently, but a change is appropriate if it yields an equally or more representative measurement — para 65 lists the circumstances: new markets develop, new information becomes available, information previously used is no longer available, techniques improve, or market conditions change. Such a change is a change in accounting estimate, though without AASB 108’s usual disclosure (para 66).

The fair value hierarchy — and the two mistakes preparers make

The hierarchy sorts inputs into three levels, giving highest priority to quoted prices in active markets and lowest to unobservable inputs (para 72):

• Level 1 — “quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date” (para 76). Property essentially never qualifies: no two properties are identical.
• Level 2 — observable inputs other than Level 1 quoted prices (para 81). Para 82 lists them, including quoted prices for similar assets in active markets and for identical or similar assets in markets that are not active.
• Level 3 — unobservable inputs (para 86), used where relevant observable inputs are not available, but still aimed at the same exit-price objective and still reflecting market participant assumptions including risk (para 87).

Now the two errors:

Mistake one: assuming the level follows the technique. It doesn’t. “The fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value” (para 74) — a discounted cash flow can sit in Level 2 or Level 3 depending on which inputs are significant.

Mistake two: averaging the levels. A measurement is categorised “in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement” (para 73). One significant unobservable input pulls the whole measurement to Level 3.

This is why ordinary commercial or residential property valued from adjusted comparable evidence often ends up in Level 3 rather than Level 2: para 83 acknowledges that Level 2 inputs get adjusted for “the condition or location of the asset”, and para 84 confirms that a significant adjustment using unobservable inputs can push the measurement down a level. Specialised assets valued on current replacement cost are Level 3 almost by definition.

Disclosure

Para 91 sets the objective: users must be able to assess the valuation techniques and inputs used, and — for recurring Level 3 measurements — the effect on profit or loss or other comprehensive income.

Para 93 then sets the minimum, by class of asset, and four sub-paragraphs carry most of the property burden:

• 93(b) — the hierarchy level the measurement sits in, in its entirety.
• 93(d) — a description of the valuation technique(s) and inputs for Level 2 and Level 3, disclosure of any change in technique and why, and for Level 3, quantitative information about the significant unobservable inputs. This is where auditor attention concentrates.
• 93(e) — for recurring Level 3, a full reconciliation of opening to closing balances, separating gains and losses through profit or loss and OCI, purchases, sales, issues, settlements and transfers.
• 93(i) — the one people forget: if an asset’s highest and best use differs from its current use, disclose that fact and why the asset is being used differently.

Para 93(g) also requires a description of the Level 3 valuation processes — how the entity sets valuation policies and analyses period-to-period changes — which in practice means documenting how you engage and review your valuer.

Two scope limits worth knowing. First, an entity that carries assets at cost but discloses fair value still owes 93(b), 93(d) and 93(i), though not the quantitative Level 3 input disclosure (para 97). Second, paragraphs 91–99 do not apply to Tier 2 entities preparing simplified disclosures under AASB 1060 (Appendix E, para AusE1) — so “AASB 13 requires the hierarchy disclosure” is a Tier 1 statement.

Not-for-profit public sector entities — a separate rulebook

This section applies only to not-for-profit public sector entities: councils, government agencies, public schools and hospitals. Appendix F states plainly that it “does not apply to for-profit entities or not-for-profit private sector entities” (para F1). A for-profit CFO who applied these paragraphs to an investment property would be making a measurement error, so treat them as a walled garden.

AASB 2022-10 amended AASB 13 for these entities, inserting paras Aus28.1, Aus29.1–Aus29.2, Aus93.2 and Appendix F. It applies prospectively to annual periods beginning on or after 1 January 2024, with early application permitted if disclosed (para AusC6.1). (The disclosure relief at para Aus93.1 is older — it came from AASB 2015-7.)

Financial feasibility is redefined by service capacity. For an asset not held primarily to generate net cash inflows, a use is financially feasible if market participants — expressly including other not-for-profit public sector entities — “would be willing to invest in the asset’s service capacity”, weighing the asset’s capability to deliver needed goods or services against the resulting cost (para Aus28.1). A community hall does not have to earn a commercial return to have a highest and best use.

The current-use presumption becomes near-absolute. Rather than searching for hypothetical alternative uses, these entities need only consider whether highest and best use differs from current use in two situations: the asset is classified as held for sale or for distribution under AASB 5, or it is “highly probable” it will be used for an alternative purpose (para Aus29.1). And “highly probable” is tightly defined by four cumulative conditions in para Aus29.2 — the alternative use passes the para 28 and Aus28.1 tests, management is committed to a plan with an active programme initiated, any required approvals are obtained, and current use will cease within one year. In practice a council does not need to theorise about redeveloping a road.

Appendix F is the operational heart, and it is an integral part of the standard rather than soft guidance. Applying the cost approach to an asset not held primarily to generate net cash inflows, an entity estimates the replacement cost of a reference asset and then adjusts for differences in service capacity and for obsolescence (para F9). A reference asset may be a modern equivalent asset — one providing similar function and equivalent utility, of current design and built with current cost-effective materials — or a replica where only a replica — or a cheaper replica — could provide that utility (para F10). The replacement is assumed to be built at the subject asset’s existing location (para F11(a)), and costs such as site preparation and disruption can come in (paras F12–F13).

Two Appendix F points are especially useful for public-sector valuation:

• Heritage assets. Where heritage features are an essential part of service capacity, replacement cost generally means the cost of replicating those features — reproduction cost — using modern cost-effective materials but “sympathetic with the original heritage design and structure to the extent feasible” (para F15).
• Economic obsolescence, handled realistically. Identifying economic obsolescence “does not require a formal decision to have been made to reduce the physical capacity” of an asset (para F16). But apparent surplus capacity is not obsolescence where it is needed for stand-by or safety purposes, even if seldom used (para F17) — and the reduction is not linear, because shared components like administration offices, canteens, toilet blocks, libraries and gymnasiums may still need near-full replacement (para F19).

One clarification on restrictions, because it is frequently misread: AASB 2022-10 added no operative paragraph on restrictions on use. The Board’s reasoning appears in the Basis for Conclusions, which accompanies but is not part of the standard: a restriction specific to the entity holding the asset is disregarded, while a restriction that would transfer to a buyer is taken into account, and a prohibition on selling the asset is not a factor in determining highest and best use (Basis for Conclusions on AASB 2022-10, paras BC104 and BC106). The operative hooks remain paras 11(b) and 28(b).

Methodology

Quotations and paragraph references are taken from Compiled AASB 13 Fair Value Measurement (Compilation No. 3, compilation date 31 December 2023; Authorised Version F2024C00046), read directly, and confirmed as the current compilation on the Federal Register of Legislation as at 27 July 2026. Deleted and repealed paragraphs (7(b), C4, Aus99.1) are not cited as operative. Where a proposition comes from a Basis for Conclusions or from Appendix B or F, that source is identified, because they carry different status: Appendices A, B, C, E and F are integral parts of the standard, while a Basis for Conclusions is not. Australian “Aus” paragraphs and Appendix F apply only to not-for-profit public sector entities and are confined to their own section above. Extracts are quoted briefly for commentary and attributed by paragraph; the standard is IFRS Foundation and AASB copyright material and should be read in full at the source linked below.

Frequently asked questions

What is fair value under AASB 13?

AASB 13 defines fair value at paragraph 9 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price, judged from the perspective of market participants rather than the entity, and it assumes normal marketing exposure rather than a forced or distressed sale.

Does AASB 13 require property to be measured at fair value?

No. AASB 13 applies only when another standard requires or permits fair value (paragraph 5) — it governs how, not whether. The triggers are AASB 116 where an entity elects the revaluation model for owner-occupied property, AASB 140 for investment property, AASB 5 for assets held for sale and AASB 136 for impairment. Leasing transactions under AASB 16 sit outside its measurement and disclosure requirements.

What are the three levels of the fair value hierarchy?

Level 1 is quoted prices in active markets for identical assets (paragraph 76) — property essentially never qualifies. Level 2 is other observable inputs, such as quoted prices for similar assets (paragraphs 81–82). Level 3 is unobservable inputs (paragraph 86). Two rules matter: the hierarchy ranks inputs, not valuation techniques (paragraph 74), and a measurement takes the level of the lowest input that is significant to the whole measurement (paragraph 73) — so one significant unobservable input makes the entire measurement Level 3.

What is highest and best use under AASB 13?

It is the use by market participants that would maximise the asset’s value, tested against whether that use is physically possible, legally permissible and financially feasible (paragraph 28) — with the standard’s own examples being a property’s size and location, and its zoning. Current use is presumed to be highest and best use unless market factors suggest otherwise (paragraph 29), and if the two differ, paragraph 93(i) requires that fact and the reason to be disclosed.

What changed for councils and government entities under AASB 2022-10?

AASB 2022-10 amended AASB 13 for not-for-profit public sector entities, applying prospectively from annual periods beginning on or after 1 January 2024. For assets not held primarily to generate net cash inflows, financial feasibility is assessed against the asset’s service capacity (paragraph Aus28.1), and an entity only needs to consider whether highest and best use differs from current use in narrowly defined situations (paragraphs Aus29.1–Aus29.2). Appendix F sets out how to apply the cost approach, including reference and modern equivalent assets, reproduction cost for heritage features, and how to treat economic obsolescence and stand-by capacity.

Sources

• Compiled AASB 13 Fair Value Measurement (PDF) — Compilation No. 3, 31 December 2023; also on the Federal Register
• Federal Register of Legislation — AASB 13 versions (Authorised Version F2024C00046, confirmed current as at July 2026)
• AASB 2022-10 Amendments — Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities (PDF), including its Basis for Conclusions

This article is general information about an accounting standard, not accounting, audit or valuation advice. Application depends on your entity type, the standard that triggered the measurement, and your asset classes — and Tier 2 preparers are exempt from the disclosure paragraphs. Confirm your treatment with your auditor or adviser, and read the standard at the source.

See also

• AASB 116 Property, Plant and Equipment — plain-English summary — the standard that most often triggers a fair value measurement for owner-occupied property
• AASB 13, 116 and 140 side by side — how the three property standards fit together
• Council Asset Revaluation Requirements by State — where the not-for-profit public sector rules bite in practice
• Financial Reporting Valuations and Asset Valuations — audit-ready fair value reports
• Depreciated Replacement Cost Valuations — the cost approach applied to specialised assets

Last verified: 27 July 2026 against Compiled AASB 13 (Compilation No. 3, 31 December 2023), confirmed as the current compilation on the Federal Register of Legislation. Accounting standards are reissued as the AASB amends them — this article is reviewed against the current compilation.