What is Fair Value Model?
The fair value model values an asset or liability at the price it would fetch in an orderly transaction between market participants at the measurement date. Under IFRS 13, fair value is exit-price based, not entry-price, and uses a three-level hierarchy of inputs.
How It Works
- Level 1: quoted prices in active markets for identical assets
- Level 2: observable inputs other than Level 1 (similar assets, observable rates)
- Level 3: unobservable inputs based on management’s assumptions
- Required for financial instruments, investment property (optional under IAS 40), biological assets
- Changes in fair value usually flow to P&L or OCI depending on the asset class
Saudi Context
Saudi listed companies disclose fair-value hierarchy under IFRS 13 in their annual reports. CMA-regulated funds and asset managers calculate daily NAV using the same hierarchy, and SAMA-regulated banks use it for trading books and derivatives.
Example
A Saudi listed real-estate fund owns an office tower in Riyadh. It values the tower under the fair value model in IAS 40 at SAR 600M based on an independent appraiser’s discounted-cash-flow valuation (Level 3 inputs). A SAR 30M revaluation gain hits the P&L for the period.