According to IFRS 13, what defines fair value?

Fair value is defined by IFRS 13 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. This definition emphasizes the importance of the market context in which the transaction occurs. It reflects the perspective of willing buyers and sellers in an active market, ensuring that the fair value measurement is representative of what could actually be realized in the market.

The focus on "an orderly transaction between market participants" is essential as it implies that the transaction is not distressed or forced, which would not accurately reflect market conditions. Rather, it seeks a realistic exit price derived from a non-coercive environment, thereby offering a more reliable measure for financial reporting purposes. This framework helps companies evaluate assets and liabilities fairly, aligning financial statements more closely with the economic reality faced by market participants.

In contrast, options that refer to forced sales or adjustments for market fluctuations introduce elements that do not align with IFRS 13’s definition of fair value. Historical cost or depreciation also diverges from the fair value concept, as these methods do not consider current market conditions or the economic context pertinent to asset or liability disposition.