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 elements of that definition carry weight: it is an exit price, not an entry cost; it assumes an orderly transaction rather than a forced sale; and it reflects the market's view, not the holder's intention.
It differs from historical cost, which records what was actually paid and does not move afterwards. A building bought for 2 million euros in 2010 stays at 2 million less depreciation under historical cost, whatever the market now says. Fair value asks a different question: what would it fetch today.
IFRS 13 organises measurement into a three-level hierarchy, ranked by observability. Level 1 uses quoted prices in active markets for identical assets, the most reliable input. Level 2 uses observable inputs other than quoted prices, such as prices for similar assets or market-derived rates. Level 3 uses unobservable inputs and relies on internal models: discounted cash flows, valuation multiples, assumptions set by the entity itself.
The hierarchy exists because judgment increases sharply as you descend it. A listed bond is measured at level 1 with little debate. A customer relationship intangible identified during a purchase price allocation is a level 3 measurement resting on projected retention rates and discount rates, both chosen internally. It is a defensible estimate, not an observed fact.
Fair value is the measurement base of the whole acquisition sequence: it determines the value of net assets acquired, and therefore the goodwill or badwill that results. Level 3 inputs are only as sound as the underlying operational data, which is why closing data reliability precedes any valuation exercise.
