IFRS 13 Fair Value Measurement
What It Is
IFRS 13 is an accounting standard issued by the International Accounting Standards Board (IASB). It defines fair value, establishes a framework for measuring fair value, and requires disclosure of fair value measurements in financial statements for entities preparing accounts under IFRS.
The equivalent standard under US GAAP is ASC 820 (Topic 820: Fair Value Measurement). The two standards are substantially converged in their core definitions and the Level 1/2/3 input hierarchy.
IFRS 13 applies when another IFRS standard requires or permits fair value measurement. For private capital funds, this includes the measurement of investment portfolios where investments are carried at fair value through profit or loss.
The Level 1 / 2 / 3 Hierarchy
The most operationally significant element of IFRS 13 for private capital is the fair value input hierarchy, which categorises the observable-ness of the inputs used in a valuation:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities. For private funds, Level 1 applies to listed securities held in the portfolio. This is the most reliable category; price is observable directly.
Level 2 — Inputs other than Level 1 prices that are observable for the asset or liability, either directly (prices) or indirectly (inputs derived from prices). Examples include quoted prices for similar assets in active markets, or observable yield curves and credit spreads.
Level 3 — Unobservable inputs, reflecting the entity’s own assumptions about what market participants would use in pricing the asset. The majority of private equity, private credit, and real estate holdings fall into Level 3 because there is no active market and prices must be modelled.
Important: A higher Level number means less reliable — Level 3 valuations require the most judgement and carry the most valuation uncertainty. The Level 1/2/3 framework in valuation risk is based on this hierarchy.
The standard requires that entities maximise the use of observable inputs and minimise the use of unobservable inputs.
Why It Matters for Private Capital
NAV: Private fund NAV aggregates the fair values of all portfolio investments. For funds holding primarily private equity, private credit, or real estate, the vast majority of the portfolio is Level 3. This means fund NAV is heavily dependent on valuation judgement, not observable market prices.
NAV production: The NAV production process translates IFRS 13 / ASC 820 measurement into the fund’s accounting records. The data inputs, valuation committee oversight, and independent verification steps all exist to support compliance with these standards.
Valuation risk: The valuation risk file describes the practical consequences of Level 3 measurement — smoothing, stale prices, and manager incentives. IFRS 13 is the accounting standard underlying those observations.
Performance metrics: Because TVPI and RVPI depend on unrealised portfolio valuations, and those valuations are Level 3, the quality of fair value measurement directly affects how performance metrics should be interpreted.
Private equity and private credit: Both private equity and private credit portfolios are predominantly Level 3. This affects not only NAV accuracy but the comparability of reported returns across managers using different valuation assumptions.
Real estate: Real estate fund valuations involve RICS-accredited appraisers in the UK and rely on market evidence, capitalisation rates, and discounted cash flows — all Level 2 or Level 3 inputs under IFRS 13.
IFRS 13 vs IPEV Guidelines
IFRS 13 is the accounting standard; IPEV Valuation Guidelines are the private capital industry’s practical guidance on how to apply fair value measurement to private investments. The two are complementary: IPEV guidelines help practitioners implement the IFRS 13 / ASC 820 principle of fair value in the specific context of private markets.
Relevant Local Files
- NAV
- NAV Production
- Valuation Risk
- TVPI
- RVPI
- Private Equity
- Private Credit
- Real Estate
- IPEV Valuation Guidelines
Source Verification Note
IFRS 13 is a published accounting standard, publicly available from the IFRS Foundation. The standard itself and its associated illustrative examples can be accessed at the source URL above. This source note describes the standard at a conceptual level for the purpose of understanding its relevance to private capital fund operations; it is not an accounting interpretation or compliance guide. Application of IFRS 13 to specific fund accounting scenarios requires qualified accounting advice.