FRS 102 amendments to Fair Value Measurement

The 2024 amendments to FRS 102 (effective for periods beginning on or after 1 January 2026) includes a new Section 2A that replaces the previous appendix on Fair Value Measurement. These updated principles for fair value measurement bring the UK standard more closely in line with IFRS 13. While many of the changes are clarificatory, they may still impact how entity’s measure certain assets and liabilities, with implications for financial reporting, valuations, and compliance strategies.

Alignment with IFRS 13

The revised section adopts the IFRS 13 framework, standardising how fair value is measured and disclosed across various asset classes and liabilities.

Fair value is now defined 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 a market-based, rather than an entity-specific measure.  The term ‘market participants’ is also now defined in the standard, incorporating the concepts of principal and most advantageous markets (previously there was no discussion of different markets in which the item might be exchanged). Additional material has also been introduced on these concepts.

Key areas to think about

1. Three-level fair value hierarchy:
   The revised standard updates the fair value hierarchy to align with international best practice:
   • Level 1: Quoted prices in active markets for identical or comparable assets or liabilities.
   • Level 2: Price from recent orderly transactions between market participants for an identical or comparable assets or liabilities, where there have been no significant changes in economic circumstances or a significant time gap since the transaction.
   • Level 3: Other valuation techniques that provide the best estimate of fair value, as defined (see 4 below).
2. Principal vs. most advantageous market:
   Entities must determine either the principal market (the market with the greatest volume and activity) or, if no such market exists, the most advantageous market (the one that maximises the amount received or minimises the amount paid).
3. Highest and best use concept:
   For non-financial assets, fair value must reflect the asset’s highest and best use from a market participant’s perspective, even if the entity uses it differently.
4. Valuation techniques:
   Currently, the standard gives examples of acceptable valuation techniques, including prices in binding sale agreements, recent arm’s length market transactions for identical assets, fair values of similar assets, discounted cash flow analysis, and option pricing models. The new standard will expect the use of:
   • Market approach (comparable market prices),
   • Income approach (discounted cash flows), and
   • Cost approach (replacement cost).

For the most part, the changes should not result in different accounting outcomes, as they mainly clarify existing guidance. However, management need to ensure they have reviewed and, where necessary, amended their approach to calculating fair value to ensure compliance with updated guidance. While fair value consideration often focuses on assets, it’s important to note that the shift from a settlement concept to a transfer concept for liabilities may have an impact. Under the transfer concept, an entity must consider the effect of its own credit risk when determining the fair value of a liability.

How we can help

We have a number of financial reporting specialists that can advise your organisation on transition through the new amendments. For further advice, get in touch with our team on 01903 234094.