Under the second edition of the IFRS for SME Standard, fair value guidance appeared in several places, including the financial instruments requirements. The third revised standard effective 1 January 2027 takes a different approach.
Section 12 now provides a single framework for fair value measurement whenever another section of the Standard requires or permits an asset or liability to be measured at fair value, or requires fair value disclosures. The new section is deliberately based on the principles of IFRS 13 in Full IFRS, although the IFRS for SMEs Standard remains a simplified standard.
What exactly is fair value?
The starting point is the definition. 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.
There are three ideas in that definition worth unpacking.
First, it is an exit price.
The question is not: ‘What did we pay for this asset?’ Nor is it: ‘What do we think this asset is worth to us?’ The question is: What price could be obtained by selling the asset, or would be paid to transfer the liability, at the measurement date?
Second, it is market-based.
Fair value is not based on the entity's own intentions or circumstances. The measurement uses assumptions that market participants would use when pricing the asset or liability. If management intends to hold an investment for another ten years, that intention does not change its fair value.
Third, the transaction is assumed to be orderly.
The measurement is not based on a forced sale or distressed transaction. It assumes a normal transaction between market participants under current market conditions.
The principal market matters
An orange in a market in Johannesburg will not cost the same as an orange in a market close to where they are grown in Mpumalanga. One of the practical questions is: which market should be used?
The revised Section 12 says the transaction is assumed to take place in the principal market for the asset or liability. If there is no principal market, the entity uses the most advantageous market.
The principal market is essentially the market with the greatest volume and level of activity for the relevant asset or liability. Importantly, the entity must have access to that market at the measurement date.
This can matter in practice for groups operating across different African markets. An asset might have potential buyers in several countries, but the fair value calculation is not simply a matter of selecting whichever market produces the highest price.
The framework starts with the market in which the entity normally conducts the relevant transactions, unless evidence indicates otherwise.
Transaction costs are not fair value
Suppose an investment has a quoted market price of R10 million but the entity would incur R200,000 in brokerage and other transaction costs to sell it. The fair value is still R10 million. The R200,000 is a transaction cost associated with selling the investment; it is not part of the fair value measurement.
What if there is no observable market price?
The revised Section 12 still requires an entity to estimate fair value even where there is no observable market. This means the absence of a quoted price does not mean that management can simply use its own preferred valuation.
Instead, the entity must use an appropriate valuation technique and maximise the use of relevant observable inputs while minimising the use of unobservable inputs. This is where professional judgement becomes much more important.
Fair value hierarchy
The revised framework also introduces the familiar three-level fair value hierarchy.
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 inputs are inputs other than Level 1 quoted prices that are observable, either directly or indirectly.
Level 3 inputs are unobservable inputs.
The further down the hierarchy you go, the more judgement is generally involved and the more information an SME would be required to disclose to users of their financial statements.
Highest and best use
A piece of land can be used for many things – industrial, residential, commercial, farming or even recreation. When you value an item under Section 12, you assume that a buyer will use it for the highest and best use even if the current use of the asset is different.
Comprehensive example
Ubuntu Office Furnishings owns a specialised CNC machine used to manufacture office furniture. At year-end, Ubuntu needs to determine the machine's fair value. The machine is traded in three markets, with Johannesburg having the greatest volume and level of activity, making it the principal market, even though another market offers a higher price. Ubuntu therefore uses the Johannesburg market price when determining fair value and does not deduct transaction costs such as brokerage or selling fees, because these are not characteristics of the asset.
However, if the machine had to be transported to the principal market, the transport cost would be considered where location is a characteristic of the asset. Ubuntu also considers the fair value hierarchy: because there are significant adjustments based on unobservable assumptions, Ubuntu classifies this as Level 3 and discloses those adjustments in its financial statements.
Finally, Ubuntu considers the machine's highest and best use. Although it currently uses the machine to manufacture office furniture, market participants could use it to manufacture kitchen cabinetry and generate greater economic benefits. As this alternative use is physically possible, legally permitted and financially feasible, Ubuntu considers it in determining fair value.
What SMEs should do in 2026
For entities preparing for the 1 January 2027 effective date, the practical preparation should start with identifying where fair value is currently used.
A useful checklist is:
- Identify every asset and liability currently measured at fair value.
- Identify where fair value disclosures are required.
- Determine how each valuation is currently performed and ensure it complies with the principles of Section 12.
- Classify the inputs. Understand whether the valuation is predominantly Level 1, Level 2 or Level 3.
- Review the assumptions. For Level 3 valuations in particular, document the assumptions and consider whether they reflect those that market participants would use.
