As per 1st of January 2013 IFRS 13 came into force which requires life settlement portfolios to be valued according to the fair value principle. ‘Fair value principle’ means ‘..the amount for which an asset could be exchanged or a liability settled, between knowledgeable and willing parties in an arm’s length transaction’. Therefore the fair value is an exit price.
- The objective of determining a fair value is to estimate the price at which an orderly transaction would take place between market participants at the measurement date.
- Fair value is a market-based measurement. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability.
- Market participants are independent, knowledgeable, able and willing to enter into a transaction, although the price in a related party transaction may be used as an input to a fair value measurement if there is evidence that the transaction was entered into on market terms.
Irrespective of the level in the fair value hierarchy used to measure the fair value of a financial instrument, the method chosen must maximize the use of relevant observable inputs and minimize the use of unobservable inputs. An input is observable if it can be observed as a market price or can be derived from an observed market price. In each case, it is not necessary for the market to be active.