The principal market

Learning objectives

• Identify the principal market for an asset or a liability (greatest volume and level of activity, accessible to the entity).L2
• Justify the market selected on the basis of activity volumes and the entity's access.L2

Normative references

• IFRS 13 §15The measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants at the measurement date under current market conditions.
• IFRS 13 §16The measurement assumes that the transaction takes place in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market.
• IFRS 13 §17The entity need not undertake an exhaustive search of all possible markets; in the absence of evidence to the contrary, the market in which it normally sells the asset (or transfers the liability) is presumed to be the principal market (or, failing that, the most advantageous market).
• IFRS 13 §18If there is a principal market, the measurement reflects the price in that market, even if the price in a different market is potentially more advantageous at the measurement date.
• IFRS 13 §19The entity must have access to the market concerned at the measurement date; different entities may have different principal markets.
• IFRS 13 §20The entity must have access to the market, but need not be able to sell the asset or transfer the liability at the measurement date to base the measurement on the price in that market.
• IFRS 13Appendix A: definitions of the terms used in the Standard (active market, cost approach, entry price, exit price, expected cash flow, fair value, highest and best use, income approach, inputs, Level 1 to Level 3 inputs, market approach, market-corroborated inputs, market participants, most advantageous market, non-performance risk, observable inputs, orderly transaction, principal market, risk premium, transaction costs, transport costs, unit of account, unobservable inputs). Market participants are defined as independent, knowledgeable, able and willing to enter into a transaction.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

6 questions

• What is the principal market of an asset within the meaning of IFRS 13?L2
• Which statements about the principal market are correct? (Several answers.)L2
• Arvenne sells copper. Market X has the largest volume and the highest level of activity; the price there is 100 per lot. Market Y, smaller and thinly traded, would offer 104 per lot. Arvenne has access to both markets at the measurement date. Which price does it use for the fair value of a lot?L2
• Market Z is the principal market of Hallevin for its tin lots. Brindelle, which has no access to Z at the measurement date, writes: "Our principal market is also Z, since it is Hallevin's." What is the error?L2
• In which case does the entity use the price of the most advantageous market to measure an asset?L2
• Which statements about the transaction assumed by a fair value measurement are correct? (Several answers.)L2