Journal Entries for Fair Value Adjustment

Quick Answer: How to Record a Fair Value Adjustment

A fair value adjustment updates an asset or liability's carrying amount on the balance sheet to reflect its current fair value. The journal entry depends on the measurement classification — whether the item is measured at fair value through profit or loss (FVTPL), through other comprehensive income (FVTOCI), or is a non-recurring measurement:

What Is Fair Value Measurement?

Fair value is defined under both IFRS 13 and ASC 820 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 an exit price concept — not an entity-specific value — and reflects market-based rather than entity-specific assumptions.

Fair value measurement is relevant to a wide range of accounting topics: investment securities, derivatives, business combinations, asset impairment testing, share-based compensation, and leases. Understanding how to record fair value adjustments is essential for anyone preparing or analyzing financial statements under IFRS or US GAAP.

The Fair Value Hierarchy (IFRS 13 / ASC 820)

Both IFRS and US GAAP use a three-level fair value hierarchy that prioritizes the inputs used in valuation techniques:

The level in the hierarchy is determined by the lowest-level input that is significant to the fair value measurement in its entirety. Level 3 measurements require the most extensive disclosures, including a reconciliation of opening to closing balances and sensitivity analysis of unobservable inputs.

Recurring vs. Non-Recurring Fair Value Measurements

Recurring Fair Value Measurements

These are assets or liabilities that are remeasured to fair value at the end of every reporting period. Common examples include:

• Trading securities — debt and equity investments held for short-term profit
• Available-for-sale debt securities — debt instruments not classified as held-to-maturity or trading
• Derivatives — forwards, futures, options, and swaps (always at fair value)
• Investment property under the fair value model (IAS 40)

Non-Recurring Fair Value Measurements

These are triggered by specific events or circumstances rather than measured every period:

• Assets held for sale (IFRS 5 / ASC 360) — measured at lower of carrying amount and FVLCD
• Impaired long-lived assets — fair value used to measure impairment loss
• Business combinations (IFRS 3 / ASC 805) — acquired assets and liabilities at fair value
• Asset retirement obligations — initial and subsequent measurement may involve fair value

Journal Entries by Measurement Classification

1. Fair Value Through Profit or Loss (FVTPL)

Under IFRS 9, financial assets are classified as FVTPL if they are held for trading, or if the entity irrevocably elects the fair value option to avoid an accounting mismatch. Unrealized gains and losses flow directly to the income statement.

2. Fair Value Through Other Comprehensive Income (FVTOCI)

For equity instruments designated as FVTOCI, fair value changes are recognized in OCI and never recycled to profit or loss — dividends remain in P&L. For debt instruments classified as FVTOCI, fair value changes go to OCI but impairment and foreign exchange gains/losses go through P&L, and accumulated OCI is recycled to P&L on derecognition.

3. Amortized Cost — No Fair Value Adjustment (But Impairment Tested)

Financial assets held within a "hold to collect" business model (e.g., loans, receivables, held-to-maturity debt securities) are measured at amortized cost. They are not remeasured to fair value each period, but they are subject to impairment testing under the expected credit loss model.

Fair Value Adjustments for Non-Financial Assets

While financial instruments dominate fair value discussions, fair value adjustments also apply to non-financial assets in specific circumstances:

Investment Property (IAS 40 — Fair Value Model)

Biological Assets (IAS 41)

Agricultural produce and biological assets (livestock, timber, crops) are measured at fair value less costs to sell, with changes recognized in profit or loss. The same journal entry structure applies — debit the asset, credit a gain (or vice versa).

Fair Value Adjustment and Foreign Currency

When a financial asset is denominated in a foreign currency, two separate adjustments may be required at each reporting date: a fair value adjustment and a foreign exchange translation. Under IFRS 9, the order of operations matters:

1. First, remeasure the foreign-currency-denominated carrying amount at the closing exchange rate
2. Then, compare the translated carrying amount to fair value and record any additional fair value adjustment

For monetary items classified as FVTPL, both the FX component and the fair value change flow through P&L. For equity instruments designated as FVTOCI, the entire change (including FX) is presented in OCI. For a more detailed discussion of cross-currency accounting, refer to our guide on journal entries for foreign currency transactions.

Disclosure Requirements (IFRS 13 / ASC 820)

Entities must disclose extensive information about fair value measurements to help users assess valuation methods and the uncertainty inherent in those measurements:

• For each class of assets/liabilities: The fair value at the reporting date and the level within the fair value hierarchy
• For Level 2 and Level 3: A description of the valuation technique(s) and the inputs used
• For Level 3: A reconciliation from opening to closing balances, total gains/losses recognized in P&L and OCI, and a sensitivity analysis of unobservable inputs
• Transfers between levels: The reasons for transfers and the entity's policy for determining when transfers are deemed to have occurred

Common Pitfalls in Fair Value Accounting

• Using the wrong measurement basis: Not all financial assets are measured at fair value — classification depends on the business model and contractual cash flow characteristics (IFRS 9's SPPI test).
• Confusing FVTOCI equity vs. FVTOCI debt: The recycling rules are different. Equity FVTOCI never recycles to P&L; debt FVTOCI does on derecognition.
• Ignoring the bid-ask spread: IFRS 13 requires using the price within the bid-ask spread that is most representative of fair value — not necessarily the mid-point.
• Failing to update fair value for non-financial assets: Investment property under the fair value model and biological assets under IAS 41 require remeasurement every period. For more on intangible asset valuation challenges, see our article on journal entries for intangible assets.
• Inadequate Level 3 disclosures: Regulators (SEC, ESMA) consistently cite Level 3 disclosure deficiencies as a top enforcement priority. The reconciliation and sensitivity analysis are not optional.
• Overlooking impairment for FVTOCI debt instruments: Even though fair value changes go to OCI, impairment losses are recognized in P&L under the expected credit loss model.

Fair Value in Business Combinations

When a company acquires another business, IFRS 3 (and ASC 805) requires the acquirer to measure identifiable assets acquired and liabilities assumed at their acquisition-date fair values — a classic example of non-recurring fair value measurement. This "purchase price allocation" (PPA) often creates fair value adjustments to the acquiree's tangible and intangible assets, including customer relationships, trademarks, technology, and goodwill.

For equity method investments, subsequent fair value changes are not recognized directly — instead, the investor records its share of the investee's profit or loss. However, the fair value at acquisition still drives the initial measurement and any basis differences that are amortized over time. For more on this topic, see our detailed guide on journal entries for equity method investments.

Fair Value vs. Historical Cost: A Practical Comparison

Fair value accounting provides more timely and relevant information to investors, but it comes at the cost of increased earnings volatility and greater complexity in financial reporting. The trend in both IFRS and US GAAP has been toward expanded use of fair value — particularly for financial instruments — and this trend shows no sign of reversing. For additional context on how fair value interacts with goodwill and acquisition accounting, see our overview of journal entries for goodwill.