FRS 102 Amendments to Fair Value Measurement: what you need to know

Kristina Perry, Partner, Carpenter Box

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.

This article explores what the changes mean in practice, how they align with international standards, and what organisations should be doing now to prepare.

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. For UK entities, this represents a step towards greater consistency with global reporting practices, which should make financial statements more comparable and transparent for investors and regulators.

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 formal discussion of how to determine which market was most relevant, leaving room for variation in practice. 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).

The hierarchy is designed to prioritise the most reliable and observable inputs. In practice, entities should always seek to use Level 1 evidence where available, falling back on Levels 2 and 3 only when necessary. This ranking is intended to give users of financial statements greater confidence in the values reported.

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).

This requirement means that businesses cannot simply choose the market that gives them the most favourable result. Instead, they must evidence that their chosen market is either the one with the highest level of activity or, in its absence, the one that would realistically provide the best outcome in a transaction.

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.

This concept can be particularly relevant in sectors such as property or manufacturing. For example, land currently used for warehousing may have a higher value if market participants would use it for residential development. Even if the entity has no intention of changing the use, the fair value must still reflect this broader market view.

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).

This codification of approaches helps to ensure greater consistency between entities. It also reflects the reality that different circumstances require different techniques: for example, actively traded securities may be best valued using market prices, while specialised assets with no active market may require an income or cost approach.

Implications for Practice

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.

This subtle but important shift may lead to lower liability valuations in some cases, as entities with weaker credit profiles must recognise that market participants would demand compensation for taking on that credit risk.

In practice, finance teams should also review whether their existing systems and models are capable of incorporating the new guidance. Additional documentation and disclosures may be required, and auditors will expect to see clear evidence of how fair values have been derived. This could involve updating valuation models, engaging with external valuers, or revisiting key assumptions around discount rates, cash flow projections, or comparable market data.

Preparing for the transition

With the amendments taking effect for periods beginning on or after 1 January 2026, entities have a limited window to prepare. Boards and finance teams should begin early planning to avoid last-minute adjustments. This includes training staff, updating accounting manuals, and assessing whether existing policies align with the new requirements.

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.