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Published online by Cambridge University Press: 15 September 2022
Before measuring the fair value, it is first required to identify the item whose value is to be measured, since the type of item to be measured may impact the outcome of the valuation. To identify the item to be measured, the reporting entity should take into account the specific characteristics of the asset or the liability that market participants would have also taken into account when determining the transaction price. These characteristics will be taken into consideration when determining the fair value, unlike characteristics specific to the reporting entity, which are not transferred along with the asset or liability and which are not to be taken into consideration when determining the fair value. The question of the item to be measured is closely related to the unit of account question, which is relevant to the asset or liability (for more information, see Section 3). The unit of account is the level at which the asset or liability is aggregated or disaggregated, that is, the unit of account will determine whether the item is measured on a standalone basis or in combination with a group of items that may include either assets or liabilities or both assets and liabilities. It should be clarified that even when the unit of account is defined as an individual asset, it is still possible that the valuation premise will be that, from the perspective of a potential market participant, the asset will be operated with other assets or liabilities, even if those assets or liabilities are not part of the unit of account and are not part of the relevant transaction (for more information, see Chapter 9, Section 3).
Characteristics of an Asset or Liability versus
Characteristics of the Entity Holding the Asset
Fair value measurement is carried out from a market participant's perspective and relates to a specific asset or liability (i.e., while taking into account relevant characteristics of the asset or liability). As a rule, fair value measurement should take into consideration characteristics of an asset or a liability if and only if market participants would have done so. The extent to which the influence of a certain characteristic should be taken into consideration is the extent to which it would have been attributed to that characteristic by market participants.