Key changes to the FRS102 Series - Part 4

Week 4: Fair Value Measurement — Section 2A in Practice

For many Jersey real estate structures, fair value has historically sat in the background as a line in the notes, shielded by the “undue cost or effort” carve-out. From 2026, that safety valve is effectively gone.

Section 2A of FRS 102 consolidates fair value measurement into a single framework aligned with IFRS 13 and raises expectations on how valuations are performed, documented and governed. If your NAV, management fees or banking covenants are linked to property values, this is not merely a tidy-up; it will shape year-end board conversations.

Building on Week 1’s overview and our deep dives on revenue (Week 2) and leases (Week 3), this article looks at how Section 2A will apply in practice, with a particular focus on Jersey real estate funds and trusts. We break the requirements into clear, practical steps you can apply now.

What is changing at a glance

• Section 2A consolidates fair value guidance into one framework aligned with IFRS 13.
• It doesn’t expand where fair value applies; it standardises how you measure and disclose fair value wherever FRS 102 requires or permits it (e.g., investment property, certain financial instruments, business combinations, impairment measures).
• The definition is now explicitly an exit price between market participants at the measurement date, in the principal (or most advantageous) market.
• Removal of the undue cost or effort exemption (first introduced in 2019) now reaffirms alignment with IFRS 13 for areas such as investment property, raising the bar on recurring measurement and governance.
• Clearer rules on valuation techniques (market, income, cost) and inputs (observable vs. unobservable) strengthen consistency and comparability.
• Disclosures must emphasise methods, key inputs, and judgments. While a full IFRS 13 level table isn’t mandatory for all entities, transparency on significant unobservable inputs is expected.

Where you’ll encounter Section 2A most often

• Investment property: Must be measured at fair value through profit or loss. The removal of the undue cost or effort carve-out means more entities now need robust year-end valuations.
• Financial instruments at fair value: Covers derivatives and other instruments designated or required at fair value.
• Business combinations: Requires identifiable assets and liabilities at fair value on acquisition.
• Impairment: When recoverable amount involves fair value less costs to sell, Section 2A governs the measurement.

Core concepts simplified

• Exit price: The amount you would receive to sell an asset (or pay to transfer a liability) today, in an orderly transaction.
• Market participants: Independent, knowledgeable, and willing buyers or sellers. Focus on market-based assumptions, not entity-specific ones.
• Principal vs. most advantageous market: Use the market with the greatest activity. If none exists, choose the one that maximises value after transaction costs. Remember: transaction costs affect the market choice but are not deducted when measuring fair value.
• Highest and best use (non-financial assets): Value the asset in its economically optimal use from a market participant perspective, even if that differs from its current use, provided it’s legally permissible, physically possible and financially feasible.
• Unit of account: Value what the standard specifies (asset, CGU, or portfolio). This determines which techniques and inputs apply.
• Measurement date: Always measure fair value at the reporting date. Update assumptions to reflect prevailing market conditions.

Valuation techniques and inputs - how to choose and document

• Market approach: Use observed prices or transactions for identical or comparable assets (e.g., recent property sales, quoted prices).
• Income approach: Apply discounted cash flow, capitalisation of earnings, or option pricing models. Ensure cash flows and discount rates reflect market participant assumptions.
• Cost approach: Estimate current replacement cost, adjusted for physical wear, functional issues, and economic obsolescence.

Inputs and hierarchy (conceptual, not rigid):

• Prioritise observable inputs (e.g., quoted prices, market rents, indices, yield curves).
• Support and disclose significant unobservable inputs (e.g., internal forecasts, illiquidity discounts). Align them with recent transactions where possible.

Documentation tip: For each material valuation, prepare a one-page summary covering method, inputs, sources, calibration, and sensitivity. This creates an audit-ready trail.

Illustration A - Investment property fair value uplift

Facts: Office property carried at £10m cost. Year-end external valuation shows £10.8m fair value.

Journal:

• Dr Investment property £0.8m
• Cr Fair value gain (P&L) £0.8m

Company law note: Unrealised gains are not distributable. Entities often create an internal equity transfer:

• Dr Retained earnings £0.8m
• Cr Non-distributable reserve £0.8m

Disclosure focus: Describe method (market/income), key inputs (market rent, vacancy, yield), sensitivity (±25 bps yield), and whether a third-party independent valuer was used.

The end of “undue cost or effort” - impact on Jersey real estate funds

The “undue cost or effort” exemption for investment property has already been phased out in earlier amendments, and the latest FRS 102 revisions complete that journey. From 2026, Jersey real estate funds, trusts and holding structures that previously relied on this carve-out will be expected to obtain annual fair values for investment property, with changes recognised in profit or loss.

In practical terms, this means:

• More properties in scope of recurring valuation.
  Properties previously held at cost under the exemption will now need to be revalued annually using a market-consistent technique (commonly an income or market approach).
• Greater focus on governance and independence.
  Boards will be expected to appoint or have suitably qualified valuers involved, agree clear engagement terms, and challenge key assumptions such as equivalent yields, void periods, lease-up profiles, exit strategies and discount rates. Reliance on a one-line valuation certificate with minimal supporting analysis is unlikely to be sufficient.
• Method consistency and change control.
  Switching between valuation methods (for example, from yield-based income approach to comparable market method) will need a clear rationale, documented and disclosed. Users of the financial statements (including investors, lenders and regulators) will want to understand whether changes in fair value reflect market movements or changes in methodology.
• Closer linkage with NAV, fees and covenants.
  For many Jersey funds, management fees are calculated as a percentage of NAV, and banking covenants reference LTV ratios or asset values. Tightened fair value rules, combined with greater transparency over assumptions, increase the scrutiny on how valuation movements translate into fees, performance metrics and covenant headroom.

For boards and trustees, the removal of the undue cost or effort language is a clear signal, fair value measurement for investment property is no longer something to step around.

Disclosures & governance - quick checklist

• Update accounting policies with Section 2A terms (exit price, market participant, principal market, highest and best use).
• Document valuation techniques and inputs by class (e.g., property, derivatives).
• Flag significant unobservable inputs with sensitivity commentary.
• Disclose use and independence of third-party valuers.
• Maintain internal controls: model ownership, calibration, change logs, review minutes.
• Track equity reserves for non-distributable unrealised gains if this accounting policy is adopted.
• Remember: small entities (Section 1A) may reduce disclosure volume, but measurement rules remain the same.

2025–2026: What to do now

• Map where fair value applies (properties, instruments, acquisitions, impairments).
• Select methods (market, income, cost) and create model templates. Record sources and dates of market data.
• Engage valuers early for December/March year ends. Define scope, assumptions, and reporting formats.
• Build sensitivities (yields, growth, discount rates) to prepare boards and lenders for volatility.
• Draft disclosures now; don’t leave to year end.