An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data  is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.  [para.61]  The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants, at the measurement date, under current market conditions. Three widely used valuation techniques are: [para.62] 
(a) market approach,
(b) cost approach; and
(c) income approach.

An entity shall use valuation techniques consistent with one or more of those approaches to measure fair value.

In some cases a single valuation technique will be appropriate (e.g. when valuing an asset or a liability using quoted prices in an active market for identical assets or liabilities).  In other cases, multiple valuation techniques will be appropriate (e.g. this may be the case when valuing a cash-generating unit).  If multiple valuation techniques are used to measure fair value, the results (i.e. respective indications of fair value) shall be evaluated considering the reasonableness of the range of values indicated by those results.  A fair value measurement is the point within that range that is most representative of fair value in the circumstances.  [para.63]

Inputs to valuation techniques

The general principles in using valuation techniques to measure fair value are to maximise the use of relevant observable inputs and minimise the use of unobservable inputs. [para.67] Examples of markets in which inputs might be observable for some assets and liabilities (e.g. financial instruments) include:  [para.68]
(a) exchange markets,
(b) dealer markets,
(c) brokered markets; and
(d) principal-to-principal markets.

If an asset or a liability measured at fair value has a bid price and an ask price (e.g. an input from a dealer market), the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value.  [para.70] The use of bid prices for bid prices for asset positions and ask prices for liability positions is permitted, but is not required.  Furthermore, the HKFRS 13 does not preclude the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread. [para.71]

Fair Value Hierarchy

To increase consistency and comparability in fair value measurements and related disclosures, the HKFRS 13 establishes a fair value hierarchy that categorizes the inputs to valuation techniques into three levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).  [para.72]

(a) Level 1 inputs are quoted prices (unadjusted) in active markets (i.e. principal market, most advantageous market or recent entity’s transaction) for identical assets or liabilities that the entity can access at the measurement date. [para.76]  A quote price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available except when: [para.77]
• An entity holds a large number of similar assets or liabilities for which quoted price in active markets are available but not readily accessible for each of those assets or liabilities individually.   The entity may therefore measure fair value by using an alternative pricing method that does not rely exclusively on quoted prices, for instance matrix pricing, but the resulting fair value measurement will be categorized within a lower level of fair value hierarchy.

• The quoted price in an active market does not represent fair value at the measurement date, e.g. significant events after the close of a market but before the measurement date.  An entity shall establish and consistently apply a policy for identifying those events that might affect fair value measurements. However, if the quoted price is adjusted for new information, the resulting fair value measurement will be classified in a lower level of the fair value hierarchy. [para.79]

(b) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. [para.79] Level 2 inputs include the following:
i. Quoted prices for similar assets or liabilities in active markets.
ii. Quoted prices for identical or similar assets or liabilities in markets that are not active.
iii. Inputs other than quoted prices that are observable for the asset or liability, for example:
• Interest rates and yield curves observable at commonly quoted intervals;
• Implied volatilities; and
• Credit spreads.
iv. Market-corroborated inputs.

Remarks for Level 2
If adjustment to Level 2 inputs is required, it will vary depending on factors specific to the asset or liabilities, which include:
1) The condition or location of the asset;
2) The extent to which inputs relate to items that are comparable to the asset or liability (including those factors described in paragraph 39); and
3) The volume or level of activity in the markets within which the inputs are observed.

An adjustment to a Level 2 input that is significant to the entire measurement might result in a fair value measurement categorized within Level 3 of the fair value hierarchy if the adjustment uses significant unobservable inputs.

Here are some examples for Level 2 inputs:
1) Receive-fixed, pay-variable interest rate swap based on the London Interbank Offered Rate (LIBOR) swap rate;
2) Receive-fixed, pay-variable interest rate swap based on a yield curve denominated in a foreign currency;
3) Receive-fixed, pay-variable interest rate swap based on a specific bank’s prime rate;
4) Three-year option on exchange-traded shares;
5) Licensing arrangement;
6) Finished goods inventory at a retail outlet;
7) Building held and used; and
8) Cash-generating unit - derived from observable market data, e.g. multiples derived from prices in observed transactions involving comparable (i.e. similar) businesses.

(c) Level 3 inputs are unobservable inputs for the asset or liability.  Examples of Level 3 inputs are:
1) Long-dated currency swap;
2) Three-year option on exchange-traded shares;
3) Interest rate swap;
4) Decommissioning liability assumed in a business combination. – current estimate using the entity’s own data about the future cash outflows to be paid to fulfill the obligation; and
5) Cash-generating unit - developed using the entity’s own data.