The fair value measurement of financial instruments under IAS 32 is significant because it provides users of the financial statements with relevant and reliable information about the value of the instruments and the risks associated with them. The fair value of a financial instrument is the amount 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.

The fair value of a financial instrument is determined based on a range of information sources, including:

• Market prices from active markets for similar instruments
• Quoted prices from inactive markets for similar instruments
• Valuation techniques that use observable inputs, such as interest rates, credit spreads, and yield curves
• Valuation techniques that use unobservable inputs, such as assumptions about future cash flows, discount rates, and credit risk

The level of inputs used to determine the fair value of a financial instrument is classified into three levels, as follows:

• Level 1 - quoted prices in active markets for identical instruments
• Level 2 - observable market data, such as prices for similar instruments, yield curves, and credit spreads
• Level 3 - unobservable inputs, such as assumptions about future cash flows and discount rates

The fair value of a financial asset or financial liability is determined on initial recognition and subsequently on each reporting date. Any changes in fair value are recognized in profit or loss or other comprehensive income, depending on the nature of the instrument and the entity's accounting policy.

Here's an example to illustrate the significance of the fair value measurement of financial instruments:

Suppose a company holds a portfolio of marketable securities that includes 1,000 shares of XYZ Corporation, which is publicly traded on a stock exchange. The company acquired the shares for $50 per share and the fair value of the shares at the end of the reporting period is $60 per share.

To determine the fair value of the shares, the company would use Level 1 inputs, as the shares are publicly traded and quoted prices are available in an active market. The fair value of the shares would be $60, which represents the amount that would be received to sell the shares in an orderly transaction between market participants at the measurement date.

The company would recognize a gain of $10,000 in profit or loss or other comprehensive income, depending on the nature of the shares and the entity's accounting policy. The recognition of the gain provides users of the financial statements with relevant and reliable information about the value of the shares and the impact of changes in market conditions on the company's financial performance.