Ind-AS 113 – Fair Value Measurement

By CA Prashant Kumar Dutt

Objectives of Ind AS 113

  1. To determine Fair Value
  2. To set out a single Ind AS framework for measuring fair value
  3. To require disclosures with respect to fair value measurements

Scope

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This Ind AS applies when another Ind AS requires or permits fair value measurements or disclosures about fair value measurements.

Exclusion
This Ind-AS do not apply to the following:

  1. Share –based payment transaction as per Ind AS 102
  2. Leasing transactions within as per Ind AS 47 and
  3. Measurements that have some similarities to fair value but are not fair value, such as net realisable value (NRV) in Ind AS 2,Inventories, or value in use in Ind AS 36, Impairment of Assets.

Fair Value Measurement
A. Definition of Fair Value in accordance with Ind AS 113
Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (Not a liquidation price or forced sale) between market participants (Market-based measurement rather than an entity-specific measurement) at the measurement date (Current Price)

Fair Value Measurement – Approach
Ind AS 113 states that fair value measurement requires an entity to determine all the following:

  • Asset / Liability: The particular asset / liability that is the subject of measurement maybe either a stand-alone asset / liability or a group of assets / group of liabilities / group of assets and liabilities
  • Principal / Most advantageous market: The principal (or most advantageous market) for the asset or liability
  • Non-financial assets: For a non-financial asset, the valuation premise that is appropriate for measurement (consistent with its highest and best use)
Valuation Techniques

The valuation techniques considering the availability of data to develop inputs and the level of the fair value hierarchy within which the inputs are categorized

Principal Market vs. most advantageous market
A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either:
• In the principal market for the asset or liability; or
• In the absence of a principal market, in the most advantageous market for the asset or liability

Principal market is the market with the greatest volume and level of activity for the asset or liability. Different entities can have different principal markets, as the access of an entity to some market can be restricted.

The most advantageous market is the market that maximises the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability

Fair Value Measurement – Valuation Techniques
Ind AS 113 states that the 3 valuation approaches widely used are:
(i) Market Approach

  • Market Multiples of similar publicly listed companies (Revenue, EBITDA, EBIT, Price to Book etc. adjusted for differences in growth, risk and profitability)
  • Guideline Transactions in the market in the same industry as the subject Company

(ii) Cost Approach

  • Reflects the amount that would be required to replace the service capacity of an asset.
  • For Non-financial assets=Current Replacement Cost + Obsolescence

(iii) Income Approach

  • Present Value Techniques(E.G. Discounted Cash Flow Method when valuing a business)
  • Option Pricing Models (E.g. Black Scholes, Monte Carlo Simulation and Binomial models in valuing ESOP or put/call options).
  • Multi-Period Excess Earnings Method (E.g. Valuing the primary intangible asset in the business)
  • Relief-from-royalty Method (E.g. Valuing Brand or IP)
  • With-and-without Method (E.g. Valuing Non-Compete agreements)

Fair Value Measurement – Fair Value Hierarchy
Ind AS 113 establishes a fair value hierarchy that categorizes inputs to valuation techniques into 3 levels
(i) Input Level 3 (Unobservable):
Inputs that reflect management’s own assumptions about the assumptions that a market participant would make (E.g. Projected cash flows used to value a business or non-controlling interest in an unlisted entity)

(ii) Input Level 2 (Indirectly Observable)
– Prices in active markets for similar assets / liabilities Quoted prices for identical / similar items in markets that are not active.
– Inputs other than quoted prices (E.g. Interest Rates and yield curves, implied volatilities etc.)

(iii) Input Level 1 (Directly Observable)

Quoted prices in active markets for identical assets / liabilities (E.g. Quoted prices for an equity security on the BSE/ NSE).

Disclosures in Financial Statements
An entity shall disclose information that helps users of its financial statements assess both of the following:
(a) For assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the balance sheet after initial recognition, the valuation techniques and used to develop those measurements.
(b) For recurring fair value measurements using significant unobservable inputs (Level 3),the effect of the measurements on profit or loss or other comprehensive income for the period.

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