DETAILED GUIDE TO FAIR VALUE MEASUREMENT UNDER IND AS 113
Detailed Guide to Fair Value Measurement Under Ind AS 113
Introduction to Ind AS 113
Ind AS 113, Fair Value Measurement, is a standard that provides a framework for measuring fair value and requires disclosures about fair value measurements. It defines fair value, sets out in a single Ind AS a framework for measuring fair value, and requires disclosures about fair value measurements.
Key Definitions and Concepts
Fair Value: Fair value is defined as the price 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.
Market Participants: These are buyers and sellers in the principal (or most advantageous) market for the asset or liability that are independent of each other, knowledgeable, able, and willing to enter into a transaction.
Principal Market: The market with the greatest volume and level of activity for the asset or liability.
Most Advantageous Market: The market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after considering transaction costs and transport costs.
Fair Value Hierarchy
Ind AS 113 establishes a fair value hierarchy that categorizes the inputs to valuation techniques into three levels:
Level 1 Inputs: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 Inputs: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 Inputs: Unobservable inputs for the asset or liability. These inputs reflect the entity’s assumptions about what market participants would use in pricing the asset or liability, including assumptions about risk.
Measurement Techniques
Ind AS 113 outlines three valuation techniques:
Market Approach: Uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities.
Cost Approach: Reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost).
Income Approach: Converts future amounts (e.g., cash flows or income and expenses) to a single current (discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.
Key Considerations in Fair Value Measurement
Highest and Best Use: Fair value measurement assumes the asset’s highest and best use by market participants. This use must be physically possible, legally permissible, and financially feasible.
Non-Financial Assets: The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible, and financially feasible.
Liabilities and Own Equity Instruments: Fair value measurement of a liability or an entity’s own equity instruments assumes that the liability or equity instrument is transferred to a market participant at the measurement date.
Disclosures
Ind AS 113 requires extensive disclosures to provide users of financial statements with information about the valuation techniques and inputs used to develop fair value measurements and the effect of the measurements on profit or loss or other comprehensive income. Key disclosure requirements include:
Fair Value Hierarchy Levels: Disclose the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety.
Valuation Techniques and Inputs: Disclose the valuation techniques used to measure fair value and the inputs used within each level of the fair value hierarchy.
Quantitative Information about Significant Unobservable Inputs: Provide quantitative information about the significant unobservable inputs used in the fair value measurement.
Reconciliation of Level 3 Measurements: Disclose a reconciliation from the opening balances to the closing balances for fair value measurements categorized within Level 3 of the fair value hierarchy.
Practical Application in India
Regulatory Compliance: Entities in India must ensure that their fair value measurements and disclosures are in line with Ind AS 113 to comply with regulatory requirements.
Market Conditions: Given the evolving market conditions in India, entities should be vigilant about the availability of market data and the reliability of inputs used in fair value measurement.
Training and Expertise: Companies should invest in training their finance and accounting teams to understand and implement Ind AS 113 effectively.
Ind AS 113 provides a comprehensive framework for fair value measurement, which is crucial for the transparency and reliability of financial statements. By following the guidelines and disclosures required by Ind AS 113, entities can ensure that they present a true and fair view of their financial position and performance.
