India has adopted Indian Accounting Standard (Ind AS) for convergence with International Financial Reporting Standards (IFRS).
The consolidated impact of this convergence will have impact on preparation and presentation of the financial statement, which will in a way create more transparency, strengthen accountability which in return will create uniformity for the investors and other market participants to make informed economic decision.
Fair value measurement is a fundamental concept forming the underlying basis for the Ind AS framework. Fair valuation of certain assets and liabilities is a prerequisite for the adoption of Ind AS.
IND AS 113: Fair value measurement applies to IND AS’s that require or permit fair value measurements or disclosure and provide single framework for measuring fair value and require disclosures about fair value measurement.
But it excludes the following standards from its scope:
Ind AS 102 (Share – based Payments)
Ind AS 17 (Leases)
Ind AS 2 (Inventories)
Ind AS 36 (Impairment of Assets)
“Fair value is 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.”
We need to determine the following for fair value measurement:
Asset or Liability which is subject to measurement
Highest and best use for non-financial asset.
Principal (or most advantageous) market
Fair Value hierarchy
Fair Value Hierarchy:
Ind AS 113, defines three levels for considering the inputs for valuation techniques.
Level 1: Quoted price in active markets for identical assets / liabilities
Eg.: quotes of shares traded on stock exchange
Level 2: Inputs from other markets which are not active for similar / identical items for assets / liabilities.
Level 3: Unobservable inputs which could be based on management’s own assumptions that a market participant would make.
Eg: Financial forecast, Historical data
Right choose of valuation technique will maximise the use of observable inputs of Level 1 and minimise the use of unobservable inputs of Level 3.
Three widely used valuation techniques are :
Market approach uses price and other information available in the market on account of transactions generated which involves comparable assets/ liabilities / business in relation to quantitative and qualitative factors.
Cost Approach reflects the amount that would be required to replace the existing service capacity of an asset. (Replacement Cost Method)
Income approach converts future amount to current (i.e. discounted) amount resulting in the market expectations about the future amount. Discounted cash flow method, Black Scholes, multi period excess earning method are some of the methods under income approach.
If multiple valuation techniques are used to measure fair value, the results should be evaluated considering the reasonableness of the range of values. Fair value is the point within the range that is most representative of the fair value in the given scenario.
Valuation method for fair value will be applied consistently. However, if there are circumstantial evidences supporting the change in the valuation method will result in better fair value than the same can be adopted.
Eg: New market develops, new information is available, Improvement in valuation technique
Ind AS 113, discloses information in the financial statement, in relation to
Fair value of the assets and liabilities
Valuation techniques, assumptions and inputs
In case of recurring fair value measurements using significant unobservable inputs (Level 3), the impact of the assumption on the profit & loss statement.
Source :CA Hetal Kothari (specialised in IFRS implementation)