Ind As 113 – Fair Value Measurement

1 1 Ind AS 113 fair Value Measurement Reviewed by:- Nirmal Kumar Burad CHATURVEDI & SHAH CHARTERED ACCOUNTANTS Prepared by:- Sagar A. Kawali 2 Objective of IND AS 113 IND AS Scope 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 . IND AS 113 also applies to measurements such as fair Value less costs to sell, based on fair Value or disclosures about those measurements. For eg. If you own a biological asset then it shall be measured on initial recognition & at the end of each reporting period at its fair Value less cost to sell.

2 3 Excluded from it scope items in following standard even though they are measured at fair Value :- Ind AS 102 ( Share-based Payments ) Ind AS 17 ( Leases ) Ind AS 2 ( Inventories ) Ind AS 36 ( Impairment of Assets ) Disclosures in Ind AS 113 not apply for:- Disclosure of plan Assets measured at fair Value - Employee Benefits (Ind AS 19) Assets for which recoverable amount is fair Value less costs of disposal (Ind AS 36) 4 fair Value 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.

3 Comments It refers to the selling of the asset It refers to the transfer of liability It is not a forced or distressed sale It is clear it is market-based (not Entity based) It states explicitly when the sale or transfer takes place. 5 Price:- The Price in the principal (or most advantageous) market used to measure the fair Value of the assets or liabilities shall not be adjusted for transaction cost. 6 IND AS 113- fair Value Measurement Definition Active Market:- A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

4 Entry Price:- The price paid to acquire an asset or received to assume a liability in an exchange transaction. Exit Price:- The price that would be received to sell an asset or paid to transfer a liability. Inputs:- Assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable Inputs:- Based on market data obtained from sources independent of the reporting entity. Unobservable Inputs:- Reflects reporting entity s own assumptions about the assumptions market participants would use. 7 fair Value Measurement of Non Financial Assets A fair Value Measurement of a non-financial asset takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use (HBU).

5 The highest and best use of a non-financial asset takes into account the use of the asset that is Physically Possible Legally Permissible Financially feasible Highest or best use is usually (but not always) the current use if for competitive reasons an entity dose not intend to use the asset at its highest and best use, the fair Value of asset still reflects its highest and best use by market participants (defensive Value ). Does not apply to financial instruments or liabilities. 8 Valuation premise HBU is on Stand-alone basis:- fair Value is the price that would be received in a current sale, to market participants, that would use the assets on a standalone basis.

6 HBU is in combination with other assets:- fair Value is the price that would be received in a current sale, to market participants, assuming the assets will be used in combination with those assets (which are also assumed to be available to the market participants). 9 Transfer notion Liabilities and An Entity s Own Equity Instrument fair Value assumes a transfer to a market participant who takes on the obligation. The transfer assumes: - Liability or equity remains outstanding -Restrictions on transfer are already reflected in inputs; no additional adjustment required. - fair Value of a liability reflects the effect of non-performance risk.

7 10 Liability fair Value Measurement Decision Tree 11 EXAMPLE No Corresponding Asset Two possible ways to approach it: 1. Income approach:- Use the future cash flows that a market participant would expect to incur in fulfilling the obligation, including the compensation that a market participant would require for taking on the obligation. Such compensation includes: the cost to fulfil the obligation plus return for undertaking the activity; and a risk premium to compensate for the risk that actual cash flows might differ from expected cash flows. 2. Market approach:- Use the amount that a market participant would receive to enter into or issue an identical liability or equity instrument.

8 12 Portfolio of Financial Instrument- Offsetting exemption Ind As 113 permits an entity to measure a group of financial assets and financial liabilities on the basis of the net risk exposure to either market risks or credit risks. The exception was permitted because: derivatives often cannot be sold, but management can mitigate risk exposure by entering into an offsetting position portfolio composition is entity specific (depends on entity s risk preferences) Conditions that need to be met: entity must have documented risk management strategy entity provides information on the basis of the net risk exposure to key management personnel only for portfolios of instruments measured at FV 13 Portfolio of Financial Instrument- Offsetting exemption Accounting policy decision Does not affect presentation in IND AS 32.

9 Allocations shall be performed on a reasonable and consistent basis. Portfolio-level adjustments may need to be allocated to the unit of account for presentation purposes. If there are offsetting market risks: can apply bid-ask spread to net open risk position offsetting risks must be substantially the same duration of instruments leading to exposure to market risk must be substantially the same Market risk: The risk that the price will fluctuate because of changes in market prices (currency risk, interest rate risk and other price risk). 14 Portfolio of Financial Instrument- Offsetting exemption If the entity is exposed to the credit risk of a particular counterparty, an entity shall include the effect of: its net exposure to the credit risk of the counterparty.

10 The counterparty s net exposure to its credit risk. any existing arrangements that mitigate credit risk exposure if market participants expect that such arrangements would be legally enforceable in the event of default. 15 fair Value At Initial Recognition Transaction Price ( Entry Price) = fair Value (Exit Price) unless: Transactions are between Related Parties. Seller is distressed or forced. Transactions are for different units of account. Transaction takes place in different market. 16 17 MAXIMIZE LEVEL 1 INPUTS AND MINIMIZE LEVEL 3 INPUTS 18 19 Selecting a valuation technique 20 How do we arrive to a market-based Measurement ?