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Ind AS 113 Fair

Value Measurement

Reviewed by:- Nirmal Kumar Burad

CHATURVEDI & SHAH CHARTERED ACCOUNTANTS

Prepared by:- Sagar A. Kawali

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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.

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Continue… • 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)

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Definition…

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.

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.

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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.

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IND AS 113- FAIR VALUE MEASUREMENT

Definition Contd.. • 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.

• 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.

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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).

• 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.

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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.

• 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).

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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.

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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.

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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 contd..

• Accounting policy decision

• Does not affect presentation in IND AS 32.

– 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).

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Portfolio of Financial Instrument- Offsetting exemption contd..

• 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.

– 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.

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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.

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MAXIMIZE LEVEL 1 INPUTS AND MINIMIZE LEVEL 3 INPUTS

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Selecting a valuation technique

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How do we arrive to a market-based measurement ?

Disclosures…..

Disclosure are based on whether the fair value measurement are recurring or non-recurring.

Recurring:- IND AS permits or require to measure at fair value on reporting date.

Non-recurring:- requires fair value measurement only in particular circumstances (eg. Measuring Assets held for sale= F.V-Cost to sell, because F.V.- Cost to sell is less than carrying amount (IND AS-105).

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Disclosure Continue…

Disclosure Requirement RFVM NRFVM FV Disclosed

Fair value at reporting date a a

Reason for fair value measurement a

Fair value hierarchy level i.e. level 1,2,3. a a a

Transfer between Level 1 and 2 (including reason and entity’s policy for transfer)

a

Valuation technique, inputs, changes, reason for changes etc. Level 2 and 3.

a a a

Level 3 valuation process / Policies a a

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Disclosure Continue….

Disclosure requirement RFVM NRFVM FV Disclosed

Level 3 unobservable inputs a a

Level 3 (reconciliation total gain or loss in P&L and OCI, purchase, sales, issue, settlement, and transfer)

a

Level 3 Unrealized gain / losses recognized in P&L

a

Level 3 Sensitivity to change in unobservable events (Qualitative:- non-financial instrument and Quantitative:- Financial instrument)

a

Reason if HBU differs from current use a a a

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Disclosure by IFRS complying companies. Unilever Fair value

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