Indian Accounting Standard (Ind AS) 113 Summary
Indian Accounting Standard (Ind AS) 113 Fair Value Measurement, applies to most fair value measurements and disclosures that are required or permitted under Ind AS.
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 i.e. an exit price. Market participants are independent of each other, they are knowledgeable and have a reasonable understanding of the asset or liability, and they are willing and able to transact.
Fair value measurement assumes that a transaction takes place in the principal market (i.e. the market with the greatest volume and level of activity) for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability.
There are three general approaches to valuation, with various techniques applied under those approaches:
– The market approach e.g. quoted prices in an active market,
– The income approach e.g. discounted cash flows, and
– The cost approach e.g. depreciated replacement cost
A fair value hierarchy is established based on the inputs to valuation techniques used to measure fair value.
A premium or discount (e.g. a control premium) may be an appropriate input to a valuation technique, but only if it is consistent with the relevant unit of account.
The inputs are categorised into three levels, with the highest priority given to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority given to unobservable inputs. Appropriate valuation technique(s) should be used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
Fair value on initial recognition generally equals the transaction price.
Non- financial assets are measured based on their ‘highest and best use’- i.e. the use that would maximise the value of the asset (or group of assets) for a market participant.
In the absence of quoted prices for the transfer of the instrument, a liability or an entity’s own equity instruments is valued from the perspective of a market participant that holds the corresponding asset. Failing that, other valuation techniques are used to value the liability or own equity instrument from the perspective of a market participant that owes the liability or has issued the equity instrument.
The fair value of a liability reflects non-performance risk, which is assumed to be the same before and after the transfer of the liability.
Certain groups of financial assets and financial liabilities with offsetting market or credit risks may be measured based on the net risk exposure.
For assets or liabilities with bid and ask prices, the entity uses the price within the bid-ask spread that is most representative of fair value in the circumstances. The use of bid prices for assets and ask prices for liabilities is permitted.
Guidance is provided on measuring fair value when there has been a decline in the volume or level of activity in a market, and when transactions are not orderly.