12.28.2002

Indian Accounting Standard - Ind AS 113 Fair Value Measurement

Objective and Scope

The objective of Indian  Accounting Standard i.e Ind AS 113 is to define fair value and set out a single framework for measurement of fair value. It also prescribes disclosure requirements about fair value measurement. 

It applies when another Ind AS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements)

The essential features of fair value as set out in Ind AS 113 are as follows:

The Indian Accounting Standard 113 explains how to measure fair value for financial reporting.

Fair value is a market-based measurement, not an entity-specific measurement.

Fair value should be determined based on the Exit price i.e. the price to sell the asset or to transfer the liability (from the perspective of a market participant that holds the asset or owes the liability).

The transaction forming basis of determination of fair value must be an orderly transaction.

The transaction forming basis of determination of fair value must take place between market participants at the measurement date under current market conditions.

When price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs.


Discussion on Ind AS 113

Fair Value is a price received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date.


Requirements of Fair Value Measurement

The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions.


Steps in application of Ind AS 113


Step one: determine unit of account

Step two: determine valuation premise

Step three: determine markets for basis of valuation

Step four: apply the appropriate valuation technique(s)

Step five: determine fair value

Step six: make appropriate disclosures




Unit of Account

Fair value measurement is for a particular asset or liability.

Therefore, when measuring fair value an entity should take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example, the following:

The condition and location of the asset; and

Restrictions, if any, on the sale or use of the asset.

The determination of the unit of account must be established prior to determining fair value and is defined as the level at which an asset or a liability is aggregated or disaggregated in an Ind AS for recognition purposes. There are few instances in which the unit of account is explicitly defined. 

However, in some cases, the unit of account may not be clear. Often, it is inferred from the recognition or measurement guidance in the applicable standard and/or from industry practice. 

Also, there are times when the unit of account varies depending on whether one is considering recognition, initial measurement, or subsequent measurement, including impairments.

Ind AS 113 also includes a “portfolio exception” allowing a specified level of grouping when a portfolio of financial assets and financial liabilities are managed together with offsetting markets risks or counterparty credit risk.

Orderly Transaction:

A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. 

A transaction is regarded as orderly when it is not a forced transaction like in the case of distress sale or liquidation.


Place of Transaction: Market

Fair value measurement under Ind AS 113 assumes that a transaction to sell an asset or to transfer a liability takes place in the principal market (or the most advantageous market in the absence of the principal market).

The principal market is the market with the greatest volume and level of activity for the asset or liability. 

The most advantageous market is 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 taking into account transaction costs and transport costs.

If there is a principal market, the price in that market must be used, either directly or as an input into a valuation technique. Ind AS 113 does not permit the use of a price in the most advantageous market if a principal market price is available.

It is not necessary to perform an exhaustive search of all possible markets to identify the principal market (or, in the absence of a principal market, the most advantageous market). 

However, all information that is reasonably available should be considered and the basis for conclusions should be documented.

There is a presumption in the standard that the market in which the entity normally transacts to sell the asset or transfer the liability is the principal or most advantageous market unless there is evidence to the contrary. 

Where an entity transacts in various markets, entity should document which particular market price is used and what process was followed to determine the appropriate market to use for determining fair value.


Assumptions of Market Participants in Determining Fair Value of an Asset or Liability

Fair value measurement under Ind AS 113, require an entity to consider the assumptions a market participant, acting in their economic best interest, would use when pricing the asset or a liability. Market participants are defined as having the following characteristics:

Independent of each other (i.e. unrelated parties).

Knowledgeable and using all available information.

Able of entering into the transaction.

Willing to enter into the transaction (i.e. not a forced transaction)

The standard requires the entity to put itself in the place of a market participant and exclude any entity-specific factors that might impact the price that it would be willing to accept in the sale of an asset or be paid in the transfer of a liability. 

Relevant characteristics of an asset might include or relate to the condition and location of the asset; and restrictions, if any, on the sale or use of the asset. 

Entity must consider the extent to which a market participant would take the above characteristics into account when pricing the asset or liability at the measurement date. 

The extent to which restrictions on the sale or use of the asset should be reflected in fair value are very much contingent on where the source of the restriction comes from and whether or not the restriction is separable from the asset.


Price for determination of Fair Value

The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability should not be adjusted for transaction costs.

Transaction costs should be accounted for in accordance with other Ind ASs.

Transaction costs do not include transport costs.

Measurement of Non-Financial Assets

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 or by selling it to another market participant that would use the asset in its highest and best use.

This requires that fair value be determined based on the highest and best use of the asset from the perspective of a market-participant participants that would maximise the value of the asset or the group of assets and liabilities, within which the asset would be used. 

Entity considers the current use and any other use that is financially feasible, legally permissible and physically possible. 

An entity can presume that the current use of an asset is its highest and best use. However, if the asset is being used defensively (e.g. to protect a competitive position), this presumption may be inappropriate.

Normally, the concept of highest and best use does not apply to financial assets and liabilities. 

However, there is an exception to the valuation premise when an entity manages its market risk(s) and/or counterparty credit risk exposure within a portfolio of financial instruments (including derivatives that meet the definition of a financial instrument),on a net basis. 

In such cases, Fair Value would be based on the price:

 Received to sell a net long position (i.e. an asset) for a particular risk exposure, or 

To transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction between market participants.

Fair value of this ‘offset group’ of financial assets and financial liabilities is determined consistently with how market participants would price the net risk exposure. Portfolio offsetting exception can only be used if the entity does all the following:

Manages the offset group on the basis of net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or investment strategy.

Provides information on that basis about the offset group to the entity’s key management personnel,as defined in Ind AS 24 Related Party Disclosures.

Is required (or has elected) to measure the offset group at fair value in the Balance Sheet at the end of each reporting period.

Moreover, the exception does not relate to presentation and Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors must be applied when using the offsetting exception.


Financial or Non-Financial Liabilities

A fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument (eg equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity’s own equity instrument assumes the following:

A liability would remain outstanding and the market participant transferee would be required to fulfil  the obligation.

An entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument.

Liabilities and equity instruments held by other parties as assets

When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available, then where the identical item is held by another party as an asset, an entity should measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.


Liabilities and equity instruments not held by other parties as assets

When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical item is not held by another party as an asset, an entity should measure the fair value of the liability or equity instrument using a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity.


Transaction Price Vs Fair Value

When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (an entry price) In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price).


Valuation Techniques

An entity should use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimizing the use of unobservable inputs.


Types of Valuation Techniques

Three widely used valuation techniques are

The market approach,

The cost approach and

The income approach.

An entity should use valuation techniques consistent with one or more of those approaches to measure fair value. 

Valuation techniques used to measure fair value should maximise the use of relevant observable inputs and minimise the use of unobservable inputs.


Fair Value Hierarchy

To increase consistency and comparability in fair value measurements and related disclosures, Ind AS 113 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).


Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

A quoted price in an active market provides the most reliable evidence of fair value and should be used without adjustment to measure fair value whenever available except

When an entity holds a large number of similar (but not identical) assets or liabilities (eg debt securities) that are measured at fair value and a quoted price in an active market is available but not readily accessible for each of those assets or liabilities individually (ie given the large number of similar assets or liabilities held by the entity, it would be difficult to obtain pricing information for each individual asset or liability at the measurement date).

When a quoted price in an active market does not represent fair value at the measurement date.

When measuring the fair value of a liability or an entity’s own equity instrument using the quoted price for the identical item traded as an asset in an active market and that price needs to be adjusted for factors specific to the item or the asset.


Level 2 Inputs

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. 

If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. 

Level 2 Inputs includes:

Quoted prices for similar assets or liabilities in active markets.

Quoted prices for identical or similar assets or liabilities in market that are not active.

Inputs other than quoted prices those are observable for the asset or liability,  market-corroborated inputs.


Adjustments to Level 2 Inputs depends on the following factors

The condition or location of the asset;

The extent to which inputs relate to items that are comparable to the asset or liability and

The volume or level of activity in the markets within which the inputs are observed.


Level 3 Inputs

Level 3 inputs are unobservable inputs for the asset or liability.

Unobservable inputs should be used to measure fair value to the extent thatrelevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.


Disclosure Requirements

Minimum Disclosure in Balance Sheet

For each class of asset and liability measured at Fair Value after initial recognition:

For recurring and non-recurring FV measurements, the FV measurement at the end of the reporting period, and for non-recurring FV measurements, the reasons for the measurement.

For recurring and non-recurring FV measurements, the level of the fair value hierarchy within which the FV measurements are categorised in their entirety (Level 1, 2 or 3).

For recurring FV measurements, the amounts of any transfers between Level 1 and Level 2 of the FV hierarchy, the reasons for those transfers and the entity's policy for determining when transfers between levels are deemed to have occurred . 

Transfers into each level should be disclosed and discussed separately from transfers out of each level.

For recurring and non-recurring FV measurements categorised within Level 2 and Level 3 of the FV hierarchy, a description of the valuation technique(s) and the inputs used in the FV measurement.

If there has been a change in valuation technique, the entity should disclose that change and the reason(s) for making it.

If the highest and best use of a non-financial asset differs from its current use, the fact and the reason thereof.

If portfolio exception used, the fact to be disclosed as accounting policy.

For a liability measured at FV and issued with an inseparable third-party credit enhancement, the existence of that credit enhancement and whether it is reflected in the FV measurement of the liability, should be disclosed

All the quantitative disclosures required to be presented in tabular format unless another format is more appropriate.


Additional Disclosures for Level 3 inputs

Quantitative information about the significant unobservable inputs;

A description of the valuation processes used;

For recurring FV measurement, 

a reconciliation from the opening balances to the closing balances disclosing separately changes during the period attributable to :

Total gains or losses recognised in P/L, and the line item(s) in P/L in which they are recognised. If attributable to change in unreialised gains or losses amounts to be disclosed separately.

Total gains or losses recognised in other comprehensive income, and the line item(s) which they are recognised 

Purchases, sales, issues and settlements

The amounts of any transfers into or out of Level 3, the reasons for those transfers and the entity's policy for determining when transfers between levels are deemed to have occurred.

For recurring FV measurement

A narrative description of the sensitivity of the FV measurement to changes in unobservable inputs if a change in those inputs to a different amount might result in a significantly higher or lower FV measurement.

For financial A/L, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change FV significantly, the fact and the effect of those changes.