Fair Value Measurement (Ind as 113) Scope, Definitions, Unit of Account, The Transaction, Market Participants, The Price, Fair Value at Initial Recognition, Valuation Techniques, Disclosures

Ind AS 113, “Fair Value Measurement,” outlines the framework on how to measure fair value for financial reporting. It does not dictate when an entity should use fair value, but rather, it sets out how to measure fair value when its application is required or permitted by other Ind AS standards.

Ind AS 113 ensures that fair value measurement and disclosure are standardized across entities, enhancing comparability and transparency in financial reporting. By providing a detailed framework for measuring fair value and requiring comprehensive disclosures, Ind AS 113 helps users of financial statements to understand the judgments and estimates involved in fair value measurements and the effect of fair value measurements on financial position and performance. The standard’s emphasis on market participants’ perspective, the principal (or most advantageous) market, and appropriate valuation techniques ensures that fair value measurements reflect current market conditions and expectations.

Scope

Ind AS 113 applies when another Ind AS requires or permits fair value measurements or disclosures about fair value measurements and disclosures, except in specified cases such as share-based payment transactions under Ind AS 102, leasing transactions under Ind AS 17, and measurements that have some similarities to fair value but are not fair value (e.g., net realizable value).

Definitions

• 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.

• Market Participants:

Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have a reasonable understanding of the asset or liability and are able to enter into a transaction for it.

• Principal Market:

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

• Most Advantageous Market:

The market that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, after considering transaction costs.

Unit of Account

The unit of account is determined based on the level at which an asset or liability is aggregated or disaggregated for recognition purposes under other Ind AS standards. This concept affects the identification of the asset or liability for which fair value is to be measured.

The Transaction

Fair value measurement assumes a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability.

Market Participants

Fair value measurement considers the characteristics of the asset or liability from the perspective of market participants who have the ability and willingness to transact for that asset or liability.

The Price

The transaction to sell the asset or transfer the liability takes place either in the principal market for that asset or liability or, in the absence of a principal market, the most advantageous market.

Fair Value at Initial Recognition

When an asset is acquired or a liability is assumed, the fair value at initial recognition is usually the transaction price. However, if the transaction is not considered to be at arm’s length, adjustments may be necessary.

Valuation Techniques

Ind AS 113 categorizes fair value measurement techniques into three broad approaches:

• Market Approach:

Uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities.

• Cost Approach:

Reflects the amount that would be required to replace the service capacity of an asset (replacement cost).

• Income Approach:

Converts future amounts (cash flows or earnings) to a single current (discounted) amount.

Disclosures

Ind AS 113 requires entities to disclose information that helps users of financial statements assess both of the following:

• The techniques and inputs used to develop fair value measurements.
• For recurring fair value measurements using significant unobservable inputs (Level 3 of the fair value hierarchy), the effect of those measurements on profit or loss or other comprehensive income for the period.

Specific Disclosure requirements:

• The fair value hierarchy of the inputs used to determine fair value (Levels 1, 2, and 3).
• For Level 3 fair value measurements, a reconciliation of the opening balances to the closing balances, disclosing separately changes during the period attributable to realized and unrealized gains or losses, purchases, sales, and settlements.
• The amount of total gains or losses for the period included in profit or loss that is attributable to assets and liabilities held at the reporting date and categorized within Level 3 of the fair value hierarchy, and where these gains or losses are presented in the statement of comprehensive income.
• The valuation processes used by the entity.
• For non-recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and any interrelationships between those inputs.