IFRS in IndiaMigrating to Fair Value concept By: Valuation Group SPA Merchant Bankers Limited
FAIR VALUE PRACTICES OUTLINED BY IFRSIn the past company balance sheets have shown asset and liabilityvalues as per their original price, but come April 2011, this is set tochange. As per the fair value practices outlined by the IFRS, assets andliabilities have to be valued at their current market value.There could be intangibles like brands, trademarks, and customerrelations which would now show up in the balance sheet of the acquirer.So the composition of the balance sheet will change.IFRS also dictates that companies will have to charge these componentsto profits in the future.IFRS defines Fair value as under:“Fair value is the amount for which an asset could be exchanged, or aliability settled, between knowledgeable, willing parties in an arm’slength transaction.”
What is Fair ValueIFRS defines Fair value as under:“Fair value is the amount for which an asset could be exchanged, or aliability settled, between knowledgeable, willing parties in an arm’slength transaction.”Major Components:• Could be exchanged or settled• Knowledgeable & willing Parties• Arms length transaction Requisites to be a valuerA person:• Who holds a recognized & relevant Professional qualification• Has sufficient experience in the field of valuation• Has requisite market knowledge & understanding• Is independent to give fair views
Use of Fair Values in IFRSIFRS 2 Share based Payment• Requires share based payments to be measured at fair value. For equity-settled transactions, this fair value is measured at the date of grant only. For cash settled and share-based payments with cash alternatives, the fair value of the liability is measured at fair value at each balance sheet date.IFRS 3 Business Combinations• IFRS 3 Business Combinations, requires the allocation of the purchase price in a purchase combination to be allocated between tangible and intangible assets based on fair value. IFRS 3 will require the identification of more intangible assets than is currently the norm.• The fair value concept applies on all acquisitions of subsidiaries, associates and joint venturesIAS 16 Property, Plant and Equipment• allows property to be carried at re-valued amount, which is the item’s fair value.
Use of Fair Values in IFRSIAS 38 Intangible Assets• allows the use of fair value when an active market exists for those intangiblesIAS 39 Financial Instruments: Recognition and Measurement• requires certain financial assets and financial liabilities to be measured at fair value. These include derivative instruments, assets available for sale, and assets held for trading. In addition, IAS 39 provides an option to fair value certain financial assets and financial liabilities that are not required to be measured at fair value.IAS 40 Investment Property• allows investment property to be measured under a fair value model or cost model.IAS 41 Agriculture• requires that biological assets and agricultural produce be carried at fair value.
IAS 39 - Financial Instruments: Recognition and MeasurementFinancial Assets - Summary Category HTM Receivables / FVTPL AFS * Measurement assets Payables * Initial Fair FV FV FV Value +/- TC +/- TC +/- TC Subsequent Fair Amortised Amortised Fair value cost cost value Gains / Losses P&L P&L P&L Equity Impairment / P&L P&L P&L P&L Derecognition Not Not Reclassification AFS HTM permitted applicable* Short term receivables / payables & unquoted equity instruments for which fair value is not ascertainable, measurement should be at cost
Valuation- Valuation- under IFRS/ IASWith IFRS all set to come to India, emphasis will be more on fair value accountingthan cost based accounting. Some of the standards where there will be need of fairvaluation opinions are: Share-based Payment (IFRS 2) Business Combination (IFRS 3) Financial Instruments Presentation (IAS 32 & IFRS 7) Impairment of Assets (IAS 36) Property Plant & Equipment (IAS 16) Employee Benefits (IAS 19) Financial Instruments Measurement (IAS 39) Investment Properties (IAS 40) Agriculture (IAS 41)SPA provides valuation report, which serves the purpose of financial reporting, report reportingincluding, but not limited to, the effective date of valuation, the methods andsignificant assumptions applied in estimating fair value and if applicable, the extentto which the values were determined by reference to observable prices in an activemarket or recent market transactions at arm’s length terms or were estimated usingother valuation techniques, which enables the client to make decisions on the mostappropriate accounting treatment and to account for the different assets (orliabilities) employed in the enterprise in a compatible fashion.
SPA Valuation ServicesWe provide independent valuation services utilizing accepted valuation methodologyto produce well reasoned, supportable valuation and financial consulting services.Our valuation passes two tests. First, it reaches an accurate value conclusion.Second, it clearly and convincingly establishes how the conclusion was reached. Agood business valuation can be successfully defended and supported under criticalscrutiny.The TeamQuality valuations are performed by experienced, capable appraisers. SPA pridesitself on its professional experience and expertise in the field of corporate valuations.As a financial consulting firm, our major specialty is valuing businesses and corporatesecurities. The team consists of Chartered Accountants, CFAs, Company Secretariesand ICAI Certified Valuation experts. experts.Clients Who Count On UsWe have done more than 1000 valuations across industries. Our clientele consist ofdomestic and multinational companies including various Fortune 500 companies. companies.Referrals from existing clients constitute the largest single source of clients for SPA.Other valued reference sources for new assignments include, accounting firms, lawfirms, and investment banking organizations.
Mélange of Valuation ServicesThe valuation services we provide broadly cover the following: Business Valuation • Acquisition- Domestic & Cross Border • Assessment of Merger Swap Ratio • Fairness Opinion • Valuation of business segments/divisions for spin off/restructuring • Share Purchase/Investment/Fund Raising • Good will & Asset Impairment testing (US GAAP/IFRS/Indian GAAP) • Investment Impairment testing for accounting purposes • Fair valuation for statutory/regulatory purposes Intangible Asset valuation • Brand valuation • Intellectual property valuation • Asset valuation for purchase price allocation for accounting for business combinations (US GAAP/IFRS) • Carried Interest valuation • Derivative Valuation under IFRS • Recognition and Measurement of financial assets and liabilities Employee Stock Options Valuation • Equity Shares/Common Stock for Perquisites taxation • Sweat Equity • Stock Options through Black-Scholes and Binomial or Lattice technique • Share based payment awards valuation under IFRS
Intangible Asset Valuation- Brand, IPR etc. Valuation- Market Relief From Approach Royalty Real Options Intangible Income Discounted Asset Valuation Approach Cash Flow Replacement Cost Cost Approach Actual CostWe, at SPA, provide Valuation Report which uses internationally acceptedcomplex methods but is still easily understandable.
Derivatives valuation under IFRSIAS 39 requires that all derivatives are marked at fair value (mark to market)IAS sets out a hierarchy for the determination of fair value:• For instruments traded in active markets, use a quoted price.• For instruments for which there is not an active market, use a recent market transaction.• For instruments for which there is neither an active market nor a recent market transaction, use a valuation technique.Implications:• A large section of the derivatives market use valuation techniques with parameters implied from known points.• If valuation technique cannot be calibrated back to market (e.g. complex products) then fair value is the price at which the trade was done -> Initial “Day One” P&L cannot be recognised.
Derivatives valuation under IFRS Stock Options valuation techniquesThe Black-Scholes model is a mathematical model based on the notion that prices Black-of stock follow a stochastic process, in other words the price of a stock in time t+1 isindependent from the price in time t. This is also referred to as random walkThe Binomial options pricing model approach is widely used as it is able to handle avariety of conditions for which other models cannot easily be applied. This is largelybecause the BOPM is based on the description of an underlying instrument over aperiod of time rather than a single point. As a consequence, it is used to valueAmerican options that are exercisable at any time in a given interval as well asEuropean options that are exercisable at specific instances of time.In terms of theory, Monte Carlo valuation relies on risk neutral valuation. Here theprice of the option is its discounted expected value; see risk neutrality and Rationalpricing: Risk Neutral Valuation. The technique applied then, is (1) to generateseveral thousand possible (but random) price paths for the underlying (orunderlying) via simulation, and (2) to then calculate the associated exercise value(i.e. "payoff") of the option for each path. (3) These payoffs are then averaged and(4) discounted to today. This result is the value of the option.Deciding on the appropriate valuation model is a key decision for accounting for stock options
Derivatives valuation under IFRSForeign Exchange Option valuation techniquesFX options are generally European and hence can use a standard B&S model. Likean equity option, currency options can be priced using a standard black and scholesoption model with a dividend yield. With a currency option, the dividend yieldrepresents the foreign currencys continually compounded risk-free interest rate. Inthe same way, FOREX option pricing will need to consider:Underlying Price (the Spot FOREX rate), Interest Rate = Local Currency Interest RateDividend Yield = Foreign Currency Interest Rate, Strike Price = The cross rate at whichthe currency will be exchanged, Expiration Date = The expiry date of the optionVolatility = The expected future volatility of the exchange rate over the life of theoptionGarman and Kohlhagen extended the Black-Scholes model to cope with thepresence of two interest rates (one for each currency). Suppose that rd is the risk-free interest rate to expiry of the domestic currency and rf is the foreign currencyrisk-free interest rate (where domestic currency is the currency in which we obtainthe value of the option; the formula also requires that FX rates - both strike andcurrent spot be quoted in terms of "units of domestic currency per unit of foreigncurrency").Then the domestic currency value of a call option into the foreign currency is:
Valuation for Business Combination• Traded financial instruments (eg. investments) at market values• Unquoted financial instruments based on estimated values such as price-earning ratio, dividend yield, growth rates of similar traded instruments• Long-term receivables and other long-term assets at present values determined at appropriate current interest rates less allowances for doubtful receivables and collection costs• Inventories- Finished goods at selling price less sum of cost of disposal and profit allowance for acquirer’s effort Work-in-progress at selling price of finished goods less sum of cost to complete, cost of disposal and profit allowance for acquirer’s effort Raw materials at replacement cost• Land and building at market values• Plant and equipment at market values determined by an appraiser. In absence of market value depreciated replacement cost• Net employee defined benefit asset or liability at present value less fair value of plan assets• Long-term liability at present values at appropriate interest rates Cost of Fair Value of >0 Goodwill Business - assets, liabilities and contingent Negative Combination liabilities assumed <0 Goodwill** Reassess the fair values originally determined, Any remaining excess is recognised in P & L immediately
Valuation Group: Select Clientele ACME TELE POWER LTD ARUBA NETWORKS, INC AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD BHARATI AIRTEL LTD. DOMINOS BECTON, DICKINSON AND COMPANY ESCORTS LTD. CREDIT SUISSE GROUP ECO SECURITIES GROUP PLC EVEREST INDUSTRIES LTD. EMC CORPORATION HIMALYA INTERNATIONAL CGI GROUP INC JINDAL POLYFILMS LTD FIRST CONSULTING GROUP, INC JINDAL STEEL & POWER LTD HEWITT ASSOCIATES, INC LUMINOUS POWER INTEL CORPORATION MAX HEALTHCARE JOHNSON MATTHEY MOSER BAER LTD LSI CORPORATIONNATIONAL GENERAL INDUSTRIES LTD MOSAIC COMPANY NATIONAL SEMICONDUCTOR CORPORATION, INC SONATA SOFTWARE NDS GROUP PLC TELEVISION EIGHTEEN INDIA LTD. NETWORK 18 FINCAP LTD NETLOGIC MICROSYSTEMS INC TV TODAY NETWORK LTD PRINCIPAL FINANCIAL GROUP INC. VIKAS WSP QUALITY ENGINEERING AND SOFTWARE TECHNOLOGIES INC.
Why SPA ?Experience & Clientele: SPA prides itself on its professional experience and Clientele:expertise in the field of corporate valuations. We have done more than 500valuations across industries. Our clientele consist of domestic and multinationalcompanies including various Fortune 500 companies.Team:Team: Quality valuations are performed by experienced, capable appraisers.The team consists of Chartered Accountants, CFAs, Company Secretaries andICAI Certified Valuation experts.Quality output: As a result of clear understanding of applicable laws and passion output:to excel and deliver, our valuation passes two tests. First, it reaches an accuratevalue conclusion. Second, it clearly and convincingly establishes how theconclusion was reached. Our valuation can be successfully defended andsupported under critical scrutiny.Touch of advisory: We understand that, clients require more than just the report. advisory:We are more than willing to provide advisory and support before and after therendering of services.
Key Execution Team- Valuations Team-Sudhir Chandi, Senior Vice PresidentFCA – 14 years of experience in financial services industry related to InvestmentBanking, Project Financing, Loan Syndication, forex & Corporate Valuations.Certified Valuer from Institute of Chartered Accountants of India.Mona Sutrave, Assistant Vice PresidentMBA, B. com having more than 8 years experience in the field of Merchant Banking,& Corporate Valuations.Nitin Somani, Company SecretaryACS - 6 years of experience in handling corporate compliances, Merchant Bankingand distribution of public issues .Sourabh Garg, Senior ManagerACA, B. com having more than 5 years experience in the field of Merchant Banking,Project Financing, Corporate Valuations & Taxation. Certified Valuer from Institute ofChartered Accountants of India.Mohit Jain, Senior ManagerMBA(Finance) , B.Com(H) having more than 4 years of experience in the field ofCorporate Finance and Investment Banking with Bulge Bracket Investment BankLeepika Bakshi, ManagerMBA, BBA having 1 year experience in field of Merchant Banking, Project Financing,Loan Syndication & Corporate Valuations.
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