CA Varun Sethi IndAS 113 - Fair Value Measurements

IndAS 113
Fair Value Measurements
1 Presentation by : CA Varun Sethi Private
‘Basic Concepts’
2015
CA Varun
Sethi
09899766487

20152
IndAS 113
CA Varun
Sethi
09899766487
Presentation by : CA Varun Sethi Private
Objective of fair value measurement :
• The OBJECTIVE of a fair value measurement in both cases is the same:
• 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 (i.e. an exit price at the measurement date from
the perspective of a market participant that holds the asset or owes the liability).

20153
IndAS 113
Fair Value Measurements: Coverage
CA Varun
Sethi
09899766487
Fair Value
Measurements
Disclosures about FV
measurements
Framework for applying
the definition of Fair
value
Definition of
Fair Value
Fair Value Hierarchy:
• To prioritize the inputs used
to measure FV, based on
the relative reliability of
those inputs.
• Valuation techniques
maximize use of observable
inputs and minimize the use
of unobservable inputs.
Assets Liabilities
Entity’s own
Equity instruments
Fair Value Framework:
• Characteristics of Asset or
liability to be Fair valued
• Unit of account
• Market participants
• The transaction
• Exit price
• Principal market

20154
IndAS 113
CA Varun
Sethi
09899766487
Fair Value
Measurements
(Key Concepts)
1. Exit price
2. Principal market
1. Valuation premise
2. Fair value hierarchy
1. Highest and Best use.
1. Unit of account
2. Market participant
assumptions
This Ind AS applies when another Ind AS requires or permits:
1. Initial or subsequent fair value measurements or
2. Disclosures about fair value measurements

20155
IndAS 113
CA Varun
Sethi
09899766487
Fair Value
Measurements
Application to
Financial instruments
Application to
liabilities & an entity’s
own equity
instruments
Application to
Non-financial assets
(NFA)
Initial Measurement
Subsequent
Measurement

20156
IndAS 113
Overview of Scope of Fair Value Measurements
CA Varun
Sethi
09899766487
APPLIES
TO
EXCEPT
FOR
DOES
NOT
APPLY
TO
This guidance applies to ALL fair value measurements of
1. Assets and liabilities (both financial and nonfinancial) and
2. Financial instruments (FV) in shareholder’s equity
in IndAS.
1
• Measurement of share-based payments (IndAS 102) and
• Leasing transactions within the scope of Ind AS 17, Leases;
• Measurements that have some similarities to fair value but are not
fair value, such as net realizable value in Ind AS 2, Inventories, or
value in use in Ind AS 36, Impairment of Assets.
2
3
DOES NOT APPLY to Topics that require (or permit) measurements
that are similar to, but are not intended to represent, FV.

20157
IndAS 113
Definition of ‘Fair Value’
CA Varun
Sethi
09899766487
FV is
Exit price
FV is NOT
Transaction
price
FV in
Principal market
Fair value is the price to sell an asset or transfer a liability, and
therefore represents an exit price, not an entry price.
1
The transaction price is NOT presumed to represent the fair value of
an asset or liability on its initial recognition
2
3
Fair value is an exit price in the principal market (or in the absence
of a principal market, the most advantageous market) in which the
reporting entity would transact
FV is Market-
based
measurement
4
Fair value is a market-based measurement, not an entity-specific
measurement
FV excludes
Transaction
costs.
5
Fair value measurements should NOT BE adjusted for transaction
costs.

20158
IndAS 113
Fair Value Framework
CA Varun
Sethi
09899766487
A fair value measurement requires a reporting entity to determine
all of the following:
Unit of
account
Highest and
best use
Principal
market
The particular asset or liability (both financial and nonfinancial) that is the
subject of the measurement and drives the level of aggregation (or
disaggregation) for presentation and disclosure purposes.
1
For a nonfinancial asset, the valuation premise that is appropriate for the
measurement.2
3 The principal (or most advantageous) market for the asset or liability.
Inputs and
Market
participants
4
The valuation technique(s) appropriate for the measurement, considering
1. the availability of data with which to develop inputs that represent the
assumptions that market participants would use when pricing the asset
or liability and
2. the level of the fair value hierarchy within which the inputs are
categorized.

20159
IndAS 113 (Para 11 to 14)
Fair Value Framework: Asset or Liability
CA Varun
Sethi
09899766487
‘Characteristics’ of the asset or liability
Condition or location
that market participants would require
Restrictions on sale or use of assets:
Whether Asset specific or Entity specific?
This may require the market price to
be adjusted for
1. transformation costs and (or)
2. transportation costs,
3. as well as a normal profit margin.
Determining whether a restriction is a
1. characteristic of the asset or
2. characteristic of the entity holding
the asset
may be determined (judgement) and
may be contractual in some cases.
Fair value measurement should take into account characteristics
SPECIFIC TO the asset or liability that market participants would
consider when pricing the asset or liability at the measurement date :

201510
Fair Value Framework: The Transaction
CA Varun
Sethi
09899766487
In the absence of evidence to the contrary, the market in which the
entity would normally enter into a transaction to sell the asset or to
transfer the liability is PRESUMED to be the principal/adv. Market.
Transaction taking place
The most advantageous market concept
is applied only in situations where the
reporting entity determines there is NO
principal market for the asset or liability
being measured.
In the principal market
for the asset or liability
Most advantageous market for the
asset or liability
1. Market with the greatest volume and
level of activity for the asset or liability
that the reporting entity can access.
2. The principal (or most advantageous)
market (and thus, market participants)
shall be considered from the
perspective of the reporting entity.

A fair value measurement assumes that the transaction
‘Transaction’ taking place
A fair value measurement considers
market conditions as they exist at the
measurement date and is intended to
represent the current value of the
asset or liability, not the potential
value of the asset or liability at some
future date.
Orderly transaction
Occur on the
‘measurement date’
The hypothetical TRANSACTION
assumes that market participants
have sufficient knowledge and
awareness of the asset or liability,
obtained through customary due
diligence even if, in actuality, this
process may not have yet begun (or
may never occur at all if the entity
does not sell the asset).
Fair Value Framework: The Transaction
CA Varun
Sethi
09899766487

Transaction costs : Transaction costs represent costs that result directly from and are
essential to a transaction. That is, they would not have been incurred by the entity had
the transaction not occurred. These costs are NOT included in fair value measurement
because they are not characteristics of the asset or liability being measured.
Fair Value Framework: Market Participants
CA Varun
Sethi
09899766487
1. Standard specifies that fair value is a
1. MARKET-BASED MEASUREMENT,
2. NOT AN entity-specific value.
2. Fair value DOES NOT represent the value to one particular market participant,
whose assessment of risk, specific synergies, or intended use for an asset may
differ from other market participants.
1. Instead, companies may consider those characteristics that are specific to the types
of entities that would generally transact for the asset or liability being measured
acting in their “economic best interest”.
2. STANDARD DOES NOT require companies to identify ACTUAL market participants
when measuring FV.

201513
Application to Nonfinancial Assets : highest & best use
CA Varun
Sethi
09899766487
1. The highest and best use of a NONFINANCIAL ASSET takes into account
the use of the asset that is
1. physically possible, for example, the location or size of a property,
2. legally permissible, for example, the zoning regulations applicable to a
property &
3. financially feasible.
MP to generate economic benefits
USING the asset in its
highest & best use
SELLING to another MP for use in
its highest and best use.
1.Highest & best use is determined from the perspective of MPs
2.A reporting entity’s current use of a nonfinancial asset is presumed to be its
highest & best use unless market or other factors suggest that a different
use by market participants would maximize the value of the asset.

VALUATION PREMISE
1. FV of the asset would be measured from perspective of market participants
who are presumed to hold the complementary assets and liabilities.
2. Further, the same valuation premise should be used for EACH asset,
regardless of whether any individual asset within the group would have a
higher value under another premise.
3. The fair value measurement of a non-financial asset assumes that the asset is
sold consistently with the unit of account specified in OTHER Ind ASs (which
may be an individual asset).
In combination with other
assets &/(or) liabilities
Standalone basis
ValuationpremiseforNFA IndAS 113 (Para 31 to 33)
Application to Nonfinancial Assets (NFA) : highest & best use
CA Varun
Sethi
09899766487

201515
IndAS 113 (Para 34 – 46)
Application to liabilities and an entity's own equity instruments
CA Varun
Sethi
09899766487
Considerations:
FV of Liability (L) or own equity instrument (EI)
ADJUST quoted price of L or entity's own EI
held by another party as asset ONLY for factors
specific to the asset, NOT applicable to FV of L
or EI. ‘No adjustment for restriction’ on the
transfer of a L or EI.
*Consider Nonperformance risk
- entity’s own credit risk
- inseparable (but not
separable) 3rd party credit
enhancement
Liability TRANSFERED to
a MP at the measurement
date
Use of a
1. Corresponding identical asset
2. If NO corresponding assets – use
Valuation technique
A fair value measurement assumes that a liability (financial or
non-financial) or an entity's own equity instrument (e.g. equity
interests issued as consideration in a business combination) is
TRANSFERRED to a market participant at the measurement date.
*Not applicable for EI

1. The fair value of a LIABILITY reflects the effect of non-performance risk.
2. A reporting entity takes into account the effect of its credit risk (credit standing) on
the fair value of the liability in all periods in which the liability is measured at fair
value because those that hold the reporting entity’s obligations as assets would
take into account the effect of the reporting entity’s credit standing when estimating
the prices they would be willing to pay.
IndAS 113 (Para 34 – 46)
Application to liabilities and an entity's own equity instruments
CA Varun
Sethi
09899766487
FV of a liability or entity's own equity instrument : Use of a corresponding asset to
measure a liability
1. Using the quoted price in an active market for the identical item held by another
party as AN ASSET.
2. If that price is NOT available, using other observable inputs, such as quoted price in
a market that is not active for the identical item held by another party as an asset.
3. If the observable prices in (a) and (b) are NOT available, using another valuation
technique, such as: 1. An income approach 2. A market approach

Fair value at initial recognition
CA Varun
Sethi
09899766487
Transaction price
(Entry price)
Fair Value
(Exit Price)
At Initial recognition:
No gain or loss
CaseA
Transaction price
(Entry price)
Fair Value
(Exit Price)
At Initial recognition:
Recognize gain or loss
CaseB
Transaction price
(Entry price)
the price paid to acquire the asset or received to
assume the liability (an entry price).
Fair Value
(Exit Price)
price that would be received to SELL the asset or paid
to transfer the liability (an exit price).

Use of valuation techniques
CA Varun
Sethi
09899766487
Cost approach Income approach
Valuation techniques
Market approach
An entity shall use valuation techniques that are
• appropriate in the circumstances and
• for which sufficient data are available to measure fair value,
• maximizing the use of relevant observable inputs and
• minimizing the use of unobservable inputs.
Revisions resulting from a change in the valuation technique or its
application shall be accounted for as a change in accounting
estimate in accordance with Ind AS 8.

Inputs to valuation techniques
CA Varun
Sethi
09899766487
1. A reporting entity shall select inputs
1. that are consistent with the characteristics of the asset or liability &
2. that market participants would take into account in a transaction for asset or
liability
2. In some cases, those characteristics result in the application of an adjustment,
such as a premium or discount (e.g., control premiums or discounts for lack of
marketability).
Premiums or discounts:
1. Premiums or discounts that reflect size as a characteristic of the reporting entity’s
holding rather than as a characteristic of the asset or liability (for example, a control
premium when measuring the fair value of a controlling interest) are NOT permitted
in a fair value measurement.
2. Any adjustment for the former is NOT permitted, the latter should be considered if it
is consistent with how market participants would price the asset or liability

CA Varun
Sethi
09899766487
The price within the bid-ask spread that is most representative of
FV in the circumstances shall be used to measure FV.
Option I
1. Input = Bid Price for ASSET positions
2. Input = Ask price for LIABILITY positions
Option II
Input = Mid Market (Average of bid and ask prices)Option III
Pricing Inputs - within the bid-ask spread

CA Varun
Sethi
09899766487
Use of unobservable inputs
1. The use of unobservable inputs is NOT intended to allow for the inclusion of entity-
specific assumptions in a fair value measurement. While STANDARD acknowledges
that unobservable inputs may sometimes be developed using a company’s own data,
the guidance is clear that these inputs should reflect MP assumptions.
2. Adjust factors such as
1. Timing differences between the transaction date and the measurement date, or
2. Differences between the asset being measured and a similar asset that was the
subject of the transaction.
Risk Adjustments:
1. Regardless of the valuation technique used, a reporting entity shall include appropriate
risk adjustments, including a risk premium reflecting the amount that market participants
would demand as compensation for the uncertainty inherent in the cash flows of an
asset or a liability.

201522
Fair Value Hierarchy
CA Varun
Sethi
09899766487
Level 1
Level 2
Level 3
Quoted prices (unadjusted) in active markets for IDENTICAL assets &
liabilities that reporting entity can access at the measurement date.1
Inputs other than quoted prices in active markets for identical assets
and liabilities that are observable either directly or indirectly.2
3 Unobservable inputs for the asset or liability.
Standard establishes a fair value hierarchy that prioritizes the inputs used in valuation
techniques into the following three levels:
Eg. Assume in the FV measurement of an OTC option on traded equity using option pricing
model that the risk-free rate & the dividend yield were determined to be Level 2 inputs, but
the expected volatility was determined to be a Level 3 input (as might be the case with a
long-dated option). If expected volatility is significant to the overall fair value of the option
(which would be typical), the entire measurement would be categorized in Level 3.

Fair Value Hierarchy: Level 1
CA Varun
Sethi
09899766487
Quoted price in an
active market does
not represent fair
value at the
measurement date
If an adjustment to
the corresponding
asset’s price is
required to address
differences btw the
asset & the liability
or equity instrument
(adjusted price would
NOT be a Level 1
measurement)
Level 1 measurement
exceptions
Holds a large
number of SIMILAR
assets and liabilities
for which quoted
prices exist, but are
not easily accessible,
An entity shall NOT make an adjustment to a Level 1 input
EXCEPT in the following circumstances:

CA Varun
Sethi
09899766487
Level 2
Inputs other than quoted prices in active markets for identical assets
and liabilities that are observable either directly or indirectly.2
Example: Level 2 inputs include the following
1. Quoted prices for similar assets or liabilities in ACTIVE markets.
2. Quoted prices for identical or similar assets or liabilities in markets that are NOT active.
3. Interest rates and yield curves observable at commonly quoted intervals.
4. Market-corroborated inputs.
Level 2 inputs : Adjustments : Adjustments to Level 2 inputs will vary depending on factors
specific to the asset or liability:
1. The condition or location of the asset.
2. The volume or level of activity in the markets within which the inputs are observed .
3. The extent to which inputs relate to items that are comparable to the asset or liability.
E.g.: Adj. might be required for timing differences between the transaction date and the
measurement date

CA Varun
Sethi
09899766487
Level 3 Unobservable inputs for the asset or liability.3
Level 3 inputs
1. Unobservable inputs shall be used to measure fair value to the extent that relevant
observable inputs are not available, which might include the reporting entity’s own data
2. Unobservable inputs shall reflect the assumptions that market participants would use
when pricing the asset or liability, including assumptions about risk
Requirements of other IndAS for FV: Level 3 inputs :
1. A number of Topics require (or permit) the use of fair value measurements, irrespective of
the level of market activity for the asset or liability as of the measurement date.
E.g. the re-measurement of derivative instruments under ASC 815 and the initial
measurement of intangible assets under ASC 805). As such, STANDARD allows for the
use of unobservable inputs to measure fair value in situations where observable inputs
are not available.

CA Varun
Sethi
09899766487
Level 3 Unobservable inputs for the asset or liability.3
Level 3 inputs
Incorporate Assumptions about risk
• A measurement that does not include an adjustment for risk would not represent a fair value
measurement if market participants would include one when pricing the asset or liability.
Develop MP based unobservable inputs
• An entity shall develop unobservable inputs using the best information available in the
circumstances, which might include the entity's own data. In developing unobservable inputs,
an entity may begin with its own data, but it shall adjust those data if reasonably available
information indicates that other market participants would use different data or there is
something particular to the entity that is not available to other market participants (e.g. an
entity-specific synergy).

CA Varun Sethi IndAS 113 - Fair Value Measurements

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