Ind AS 113

Understanding Ind AS 113: Fair Value Measurement in Indian Accounting

Ind AS 113, Fair Value Measurement, is a crucial Indian Accounting Standard that defines fair value, sets out a framework for measuring fair value, and requires specific disclosures about fair value measurements. It aims to enhance the consistency and comparability of financial information by standardizing how fair value is determined across various assets and liabilities within an entity’s financial statements.

Tracing Its Roots: Origin and Context of Ind AS 113

The journey of Ind AS 113 is closely tied to India’s convergence with International Financial Reporting Standards (IFRS). Prior to the issuance of a standalone standard, guidance on fair value measurement was scattered across different accounting standards, leading to inconsistencies and varying interpretations. To address this, the International Accounting Standards Board (IASB) issued IFRS 13, *Fair Value Measurement*, in May 2011, consolidating and clarifying fair value guidance into a single standard.

In India, as part of the Ministry of Corporate Affairs’ (MCA) roadmap to converge with IFRS, Ind AS 113 was notified in 2016, effective for accounting periods beginning on or after April 1, 2017. Ind AS 113 is largely based on and converged with IFRS 13, meaning its principles and requirements are virtually identical to its international counterpart. Its introduction marked a significant step towards greater transparency and comparability in financial reporting for Indian companies.

Unpacking the Standard: A Deep Dive into Ind AS 113’s Principles

Ind AS 113 provides a comprehensive framework for fair value measurement when another Ind AS *requires* or *permits* fair value measurement. It does not introduce new fair value requirements but rather specifies how to perform such measurements.

Defining Fair Value

At its core, Ind AS 113 defines fair value as “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.” Key elements of this definition include:

• Exit Price: Fair value is a selling price, not an entry price (i.e., the price to acquire an asset or incur a liability).
• Market Participants: The measurement assumes transactions occur between hypothetical buyers and sellers in the principal (or most advantageous) market, acting in their economic best interest.
• Orderly Transaction: It assumes a transaction that is not forced, for example, due to liquidation or distress.
• Measurement Date: Fair value is determined at a specific point in time, reflecting current market conditions.

For non-financial assets, Ind AS 113 also incorporates the concept of “highest and best use,” meaning the valuation should reflect the use of the asset by market participants that would maximize its value, physically possible, legally permissible, and financially feasible.

Valuation Techniques

The standard outlines three primary valuation techniques that can be used to measure fair value, chosen based on what is appropriate for the asset or liability and the availability of inputs:

• Market Approach: Uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities. Examples include matrix pricing or using multiples from comparable companies.
• Income Approach: Converts future amounts (e.g., cash flows or earnings) to a single current (discounted) amount. Examples include discounted cash flow (DCF) models or present value techniques.
• Cost Approach: Reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost). This approach is often used for specialized assets that do not have active markets.

The Fair Value Hierarchy

A crucial component of Ind AS 113 is the fair value hierarchy, which prioritizes the inputs used in valuation techniques into three levels based on their observability and reliability:

• Level 1 Inputs: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. These are the most reliable inputs (e.g., stock prices for publicly traded shares).
• Level 2 Inputs: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, interest rates, yield curves, etc.
• Level 3 Inputs: Unobservable inputs for the asset or liability. These are used when observable inputs are not available and require significant management judgment and assumptions about how market participants would price the asset or liability. Examples include financial forecasts or internally developed data for illiquid assets.

Entities must maximize the use of observable inputs and minimize the use of unobservable inputs. Extensive disclosures are required, especially for Level 3 measurements, to provide transparency about the judgments made.

Why Ind AS 113 Matters: Impact on Business Operations and Reporting

For businesses operating under Ind AS, a thorough understanding of Ind AS 113 is indispensable due to its profound impact on financial reporting and decision-making:

• Enhanced Comparability and Consistency: It mandates a uniform approach to fair value measurement, making financial statements more comparable across entities and over time.
• Increased Transparency: The detailed disclosure requirements, particularly concerning the fair value hierarchy and valuation techniques, provide greater insight into the judgments and assumptions underlying reported fair values.
• Impact on Financial Performance and Position: Fair value measurements directly affect the reported values of assets and liabilities, consequently influencing profit or loss (through fair value gains/losses) and the overall financial position (balance sheet).
• Informed Decision-Making: Reliable fair value information is critical for internal management decisions, such as capital allocation, investment analysis, and strategic planning, as well as for external stakeholders like investors and creditors.
• Risk Management: It plays a key role in assessing and reporting the fair value of financial instruments and derivatives, which is central to a robust risk management framework.

Real-World Applications: Where Businesses Apply Ind AS 113

Ind AS 113 applies whenever another Ind AS requires or permits fair value measurement. Common instances where businesses apply its principles include:

• Financial Instruments: Measuring certain financial assets (e.g., equity investments, derivatives) and financial liabilities at fair value through profit or loss or fair value through other comprehensive income, as per Ind AS 109.
• Investment Property: Measuring investment property at fair value if the fair value model is chosen under Ind AS 40.
• Business Combinations: Fair value measurement of acquired identifiable assets and assumed liabilities in a business combination, as required by Ind AS 103.
• Assets Held for Sale: Measuring assets (or disposal groups) held for sale at the lower of their carrying amount and fair value less costs to sell, under Ind AS 105.
• Biological Assets: Measuring biological assets at fair value less costs to sell, as per Ind AS 41.
• Employee Benefits: Fair value measurement of plan assets in defined benefit plans, according to Ind AS 19.
• Impairment Testing: Determining the recoverable amount of an asset or cash-generating unit, which may involve fair value less costs to sell, under Ind AS 36.

Bridging Concepts: Related Accounting Terms

Understanding Ind AS 113 often requires familiarity with several related concepts and standards:

• IFRS 13 Fair Value Measurement: The international standard from which Ind AS 113 is converged.
• Ind AS 109 Financial Instruments: Frequently mandates the use of fair value measurement for various financial assets and liabilities.
• Fair Value Accounting: A broad accounting principle that values assets and liabilities at their current market price.
• Historical Cost: The original cost of an asset when it was acquired, often contrasted with fair value.
• Present Value: A core concept used in the income approach, discounting future cash flows to their current worth.
• Active Market: A market where transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Staying Current: Recent Developments and Discussions

While the core principles of Ind AS 113 (and IFRS 13) have remained stable since their introduction, the application of fair value measurement is dynamic. Key areas of ongoing focus and discussion include:

• Consistency in Application: Regulators and auditors continue to emphasize the need for consistent application of valuation techniques and the fair value hierarchy, particularly for Level 3 inputs, where judgment is significant.
• Impact of Economic Volatility: Periods of economic uncertainty, such as high inflation, interest rate fluctuations, or market downturns, necessitate careful consideration and robust justification for fair value measurements, especially when observable inputs become less reliable.
• Non-Financial Assets: Continued scrutiny on the “highest and best use” principle and how it is applied to specialized or unique non-financial assets.

Who Needs to Know: Impacted Business Functions

Ind AS 113 impacts multiple departments within a business, necessitating a collaborative approach to compliance and reporting:

• Finance & Accounting Departments: Directly responsible for applying the standard, performing fair value measurements, preparing financial statements, and ensuring disclosure requirements are met.
• Treasury Department: Manages financial instruments, foreign currency exposures, and derivatives, all of which often require fair value measurement.
• Mergers & Acquisitions (M&A) Teams: Crucial for purchase price allocation in business combinations, which involves fair valuing acquired assets and liabilities.
• Risk Management Department: Uses fair value information to assess and manage market risks associated with various assets and liabilities.
• Internal Audit & External Audit: Involved in reviewing and validating the appropriateness of fair value measurements, valuation techniques, and disclosures.
• Legal Department: May be consulted on contractual terms and legal frameworks that influence valuation inputs or assumptions.

Looking Ahead: Future Trends in Fair Value Measurement

The landscape of fair value measurement is continually evolving, driven by technological advancements and changing economic realities:

• Enhanced Technology and Automation: Expect increasing adoption of data analytics, artificial intelligence (AI), and machine learning to source observable inputs, automate valuation models, and improve the efficiency and accuracy of fair value measurements, particularly for large portfolios of similar assets.
• ESG Considerations in Valuation: The growing importance of Environmental, Social, and Governance (ESG) factors will increasingly influence fair value assessments, especially for long-lived assets, property, plant, and equipment, and investments exposed to climate-related risks or opportunities.
• Digital Assets and Cryptocurrencies: As digital assets become more prevalent, accounting bodies may issue further guidance or interpretations specific to their fair value measurement.
• Greater Scrutiny on Unobservable Inputs: Regulators and auditors are likely to maintain or increase their focus on the robustness of Level 3 inputs and the transparency of assumptions underlying highly judgmental valuations.
• Global Harmonization Efforts: Ongoing efforts to ensure consistent application of fair value principles across different jurisdictions, despite local adoptions like Ind AS 113, will continue to shape future interpretations.