FAQs on IND AS 113: Fair Value Measurement

1. What is IND AS 113?

Ans: IND AS 113 is a part of the IND AS that provides guidance on how to measure fair value when preparing financial statements. This standard defines fair value, outlines the framework for its measurement, and sets out the requirements for disclosing fair value information in the financial statements.

2. How does IND AS 113 define fair value?

Ans: Fair value is defined 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. The standard also emphasizes that fair value is market-based and not entity-specific, and that it reflects the assumptions that market participants would make when pricing the asset or liability.

3. How is fair value measured under IND AS 113?

Ans: IND AS 113 lays down a framework for measuring fair value, which involves the following steps:

• Identify the asset or liability that needs to be measured at fair value.
• Determine the appropriate valuation technique(s) to use.
• Obtain the necessary data inputs and make necessary adjustments.
• Apply the valuation technique(s) and arrive at a fair value estimate.
• Review and validate the estimate for reasonableness.

4. What are the disclosure requirements under IND AS 113?

Ans: IND AS 113 requires entities to disclose the following information about fair value measurements:

The fair value measurement hierarchy (Level 1, 2 or 3) for each asset or liability measured at fair value.

The valuation techniques and inputs used to arrive at the fair value estimates.

The quantitative information about the significant unobservable inputs used in the fair value measurement.

5. What is the purpose of IND AS 113?

Ans: The purpose of IND AS 113 is to provide guidance on how to measure fair value when preparing financial statements. It ensures consistency and transparency in fair value measurement and reporting, enabling stakeholders to make informed decisions based on reliable information.

6. Who does IND AS 113 apply to?

Ans: IND AS 113 applies to all entities that prepare financial statements in accordance with the Indian Accounting Standards (IND AS).

7. What is the fair value hierarchy under IND AS 113?

Ans: The fair value hierarchy under IND AS 113 categorizes fair value measurements into three levels: Level 1, Level 2, and Level 3. Level 1 measurements are based on quoted prices in active markets for identical assets or liabilities. Level 2 measurements are based on observable inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities or inputs based on market data. Level 3 measurements are based on unobservable inputs that are significant to the fair value measurement.

8. What are the disclosure requirements under IND AS 113?

Ans: IND AS 113 requires entities to disclose information about fair value measurements, including the fair value measurement hierarchy (Level 1, 2, or 3) for each asset or liability measured at fair value, the valuation techniques and inputs used to arrive at the fair value estimates, and quantitative information about the significant unobservable inputs used in the fair value measurement.

9. Can fair value be negative under IND AS 113?

Ans: Yes, fair value can be negative under IND AS 113 if the market price for the asset or liability being measured is lower than its carrying value on the balance sheet. This may occur if market conditions have deteriorated or if the asset or liability is considered to be impaired.

10. Does IND AS 113 require fair value measurement for all assets and liabilities?

Ans: No, IND AS 113 does not require fair value measurement for all assets and liabilities. It only requires fair value measurement for those assets and liabilities that are required to be measured at fair value under other accounting standards or if the entity chooses to measure them at fair value for its own purposes.

11. Can entities use their own internal models to measure fair value under IND AS 113?

Ans: Yes, entities can use their own internal models to measure fair value under IND AS 113 if those models are appropriate for the asset or liability being measured and are consistent with the principles of the standard. However, entities are required to disclose the models used and the key assumptions and inputs used in the fair value measurement.

12. How often are fair values required to be updated under IND AS 113?

Ans: Fair values are required to be updated regularly under IND AS 113 to reflect changes in market conditions or other factors that affect the fair value of the asset or liability being measured. The frequency of updates will depend on the nature and volatility of the asset or liability and the reliability of the inputs and assumptions used in the fair value measurement.

13. How does IND AS 113 address the issue of illiquid assets or liabilities?

Ans: IND AS 113 requires entities to use judgment in determining the fair value of illiquid assets or liabilities and to consider the availability of relevant market data and the impact of liquidity constraints on the fair value measurement. The standard also allows entities to use valuation techniques that rely on unobservable inputs in certain circumstances, such as when observable market data is not available.

14. What are the challenges of applying IND AS 113?

Ans: Some of the challenges of applying IND AS 113 include determining the appropriate valuation techniques and inputs for each asset or liability, ensuring the reliability of inputs and assumptions used in the fair value measurement, and dealing with the complexity of measuring fair value for certain assets or liabilities, such as financial instruments or intangible assets. Additionally, the application of IND AS 113 requires judgment, which can result in variability in fair value measurements between entities.

15. Does IND AS 113 require fair value measurement for all financial instruments?

Ans: No, IND AS 113 does not require fair value measurement for all financial instruments. The standard requires fair value measurement for some financial instruments, such as derivatives and certain investments, but other financial instruments may be measured at amortized cost or at cost.

16. Can entities use broker quotes as a basis for fair value measurement under IND AS 113?

Ans: Yes, entities can use broker quotes as a basis for fair value measurement under IND AS 113 if they are based on an active market and the quote represents the fair value of the asset or liability being measured. However, entities should also consider other factors, such as the quality of the broker quote and the reliability of the market data used.

17. What are the implications of using fair value measurement for an asset or liability under IND AS 113?

Ans: The implications of using fair value measurement for an asset or liability under IND AS 113 include the recognition of unrealized gains or losses in the income statement, which can result in increased volatility in reported earnings. Additionally, fair value measurement requires the use of estimates and judgment, which can impact the reliability of financial statements and the comparability of financial information between entities.

18. How does IND AS 113 affect impairment testing?

Ans: IND AS 113 requires entities to consider fair value as part of impairment testing for assets, including non-financial assets such as property, plant, and equipment, and intangible assets. If the fair value of an asset is less than its carrying value, an impairment loss may be recognized.

19. How does IND AS 113 affect the recognition of contingent liabilities?

Ans: IND AS 113 requires entities to measure contingent liabilities at fair value if it is probable that the liability will be incurred and the amount of the liability can be estimated reliably. This may result in the recognition of a liability and corresponding expense even if the outcome of the contingent event is uncertain.

20. How does IND AS 113 impact the valuation of inventory?

Ans: IND AS 113 does not require fair value measurement for inventory. Inventory is typically measured at cost or net realizable value, whichever is lower. However, if an entity chooses to measure inventory at fair value for its own purposes, it would need to comply with the requirements of IND AS 113.

21. Can an entity change the fair value measurement method used for an asset or liability?

Ans: Yes, an entity can change the fair value measurement method used for an asset or liability, but it must do so only if it can demonstrate that the new method is more appropriate and results in a more reliable measurement. The change in measurement method should be applied prospectively and disclosed in the financial statements.

22. How does IND AS 113 impact the recognition and measurement of contingent assets?

Ans: IND AS 113 does not provide specific guidance on the recognition and measurement of contingent assets. However, contingent assets should be recognized when it is probable that they will result in an inflow of economic benefits and the amount can be measured reliably.

23. How does IND AS 113 apply to non-financial assets and liabilities?

Ans: IND AS 113 applies to the measurement of fair value for both financial and non-financial assets and liabilities. However, the fair value measurement for non-financial assets and liabilities may require different valuation techniques and inputs compared to financial instruments.

24. How does IND AS 113 apply to business combinations?

Ans: IND AS 113 applies to the measurement of fair value for assets and liabilities acquired in a business combination. Fair value measurement is used to determine the purchase price allocation and the recognition of goodwill or a bargain purchase gain.

25. Can an entity use its own internal models to estimate fair value under IND AS 113?

Ans: Yes, an entity can use its own internal models to estimate fair value under IND AS 113 if the model is appropriate and reliable. The model should consider all available market data and other relevant information, and should be consistently applied and properly documented.

26. How does IND AS 113 impact the recognition and measurement of non-controlling interests?

Ans: IND AS 113 does not specifically address the recognition and measurement of non-controlling interests. However, the fair value of non-controlling interests should be based on the price that would be received to sell the interest in an orderly transaction between market participants.

27. Can an entity use the cost approach to estimate fair value under IND AS 113?

Ans: Yes, an entity can use the cost approach to estimate fair value under IND AS 113 if the approach is appropriate and reliable. The cost approach involves estimating the current cost of replacing the asset or liability, adjusted for depreciation or amortization.

28. How does IND AS 113 impact the recognition and measurement of financial guarantees?

Ans: IND AS 113 requires entities to measure financial guarantees at fair value if the guarantee is a financial instrument. Fair value measurement may require the use of valuation techniques such as option pricing models, and may result in the recognition of a liability and corresponding expense.

29. How does IND AS 113 apply to the measurement of derivative instruments?

Ans: IND AS 113 requires derivative instruments to be measured at fair value, regardless of whether the instrument is designated as a hedging instrument or not. The fair value of a derivative instrument is based on the market price of a similar instrument or estimated using valuation techniques such as option pricing models.

30. How does IND AS 113 apply to the measurement of intangible assets?

Ans: IND AS 113 applies to the measurement of fair value for intangible assets. The valuation techniques used to estimate fair value may vary depending on the nature of the intangible asset, but may include methods such as the relief from royalty method, multi-period excess earnings method, or the cost approach.

31. How does IND AS 113 impact the recognition and measurement of non-current assets held for sale?

Ans: IND AS 113 does not specifically address the recognition and measurement of non-current assets held for sale. However, the fair value of these assets should be based on the price that would be received to sell the assets in an orderly transaction between market participants.

32. How does IND AS 113 apply to the measurement of goodwill?

Ans: IND AS 113 applies to the measurement of fair value for goodwill. The fair value of goodwill is determined based on the excess of the consideration transferred over the fair value of the identifiable assets and liabilities acquired in a business combination. The fair value measurement may require the use of valuation techniques such as the income approach or market approach.

33. How does IND AS 113 impact the recognition and measurement of investment properties?

Ans: IND AS 113 requires investment properties to be measured at fair value. Fair value may be determined based on market prices or by using valuation techniques such as the income approach or market approach.

34. How does IND AS 113 apply to the measurement of liabilities?

Ans: IND AS 113 applies to the measurement of fair value for liabilities. The fair value of a liability is based on the amount that would be required to settle the liability in an orderly transaction between market participants. The fair value measurement may require the use of valuation techniques such as the income approach or market approach.

35. How does IND AS 113 impact the recognition and measurement of biological assets?

Ans: IND AS 41 provides guidance on the accounting for biological assets, including the measurement of fair value. Under IND AS 41, biological assets are measured at fair value less costs to sell, which is consistent with the measurement principles in IND AS 113.

36. Can an entity measure fair value using quoted prices in an active market for identical assets or liabilities if the market is no longer active?

Ans: If the market for an asset or liability is no longer active, an entity may not be able to use quoted prices in an active market for identical assets or liabilities to measure fair value. In this case, the entity may need to use other valuation techniques, such as the income approach or market approach, to estimate fair value.

37. How does IND AS 113 impact the recognition and measurement of inventory?

Ans: IND AS 2 provides guidance on the accounting for inventory, including the measurement of cost and net realizable value. Fair value measurement is not typically used for inventory, as the value of inventory is usually based on its cost or net realizable value.

38. Can an entity use the fair value measurement exemption for lease liabilities under IND AS 116?

Ans: IND AS 116 provides guidance on the accounting for leases, including the measurement of lease liabilities. Under IND AS 116, a lessee may use the fair value measurement exemption for short-term leases and leases of low-value assets. In these cases, the lessee can measure the lease liability at the amount of the lease payments

Disclaimer: This article provides general information existing at the time of preparation and author takes no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and author neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.