Financial reporting necessitates that companies evaluate the real value of their liabilities and assets. Fair value measurement ind as 113 offers an exhaustive framework for calculating the fair value of financial and non-financial items in financial reports. It establishes the concept of fair value, provides guidelines for measurement, and attains consistency in valuation methods. Ind AS 113 Fair Value Measurement is essential for companies to ensure transparency, enhance financial reporting reliability, and align with Indian Accounting Standards (Ind AS). The article discusses the objective, scope, measurement process, and role of market participants under Ind AS 113.
What is Fair Value Measurement Ind AS 113?
Fair value measurement Ind AS 113 prescribes a single definition of fair value and sets out a framework for measuring fair value in financial reports. It prevents companies from employing different methods to determine fair value for assets and liabilities.
Fair Value Measurement as per Ind AS 113
The valuation basis under Ind AS 113 is based on fair value measurement from the point of view of market participants and follows three approaches. These methods include the Market Approach, which compares similar asset prices; the cost approach, which assesses replacement or reproduction expenses; and the Income Approach, which translates future cash flows into current value. That means financial statements must show realistic and transparent values according to the current market and industry situation.
Fair Value Measurement Ind AS 113
Ind AS 113 Approach provides a less flexible characteristic towards the fair value measurement RATINGS as in this case both the assets and liabilities will provide level playing field across active and/or inactive market conditions. It uses a hierarchical construct, and fair value, and valuation techniques to provide information that is transparent and consistent when recording financial information.
Fair Value Hierarchy
Ind AS 113 introduces a three-tier fair value hierarchy to classify inputs used in valuation. Level 1 consists of quoted prices in active markets for the asset, i.e., its stock and bonds. Level 2 includes inputs that can be observed, such as interest and exchange rates. Level 3 includes unobservable inputs used in assumptions used to value private equity and real estate.
Fair Value Valuation Techniques
To arrive at a fair value, businesses must follow certain valuation techniques. The Market Approach depends on prices from comparable transactions. The cost approach involves estimating the costs of replacing an asset. The Income Approach uses discounted cash flow (DCF) models to assess the present value of future earnings, ensuring accurate asset valuation.
Determining Fair Value of Liabilities
The fair value of liabilities is the value paid to settle the liability and is based on the price a market participant would pay to transfer the liability. Such a valuation accounts for non-performance risk, i.e., credit risk, which reduces the liability’s value.
Objective of Fair Value Measurement IND AS 113
Fair value measurement under IND AS 113 framework brings precision, transparency, and fidelity to financial reporting. It helps companies determine the true market value of liabilities and assets, giving investors, regulators, and other stakeholders a clearer picture in financial statements.
Establishing Common Definition of Fair Value
Hence, Ind AS 113 introduces a consistent definition of fair value to ensure uniform accounting standards in financial reporting. It removes inconsistencies in how valuation approaches are applied and makes it reliable. The feature makes sure that a company can always be valued using a market-based approach rather than an entity-specific value, which is essential to make sure that the financial statements are reliable and comparable for stakeholders, regulators, and investors.
Providing a Framework for Measuring Fair Value
Ind AS 113 specifies under what circumstances fair value measurement will be used in financial statements and what are the respective requirements to accomplish the fair value. The standard introduces three valuation methods (market, cost, and income) to estimate asset and liability values. Management must also ensure that fair value measurements are transparent and reflective of market conditions, using market data available at the time.
Ensuring Transparency and Comparability
Ind AS 113 has similar requirement for disclosure of inputs and techniques used for fair value measurement. Such a disclosure informs investors and stakeholders as to relative fair values across industrial sectors. The measurement policies eliminated the risk of misstatement of the financial position. This made the financial statements credible and comparable.
Improving Decision-Making
Fair value measurement assists firms in making better-informed financial choices through an honest reflection of the assets and liabilities. Investors count on fair value estimates to judge risks, and lenders use them to judge the security of the loan and the viability of the business. Fair value reporting correctly will make the participants of financial markets confident and trusting to make good investment decisions.
Scope of Fair Value Measurement IND AS 113
Ind AS 113 establishes fair value measurement of financial and non-financial assets to provide correct and consistent financial reporting. It applies to several Indian Accounting Standards but does not apply to certain transactions with different valuation methods.
Applicability to Financial and Non-Financial Items
Ind AS 113 applies to financial and non-financial items for consistent fair value measurement. It applies to financial assets and liabilities such as investments, bonds, and derivatives. It also applies to non-financial assets such as real estate, plants, and machinery. Ind AS 113 is also applied in business combinations and goodwill, providing precise financial reporting.
Applicability to Other Indian Accounting Standards
Ind AS 113 shall be applied when another Ind AS requires (or permits) fair value measurement. It is used in Ind As 16 (Property, Plant, and Equipment), Ind As 109 (Financial instruments), Ind As 40 (Investment Property), and Ind As 36 (Impairment of Assets). So all relevant financial components are consistent and measured uniformly.
Exclusions from Fair Value Measurement
On the other hand Ind AS 113 does not apply to the following:- It does not include share-based payment under Ind AS 102, leases under Ind AS 116, and net realizable value calculation under Ind AS 2 (Inventories). These exclusions implicitly ensure that different financial instruments follow appropriate valuation methodologies because they are rooted in their own nature.
Market Participant Under Ind AS 113
Ind AS 113 requires fair value measurement from the vantage point of market participants rather than entity-specific assumptions. Ind AS 113 reduces the spirit of internal valuation for a fair value measurement based on objective market data assuring market participant.
- Independent Transactions: The market participants must not be related to one another and related-party relationships must not materially affect the transaction. However, a related-party transaction would be eligible for fair value measurement if it related to a transaction at market terms. It encourages transparency and reliability in financial reporting.
- Knowledgeable Decision-Makers: Parties to a transaction must be relatively knowledgeable about the asset or liability and understand the transaction. A fair and accurate market value is ensured through the market value price so that price manipulation or unfair valuations do not occur.
- Willing and Able to Transact: The parties can be knowledgeable about their information on both sides of the transaction. When we say that they should have the alpha state of mind, they should not be under any financial pressure, the stress of low finances, or any pressure or pulling that must force them into the transaction. A fair value measurement assumes that both parties act prudently and without compulsion and will take their respective business and financial risks.
Relevance to ACCA Syllabus
Fair value measurement Ind AS 113 / IFRS 13) is a key subject in Financial Reporting (FR) and Strategic Business Reporting (SBR) of the ACCA syllabus. The standard establishes the fair value hierarchy, valuation approaches, and disclosure requirements to provide transparent financial reporting. Candidates are taught to measure fair value for financial instruments, property, plant and equipment, and intangible assets.
Fair Value Measurement Ind AS 113 ACCA Questions
Q1: Fair value is defined as per Ind AS 113 (IFRS 13) as:
A) The transaction value at which an asset was acquired
B) The amount that would be received to sell an asset in an orderly transaction between market participants
C) An asset’s historical cost after being depreciated
D) The recorded book value of an asset as per accounting records
Ans: B) The price that would be received to sell an asset in an orderly transaction between market participants
Q2: Which one of the following is NOT a fair value measurement technique as per Ind AS 113?
A) Market Approach
B) Income Approach
C) Cost Approach
D) Depreciation Approach
Ans: D) Depreciation Approach
Q3: As per Ind AS 113, Level 1 inputs in fair value hierarchy are:
Level 1 input — Quoted prices in active markets for identical assets or liabilities
B) Prices adjusted on the basis of observable data
C) Inputs not observable in the market used for complex valuations
D) Inflation – adjusted historical costs
Ans: A) Level 1 inputs based on quoted prices in active markets for identical assets or liabilities
Q4: How many tiers are there within the fair value hierarchy?
A) Two
B) Three
C) Four
D) Five
Ans: B) Three
Q5: What must be one of the item in the financial statement disclosures under IFRS 13?
A) Historic purchase flow data
(b) Valuation techniques and inputs used in fair value measurement
C) The number of amino acids in the protein
D) Fair value adjustment taxation treatment
Ans: C) The valuation techniques and inputs used in fair value measurement
Relevance to US CMA Syllabus
The US CMA syllabus addresses Fair Value Measurement under Financial Reporting, Valuation, and Risk Management. CMA candidates examine fair value accounting concepts, market-based valuations, and measurement of financial instruments. Fair value measurement understanding aids in evaluating business valuation, asset impairment, and investment risk.
Fair Value Measurement Ind AS 113 US CMA Questions
Q1: Fair value measurement-is mainly used in:
A) Historical cost accounting
B) Fair Value Measurement of Assets and Liabilities
C) Tax assessment only
D) Internal management reporting
Ans: B) Valuation of assets and liabilities at market-price
Q2: The Cost Approach to fair value measurement is based on:
Q&A: A) Market prices for similar assets in adjusted form
B) Future cash flows of the asset discounted
C) The cost to replace the asset
D) Net book value of the asset
Ans: C) The cost needed to replace the asset with an identical one
Q3: What is a limitation of the fair value measurement?
A) Always reflects historical cost
B) There may be a lack of market prices for valuation
C) This considers calculation of present value
D) It relies solely on conjectural estimates
Ans: B) Market prices may not always be available for valuation
Q4: Which method of Fair Value Measurement uses future cash flow estimates discounted to present value?
A) Market Approach
B) Income Approach
C) Cost Approach
D) Historical Cost Approach
Ans: B) Income Approach
Q5: What level is used in the fair value hierarchy if there are no observable market inputs?
A) Level 1
B) Level 2
C) Level 3
D) Level 4
Ans: C) Level 3
Relevance to US CPA Syllabus
US CPA syllabus covers Fair Value Measurement (ASC 820 – Fair Value Measurement under US GAAP) under Financial Accounting & Reporting (FAR). Candidates for CPA learn valuation methods (market, income, and cost approach), fair value hierarchy, and disclosures required. Meeting SEC requirements and audit requirements is essential in financial reporting.
Fair Value Measurement Ind AS 113 US CPA Questions
Q1: When measuring the fair value of an asset in accordance with IFRS 13, what assumptions should be used?
A) Price the entity is willing to sell the asset
B) The value that would be lost in an orderly industry transaction between constituent parties
C) The value assessed by the taxing authority
D) The price at which the asset was historically acquired
Ans: B) Price that will be received in an orderly transaction between market participants
Q2: What does the fair value hierarchy in IFRS 13 seeks to do?
A) Minimize dependence on professional judgement
B) Placing more emphasis on inputs utilized in a fair value measurement that have a high degree of reliability
C) Towards valuations based on historical cost
D) Re-scale all assets to same scale
Ans:B) Placing more emphasis on inputs utilized in a fair value measurement that have a high degree of reliability
Q3: The market approach in fair value measurement is based on:
A) Cost estimates are adjusted based on value
B) Recent transactions and quotes in the market
C) The discounted value of future earnings
D) Financial Statements : Book Value of Assets
Ans: B) Transactions between others in an active, traded market
Q4: What is one of the the most significant factors in determining the principal market for the purposes of fair value measurement?
A) The market has the lowest transaction costs
B) The market in which the entity engages the majority of conversations
C) The market with the highest asset prices
D) The market containing the most complex financial instruments
Ans: B) Market in which the entity undertakes the majority of its transactions
Q5: Which of the following is NOT a fair value measurement disclosure requirement (ASC 820)?
B) Limitations of the techniques used Logical grouping
B) Market conditions affecting fair value
C) Forthcoming expected fair values
D) G fair value hierarchy used
Ans: C) Fair values expected in the future
Relevance to CFA Syllabus
For instance, fair value measurement is covered in the financial reporting & Analysis, Fixed Income, and Alternative Investments sections of the CFA program syllabus. CFA candidates study valuation models, the pricing of financial instruments, and adjustments to the fair value of financial reports. Investment decisions, risk assessment, and portfolio appraisal are all based on fair value.
Fair Value Measurement Ind AS 113 CFA Questions
Q1: Under fair value accounting (e.g., as per IFRS 13 or US GAAP), what is the basis for determining the fair value of an asset or liability?
A) The market where most of the trading of the asset or liability occurs
C) Entity’s internal price expectations
C) The initial cost of purchasing the asset
D) Liquidation value in distress
Ans: A) The most advantageous market for the asset or liability
Q2: For which of these scenarios would it be most appropriate to use the market approach for fair value measurement?
A) Where there are no comparable market transactions
B) where the market prices for similar assets are observable
C) If the value of the asset is mainly determined by future cash flows
D) Where historical cost provides a more faithful representation
Ans: B) In case observable market prices are available for similar assets
Q3: Which is the main valuation convention under IFRS 13 for assets that do not have transactions in an active market?
A) Cost Approach
B) Market Approach
C) Income Approach
D) Amortized Cost
Ans: C) Income Approach
Q4: What is the purpose of the fair value hierarchy in financial reporting?
A) Categorizing inputs according to how confident we are about their value
B) Assess tax liabilities of companies
C) Adopt financial reporting policies
D) Calculate profit ratios
Ans: A) Categorize the inputs on the basis of their reliability for valuation
Q5: Why do financial analysts primarily utilize fair value measurement for investments?
A) To know the cost incurred in the production
B) To check risk and valuation correctness
C) To boost book value for tax purposes
D) To calculate total variable costs
Ans: B) To analyze risk of investment and accuracy of valuation
