Ind AS 113, Fair Value Measurement | Definition | Market participants

Ind AS 113

Ind AS 113, Fair Value Measurement : Ind AS 113 applies when another Ind AS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in specified circumstances .

The measurement and disclosure requirements of this Ind AS do not apply to the following:

  • share-based payment transactions within the scope of Ind AS 102,

Share- based Payment;

  • leasing transactions within the scope of Ind AS 17, Leases; and
  • measurements that have some similarities to fair value but are not fair value, such as net realisable value in Ind AS 2, Inventories, or value in use in Ind AS 36, Impairment of

The disclosures required by this Ind AS are not required for the following:

  • plan assets measured at fair value in accordance with Ind AS 19,

Employee Benefits; and

  • assets for which recoverable amount is fair value less  costs  of  disposal in accordance with Ind AS

Definition of Fair value

The Standard 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.

Asset or liability

A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall  take into account the  characteristics  of the asset or liability if market participants would  take  those  characteristics into account when pricing the asset or liability at the measurement date.Such characteristics include, the condition and location of the asset; and restrictions, if any, on the sale or use of the asset.

The transaction

A fair value measurement assumes that the asset or liability is exchanged in  an orderly transaction between market participants to sell  the  asset  or transfer the liability at the measurement date  under  current  market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either, in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability.

Market participants

An entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic i nterest.

The price

Fair value is the price that would be received to sell an asset or paid  to  transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e., an exit price) regardless of whether that price is directly observable or estimated using another valuation technique.

Application to non-financial assets

A fair value measurement of a non-financial asset takes into  account  a  market participant’s ability to generate economic benefits by using the  asset   in its highest and best use or by selling it to another market participant that would use the asset in its highest and best  use.  The highest and best use of  a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible.

Application to liabilities and an entity’s own equity instruments

A fair value measurement assumes that a financial or non-financial liability 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. The transfer of a liability or an entity’s own equity instrument assumes the following:

  • A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation. The liability would not be settled with the counterparty or otherwise extinguished on the measurement
  • An entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise extinguished on the measurement

Liabilities and equity instruments held by other parties as assets

When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical  item  is  held  by another party as an asset, an entity shall measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.

Liabilities and equity instruments not held by other parties as assets

When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical item  is  not  held by another party as an  asset, an  entity shall measure the fair  value of  the liability or equity instrument using a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity.

Valuation techniques

An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure  fair value, maximising the use of relevant observable inputs and  minimising the use of unobservable inputs. Three widely used valuation techniques are the market approach, the cost approach and the income approach.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 inputs are inputs other than  quoted prices included within Level 1  that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs for the asset or liability.

Disclosure

An entity shall disclose information that helps users of its financial

statements assess both of the following:

  • for assets and liabilities that are measured at fair value on a  recurring or non-recurring basis in the balance sheet after initial recognition, the valuation techniques and inputs used to develop those
  • for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the

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