Indian Accounting Standard 113 (Ind AS 113) helps companies with a unified procedure to define the fair value of assets while declaring their financing statements. The standard, apart from setting a single framework for measuring fair value, also prescribes the methods of disclosures of fair value measurements.
Ind AS 113: What is fair value?
According to the official definition, fair value measurement is the exercise to estimate the ‘price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants, under the current market conditions, at the measurement date’. Being a market-based estimate, fair value is measured using risk assumptions, as well.
In instances where companies have no prior example to arrive at the fair market value of an asset or liability, they can measure it through another valuation technique that ‘maximises the use of relevant observable inputs and minimises the use of unobservable inputs’.
See also: All about Indian accounting standards (Ind AS)
What is a market participant under Ind AS 113?
Market participants according to the standard include the sellers and buyers in the principal or most advantageous market, for the asset/liability that have all the characteristics listed below:
- They are independent of one another, although the price in a related-party transaction can be used to gauge fair value measurement, if the entity has evidence that the transaction was at market terms.
- They are knowledgeable and have reasonable understanding about the asset / liability and the transaction, through all available information, including information obtained through usual and customary due diligence.
- They are able / willing to enter into a transaction for the asset or liability and they are not forced or otherwise compelled to do so.
Scope of Ind As 113 and exceptions
The provisions of the standard are set in motion when another standard permits fair value measurements, or disclosures about fair value measurements. This standard is also applied to a company’s own equity instruments measured at fair value.
Exceptions
The measurement requirements of Ind AS 113 do not apply to:
- Share-based payment transactions that are within the scope of Ind AS 102.
- Leases within the scope of Ind AS 17.
- Measurements that have similarities with fair value but are not fair value – for example, net realisable value under Ind AS 2, inventories, or impairment of assets.
See also: All about Ind AS 116 and lease contrracts
The disclosures required by Ind AS 113 are not required for:
- Employee benefits measured at fair value, in accordance with Ind AS 19.
- Assets where the recoverable amount is fair value, minus the cost of disposal in accordance with Ind AS 36.
Valuation techniques for Ind AS 113
Companies have to stick with one among various valuation techniques available to them, to measure fair value. A change in the valuation technique or its application is also appropriate, if the resultant measurement is equally or more representative of fair value in the circumstances. The events that justify such a change include:
- New markets developments
- New information
- Unavailability of previous information
- Improvement in valuation techniques
- Change in market conditions
See also: How to arrive at the fair market value of a property, and its importance in income tax laws
Disclosures under Ind AS 113
Companies are required to disclose information that helps users of its financial statements to assess the following:
- The valuation techniques and inputs used to develop the measurements, for assets and liabilities that are measured at fair value on a recurring / non-recurring basis after initial recognition in the balance sheet.
- The effect of the measurements on profit or loss or other comprehensive income for the period, for recurring fair value measurements that use significant unobservable inputs.
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FAQ
What is IND 113?
Indian accounting standard Ind As 113 permits an entity to measure financial assets / liabilities on the basis of net risk exposure to market or credit risks.
What is fair value as per Ind AS?
Fair value is the price that one can receive through the sale of an asset or the price paid to transfer a liability, in an orderly transaction on its measurement date.