CA Final · Financial Reporting

Ind AS 113 Fair Value Measurement: formula sheet

Full chapter guide

Key formulas

Definition of fair value: Fair value = price received to sell an asset OR paid to transfer a liability, in an orderly transaction between market participants at the measurement date; This is an exit price. Quote this wording in theory answers.
Scope: applies to: Fair value measurements and disclosures required or permitted by other Ind AS (with exclusions); The standard applies to both initial and subsequent measurement when another Ind AS requires or permits fair value.
Scope exclusions: both measurement and disclosure: Share-based payment transactions (Ind AS 102); leasing transactions within Ind AS 116; measurements similar to fair value but not fair value (net realisable value in Ind AS 2, value in use in Ind AS 36); Both the measurement and the disclosure requirements of Ind AS 113 are excluded for these items. Ind AS 113 does not apply to leasing transactions within Ind AS 116. It still applies to fair value measurements required for other purposes, for example the fair value of plan assets, or the fair value of an underlying asset when another standard needs it, because those are not leasing transactions. Net realisable value and value in use are measurements similar to fair value but not fair value. Fair value less costs of disposal is not excluded.
Disclosure-only exemptions: Disclosures of Ind AS 113 are not required for: plan assets at fair value under Ind AS 19; retirement benefit plan investments at fair value under Ind AS 26; assets whose recoverable amount is fair value less costs of disposal under Ind AS 36; These are separate from the exclusions above. Measurement rules of Ind AS 113 still apply to these items. Fair value less costs of disposal under Ind AS 36 is measured using Ind AS 113, and only its disclosures are exempt. Value in use is the excluded measure.
Fair value vs entry price: Fair value (exit price) ≠ transaction price (entry price) by default; Check whether the transaction price represents fair value at initial recognition.
Fair value (definition): Fair value = price received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date; It is an exit price and market-based, not entity-specific.
Fair value when a principal market exists: Fair value = price in principal market − transport costs; Transaction costs are not deducted. Use this even if another market gives a higher price.
Fair value when there is no principal market: Fair value = price in most advantageous market − transport costs; Transaction costs are not deducted from the fair value.
Most advantageous market test: Net amount = price − transport costs − transaction costs (choose the market with the highest net amount); For liabilities, choose the market that minimises the net amount paid. This test only selects the market.
Principal market presumption: Principal market = market the entity normally uses to sell the asset, unless evidence suggests another market; The entity needs no exhaustive search, but must consider all reasonably available information.
Three tests of highest and best use: Physically possible → Legally permissible → Financially feasible; A use must pass all three. Choose, among passing uses, the one that maximises value to market participants.
Financial feasibility test: Income or cash flows from the alternative use, after conversion costs, must give the return market participants require; select the use giving the highest value; Conversion costs are taken into account in the cash flows of the alternative use. Compare the resulting value with the value under the current use.
Presumption: Current use = highest and best use, unless market factors suggest otherwise; Applies to the viewpoint of market participants, not the entity's intention.
Valuation premise: In combination with other assets / liabilities OR stand-alone; Choose the premise that gives maximum value to market participants.
Fair value adjustments: Fair value = price in principal (or most advantageous) market, adjusted for transport cost only where location is a characteristic of the asset; transaction costs not deducted; This is a price rule and is not linked to the valuation premise.
Transaction price vs fair value: Transaction price = entry price; Fair value = exit price; They are different concepts. They may be equal at initial recognition, but you must test it.
Day-one gain or loss: Day-one gain or loss = Fair value − Transaction price (for an asset); For a liability, the sign reverses: gain if fair value of the liability is less than the proceeds received. Recognise in profit or loss unless the relevant Ind AS says otherwise or the difference is in substance an owner transaction.
Situations where transaction price may not equal fair value: Related party deal | Duress or forced sale | Different unit of account | Different market; These are indicators to assess. They do not automatically mean a difference exists.
Financial instruments (Ind AS 109 link): Fair value ≠ transaction price: gain or loss in P&L only if fair value is based on a Level 1 price or only observable inputs; else defer the difference; Deferred difference is recognised later only to the extent it arises from a change in a factor market participants would consider, such as time.
Present value (discrete cash flows): PV = Σ [CFt ÷ (1 + r)^t]; CFt is the expected cash flow in period t and r is the discount rate. Cash flows and rate must be consistent in currency, nominal or real terms, pre- or post-tax, and risk treatment.
Discount rate adjustment technique: PV = Σ [Contractual or promised CF ÷ (1 + risk-adjusted r)^t]; Uses promised or most likely cash flows. The rate carries the risk premium, derived from observed rates for comparable instruments.
Method 1 expected present value: PV = Σ [Risk-adjusted expected CF ÷ (1 + risk-free r)^t]; Expected cash flows are probability-weighted and reduced by a cash-flow risk premium (certainty-equivalent). Discount at the risk-free rate.
Method 2 expected present value: PV = Σ [Probability-weighted expected CF ÷ (1 + risk-free r + risk premium)^t]; Expected cash flows are not risk-adjusted. The rate includes a risk premium.
Calibration rule: If transaction price = fair value at initial recognition and an unobservable-input technique is used, calibrate so the technique gives the transaction price at initial recognition.; Applies to the technique used later. Recalibrate to ensure it reflects current conditions.
Cost approach: Fair value = Current replacement cost − Physical, functional and economic obsolescence; Measures what a market participant buyer would pay, not the seller's historical cost.
Transaction costs: Fair value excludes transaction costs; Transaction costs are not a feature of the asset, so the price in the principal (or most advantageous) market is not adjusted for them. They are considered only when identifying the most advantageous market, which is the one that maximises the net amount received after transaction and transport costs. The resulting fair value is still not adjusted for transaction costs. Transport costs are different: if location is a characteristic of the asset, the market price is adjusted for the costs that would be incurred to transport the asset to that market.
Level 1 inputs: Quoted price (unadjusted) + active market + identical item + accessible at measurement date; All four conditions must hold. If any one fails, check Level 2. Do not apply a blockage factor to a Level 1 price.
Level 2 inputs: Observable inputs other than Level 1 prices (direct or indirect); Includes similar items in active markets, identical or similar items in inactive markets, yield curves, implied volatilities, credit spreads and market-corroborated inputs.
Level 3 inputs: Unobservable inputs, used only when relevant observable inputs are not available; Reflect market participant assumptions, including risk. Own data is a starting point and must be adjusted for contrary market information.
Level of the whole measurement: Level of the lowest-level input that is significant to the entire measurement; Significance is a judgement. A technique with one significant Level 3 input is a Level 3 measurement.
Activity significantly decreased: Evaluate whether the transaction is orderly → weight the price → consider changing or combining techniques; The objective stays an exit price in an orderly transaction under current market conditions. Do not ignore transaction prices automatically and do not use a distressed price as fair value.
Disclosure for every class (recurring and non-recurring): Fair value at the end of the period + hierarchy level + (Level 2 and 3) technique and inputs + any change in technique with reasons; For non-recurring items also state the reason for the measurement. For Level 3 measurements in the balance sheet, give quantitative information about significant unobservable inputs.
Additional disclosures for recurring Level 3: Opening balance + gains/losses in P&L + gains/losses in OCI + purchases − sales + issues − settlements + transfers into Level 3 − transfers out of Level 3 = Closing balance; Show transfers into Level 3 and transfers out of Level 3 as separate lines, with the reasons. Also disclose the line items where gains and losses are shown, the unrealised portion for items held at the reporting date, the valuation process, and a narrative sensitivity of fair value to unobservable inputs.
Additional disclosures for recurring Level 1 and 2: Transfers between Level 1 and Level 2: amounts, reasons, and the policy for deciding when a transfer occurred; The policy must be applied consistently to transfers in and transfers out.
Fair value disclosed but not measured at fair value: Disclose the level, and for Level 2 and 3 the technique and inputs; for non-financial assets, state if the highest and best use differs from current use; Examples are investment property under the cost model and borrowings at amortised cost. Quantitative information on unobservable inputs is not required for these disclosure-only items.
Transition rule: Prospective application from the start of the annual period of initial application; the disclosure requirements need not be applied to comparative information for periods before initial application; Do not restate earlier fair values. First-time adopters follow Ind AS 101 and Ind AS 1 for the comparatives they present.

Quick revision

Fair value = exit price: price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.
It is a market-based measure, not entity-specific; use the assumptions market participants would use.
Use the principal market; if there is none, use the most advantageous market.
The price in the principal market is adjusted for transport costs only if location is a characteristic of the asset. Transaction costs are not deducted.
Highest and best use must be physically possible, legally permissible and financially feasible.
For liabilities, assume transfer to a market participant, and the liability's non-performance risk, including own credit risk, is reflected.
Fair value at initial recognition often equals the transaction price, but not always, for example in related party deals or forced sales.
Three approaches: market, cost (current replacement cost) and income (converts future amounts such as cash flows, income or expenses to a single current, discounted amount).
Maximise relevant observable inputs and minimise unobservable ones.
Level 1 is unadjusted quoted prices for identical items in an active market; Level 2 is other observable inputs; Level 3 is unobservable inputs.
The whole measurement is classified at the level of the lowest-level input that is significant to it.
Disclosure is more extensive for Level 3 and for recurring measurements.

Common mistakes

Saying Ind AS 113 requires assets to be carried at fair value. Fix: State that Ind AS 113 only gives the method. Other Ind AS decide when fair value is used.
Treating NRV under Ind AS 2 or value in use under Ind AS 36 as fair value. Fix: Remember they are measures similar to, but not, fair value. They are excluded from Ind AS 113.
Choosing the market with the highest price as the principal market. Fix: The principal market is the one with the greatest volume and activity. Use the most advantageous market only when there is no principal market.
Deducting transaction costs from fair value. Fix: Transaction costs are not part of fair value. Use them only to select the most advantageous market.
Using the entity's intended use as the highest and best use. Fix: Always value from the market participants' viewpoint. Management's intention is irrelevant to the fair value.
Skipping the legal permissibility test, or treating a zoning restriction as absolute. Fix: Check the restriction. If it is reasonably likely to be changed, consider it, including the cost and time of change; otherwise reject the use.
Assuming transaction price is always fair value. Fix: State the presumption, then check the four indicators from Ind AS 113 against the facts.
Assuming transaction price never equals fair value when parties are related. Fix: Say that a related party deal may be at market terms. Look for evidence the price departs from market.
Treating the three approaches as a free choice or as a ranking. Fix: Say that the technique must be appropriate and have enough data, and that observable inputs must be maximised. Several techniques may be used and weighed.
Deducting transaction costs from fair value. Fix: Fair value is not adjusted for transaction costs. They are treated under the relevant Ind AS.

Exam tips

In theory answers, quote the definition fully: exit price, orderly transaction, market participants, measurement date.
For exclusion questions, list Ind AS 102, Ind AS 116 and the NRV and value in use examples. Add the disclosure exemptions separately.
In case MCQs, look for words like forced, distressed, urgent or entity-specific. They signal a price that is not fair value.
Always state that Ind AS 113 gives the method and other standards decide when to use fair value. This sentence earns marks.
Write the market decision in words first (principal or most advantageous), then the calculation. Examiners award marks for the logic.
In every numerical case, ask: is a principal market named? That decides if you compute net amounts at all.
Keep a clear line: transport costs adjust the price, transaction costs only help choose the market.
In theory answers, mention that the entity must have access to the market and that participants are independent, knowledgeable, able and willing.