CMA Final · Corporate Financial Reporting

Fair Value Measurement (Ind AS 113): 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; Learn the key phrases: exit price, orderly transaction, market participants, measurement date.
Objective of the standard: Ind AS 113 (a) defines fair value; (b) sets a single framework for measuring it; (c) requires disclosures; Three limbs. Examiners often ask you to list them.
General scope rule: Applies when another Ind AS requires or permits fair value measurements or disclosures, including measures based on fair value such as fair value less costs to sell; Exceptions are only those in the scope paragraphs.
Scope exclusions: Not applied to: (a) share-based payments under Ind AS 102; (b) leasing under Ind AS 116; (c) measures similar to but not fair value, e.g. NRV (Ind AS 2), value in use (Ind AS 36); The exclusion covers both measurement and disclosure requirements.
Nature of fair value: Market-based, not entity-specific; Your own intentions or special benefits do not set fair value.
Definition of fair value (para 9): Fair value = price to sell an asset / transfer a liability in an orderly transaction between market participants at the measurement date; An exit price, from the viewpoint of market participants.
Market to use (para 16): Principal market; if none, most advantageous market; Most advantageous market is chosen after considering transaction and transport costs.
Fair value when location matters: Fair value = Price in the market − Transport costs; Applies if location is a characteristic of the asset. Transaction costs are not deducted.
Net proceeds to compare markets: Net amount = Price − Transport costs − Transaction costs; Used only to select the most advantageous market, not to state fair value.
Transaction cost test: Directly from and essential to the sale AND would not be incurred if the sale decision were not made; Both criteria must be met. Transaction costs exclude transport costs.
Three tests of highest and best use: Physically possible → Legally permissible → Financially feasible; Para 28. The use must pass all three. Financial feasibility includes the cost of converting the asset to that use.
Perspective rule: Highest and best use = market participants' view, not the entity's intention; Para 29. Current use is presumed to be highest and best use unless market or other factors suggest otherwise.
Valuation premise: in combination: Fair value = price to sell the asset assuming use with complementary assets and associated liabilities available to market participants; Para 31(a). Liabilities include those funding working capital, not those funding assets outside the group.
Valuation premise: stand-alone: Fair value = price received from market participants who would use the asset on a stand-alone basis; Para 31(b).
Defensive use rule: Measure at highest and best use even if entity does not use the asset actively; Para 30. Example: an acquired intangible held to block competitors.
Unit of account: Asset is sold consistent with the unit of account in other Ind AS, even under the in-combination premise; Para 32. The buyer is assumed to already hold the complementary assets.
Transfer notion: Fair value of liability = price paid to transfer it to a market participant at the measurement date; The liability remains outstanding. The transferee must fulfil it. It is not the settlement price with the creditor.
Non-performance risk (para 42): Fair value reflects non-performance risk; risk is the same before and after transfer; Includes, but is not limited to, own credit risk.
Demand feature (para 47): Fair value ≥ amount payable on demand, discounted from the first date it could be required to be paid; Example: a demand deposit. This is a floor.
Transfer restrictions (para 45): No separate input or adjustment for a restriction preventing transfer; Applies to liabilities and own equity instruments.
Risk premium in present value (B33): Risk premium goes either in the cash flows (higher outflows) or in the discount rate (lower rate), not both; Prevents double-counting or omission of risk.
Credit enhancement (para 44): Separately accounted inseparable third-party enhancement is excluded; use own credit standing; Do not use the guarantor's credit standing.
Objective of valuation techniques: Fair value = price in an orderly transaction between market participants at the measurement date, under current market conditions; Para 62. All three approaches aim at this exit price.
Cost approach (replacement cost): Fair value ≈ Current replacement cost of a substitute asset of comparable utility − Obsolescence (physical + functional + economic); Paras B8 and B9. Obsolescence is broader than book or tax depreciation.
Income approach (present value): Fair value = Σ [Expected cash flow in year t ÷ (1 + r)^t]; Converts future amounts to one discounted amount (Appendix A, B11). Use market participant expectations and a market-based rate.
Market approach (multiple): Fair value = Relevant metric of the subject × Selected multiple from comparables; B6. Selecting the multiple within the range needs judgement and adjustment for differences.
Multiple techniques: Fair value = point within the range of indications most representative of fair value; Para 63 and B40. Consider the reasonableness of the range. A wide range signals further analysis is needed.
Calibration: Technique result at initial recognition = Transaction price (where the transaction price is fair value); Para 64. Applies when unobservable inputs will be used in later periods.
Level 1 input: Quoted price (unadjusted) + active market + identical item + accessible at measurement date; All four conditions must hold. Miss one and it is not Level 1.
Level 2 input: Observable, directly or indirectly, other than Level 1 quoted prices; Includes similar items in active markets, identical or similar items in inactive markets, interest rates, yield curves, implied volatilities, credit spreads and market-corroborated inputs. For a contractual term, it must be observable for substantially the full term.
Level 3 input: Unobservable inputs for the asset or liability; Used only to the extent relevant observable inputs are not available.
Level of the whole measurement: Level = lowest level of any input that is significant to the entire measurement; An observable input adjusted by a significant unobservable adjustment makes the measurement Level 3.
Adjustments to Level 1: No adjustment to a Level 1 input, except in three stated cases; The cases are a large number of similar items priced by matrix pricing, a quoted price that no longer represents fair value at the measurement date, and a liability or own equity instrument priced from the identical item held as an asset. An adjustment moves the measurement to a lower level. For the third case, no adjustment means Level 1.
Level 3 disclosure (recurring): Narrative sensitivity to unobservable inputs; for financial instruments, effect of reasonably possible alternative assumptions if significant; Significance is judged against profit or loss, total assets or total liabilities, or total equity when changes go through OCI.
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; This is an exit price. The transaction price is an entry price.
Day-one gain or loss: Day-one gain or loss = Fair value − Transaction price (for an asset acquired); For an asset, fair value above price paid is a gain. For a liability assumed, compare amount received with the fair value to transfer it. Recognise in profit or loss unless the applicable Ind AS says otherwise.
Situations where price may not equal fair value: Related parties; duress; different unit of account (including transaction costs in the price); different market; These come from Appendix B (paragraph B4). They are examples of conditions, not a closed test.
Transaction costs: Fair value is not adjusted for transaction costs (paragraph 25); Account for transaction costs under other Ind AS. They are specific to the transaction, not a characteristic of the asset.
Calibration: At initial recognition: technique result = transaction price (when the price is fair value and unobservable inputs are used later); Paragraph 64.
Objectives (para 91): Techniques and inputs used + effect of recurring Level 3 on profit or loss / OCI; Every disclosure traces back to these two objectives.
Basic disclosures (para 93(a)-(b)): Fair value at end of period + reasons (non-recurring only) + hierarchy level; Applies to recurring and non-recurring measurements, by class.
Level 1 / Level 2 transfers (para 93(c)): Transfers between Level 1 and 2 + reasons + policy for when transfers are deemed to occur; Required for recurring measurements held at period end. Transfers in and out are disclosed and discussed separately.
Level 2 and 3 technique (para 93(d)): Description of valuation technique(s) and inputs; change in technique and reason; Applies to recurring and non-recurring. For Level 3, add quantitative information on significant unobservable inputs.
Level 3 reconciliation (para 93(e)): Opening balance ± gains/losses in P&L ± gains/losses in OCI ± purchases, sales, issues, settlements (each separately) ± transfers into/out of Level 3 = Closing balance; Recurring Level 3 only. Transfers in and out are disclosed separately with reasons and policy.
Unrealised gains (para 93(f)): Part of P&L gain or loss in 93(e)(i) relating to assets and liabilities held at period end + P&L line item; Recurring Level 3 only.
Level 3 valuation process (para 93(g)): Description of valuation processes; Applies to recurring and non-recurring Level 3.
Level 3 sensitivity (para 93(h)): Narrative sensitivity + interrelationships; for financial instruments, effect of reasonably possible alternative assumptions if significant; Recurring Level 3 only.
Highest and best use (para 93(i)): If highest and best use of a non-financial asset differs from current use: state the fact and why; Recurring and non-recurring.
Not measured at fair value but fair value disclosed (para 97): Disclose 93(b), (d) and (i) only; no quantitative Level 3 input data; No other Ind AS 113 disclosures needed for these items.

Quick revision

Fair value is an exit price in an orderly transaction between market participants at the measurement date, under current market conditions.
Ind AS 113 says how to measure fair value; other Ind AS say when to use it.
Paragraph B2 checklist: asset or liability (unit of account), valuation premise, principal or most advantageous market, valuation technique.
Highest and best use is judged from the market participant's view, even if the entity intends a different use.
The entity's current use is presumed to be the highest and best use unless market or other factors suggest another use would maximise value.
A use must be physically possible, legally permissible and financially feasible.
Valuation premise is either in combination with other assets or liabilities, or stand-alone.
Even with the in-combination premise, the asset is sold per its unit of account, assuming the market participant already holds the complementary assets and liabilities.
Three techniques: market approach, cost approach, income approach. Use one or more consistent with them.
An entity that holds an asset defensively still measures its fair value at its highest and best use by market participants.
Level 3 recurring measurements need a narrative on the sensitivity to unobservable inputs.
If highest and best use differs from current use, disclose that fact and why the asset is used differently.

Common mistakes

Treating fair value as the price paid to buy the asset (an entry price). Fix: Fair value is an exit price: the price received to sell the asset or paid to transfer the liability.
Using net realisable value of inventory or value in use as fair value. Fix: The standard says these only resemble fair value. NRV (Ind AS 2) and value in use (Ind AS 36) are outside its scope.
Deducting transaction costs from the price to report fair value. Fix: Para 25 says the price is not adjusted for transaction costs. Use them only to choose the most advantageous market.
Ignoring transport costs for a commodity. Fix: Transaction costs exclude transport costs. If location is a characteristic of the asset, adjust the price for transport to the market (para 26).
Using the entity's intended use as the highest and best use. Fix: Use the market participant's view. Even defensive or idle holding is measured at highest and best use.
Choosing the highest-value use without checking legal permissibility. Fix: Screen for physical and legal limits first. A use barred by zoning is not available.
Valuing a liability at the amount needed to settle it with the creditor. Fix: Ind AS 113 uses the transfer notion. The liability stays outstanding with the transferee.
Assuming own credit risk is ignored, or resets on transfer. Fix: Non-performance risk, including own credit risk, is reflected and assumed the same before and after transfer.
Treating the cost approach as historical cost less book depreciation. Fix: Use current replacement cost of a substitute with comparable utility, then deduct physical, functional and economic obsolescence.
Deducting only physical wear when computing replacement-cost-based fair value. Fix: Check the question for technology change (functional) and falling demand or external factors (economic) and deduct those too.

Exam tips

Memorise the definition word for word in substance: exit price, orderly transaction, market participants, measurement date. Marks often hinge on these terms.
For scope questions, list the three exclusions and name the governing standard for each: Ind AS 102, Ind AS 116, and Ind AS 2 or Ind AS 36.
In MCQs, watch options that call NRV or value in use fair value. Those are the usual traps.
In case answers, say that fair value is market-based, then apply it to the facts. Do not use the entity's own intentions.
Write the three objectives of the standard as a short list if asked for its purpose.
Write the sequence: asset, market, participants, price. Examiners award marks for each step.
In numerical questions, state clearly that transaction costs are used for choosing the market but not deducted from fair value.
Always check for a principal market before comparing prices.