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CA Final · Financial Reporting · Ind AS 113 Fair Value Measurement

Kaveri Pharma Ltd must determine the fair value of a financial liability it owes. The CFO says, 'Fair value of a liability is what we would need to pay to settle it with the lender today, because only we are affected.' Under the definition in Ind AS 113, which view is correct?

For a liability, fair value is the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date. It is a transfer price viewed from the market participant perspective, not the amount to settle with the specific lender or the original proceeds.

  1. AFair value is the price paid to transfer the liability in an orderly transaction between market participants at the measurement dateCorrect
  2. BFair value is the amount the entity would pay to extinguish the obligation with the specific lender on the reporting date
  3. CFair value equals the original proceeds received, as the liability is not sold but repaid
  4. DFair value is the entity's own estimate of future outflows, undiscounted, since no market exists for liabilities

Explanation

The standard defines fair value for a liability as the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date. This is a transfer concept and not a settlement with the specific counterparty. The CFO's view is therefore not consistent with the definition, and neither is original proceeds or undiscounted entity estimates.

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