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CMA Final · Corporate Financial Reporting · Fair Value Measurement (Ind AS 113)

Under Ind AS 113, fair value is 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. Bharat Steels Ltd must measure the fair value of a liability it owes. The company could settle the obligation internally for ₹4.2 crore. A market participant would demand ₹4.8 crore to take over (transfer) the same obligation in an orderly transaction at the measurement date. The original amount received when the liability arose was ₹4.0 crore. Which amount is the fair value of the liability?

The fair value is ₹4.8 crore. Ind AS 113 defines fair value of a liability as the price paid to transfer it in an orderly transaction between market participants at the measurement date. The entity's internal settlement cost and the original proceeds are not transfer prices.

  1. A₹4.0 crore
  2. B₹4.2 crore
  3. C₹4.8 croreCorrect
  4. D₹0.6 crore

Explanation

Fair value of a liability is the price that would be paid to transfer it in an orderly transaction between market participants at the measurement date. That price is ₹4.8 crore. The internal settlement cost of ₹4.2 crore is entity-specific, and the ₹4.0 crore is a historical amount; neither is a transfer price. The ₹0.6 crore is merely the gap between ₹4.8 crore and ₹4.2 crore.

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