What does this standard include?

This standard prescribes fair valuation of all types of assets and liabilities
But does not prescribe
 which assets and liabilities to be fair valued and
 whether to consider units individual or consolidated.

This standard is not applicable

1. Share Based Payments (Ind AS 102)
2. Recoverable Amount (Ind AS 36)
3. Net Realizable Value (Ind AS 2)
4. Lease Transactions (Ind AS 116)
 Important Fair Valuation Basics
1. Meaning
Price to be received by selling an asset and amount to be paid
for settlement of liability
 in orderly transaction
 between market participants
 at measurement date

2. Orderly transaction
Transaction without force. Sale of asset and settlement of
liability in case of liquidation is not treated as orderly
transaction.
3. Market Participants
 Knowledgeable
 Not related
 Willingness of entering into transaction
 Capacity of entering into transaction
4. Measurement date
Date on which valuation is done.

5. Exit price
Value must be based on exit price

6. Difference between Financial liability and non financial

liability
Whether the liability is an obligation to deliver cash (a
financial liability) or an obligation to deliver goods or
services (a non-financial liability).
 Price for Fair Valuation
Preference 1: Price for fair
valuation shall be based
on Principal Market i.e. a
market with highest level
of activity.
Preference 2: Price for fair
valuation shall be taken
from Most Advantageous
Market i.e. a market where
realization is highest.

Note:
 Transaction cost is not uniform hence not adjusted in fair value.
 Transportation cost is uniform and hence adjusted in fair value.
Transaction value is equal to Fair value except
When transaction When transaction Any difference in
transaction value
is not entered in is done under any and fair value is
principal market force treated as per the
relevant Standard.

When transaction When transaction

is done between is done in business
related parties combination
 Principle of Valuation

Liabilities and
Assets Equity

Liabilities and
Liabilities that are
Non- Financial Equities that are
Financial Assets not asset for other
Assets asset for other
party
party

Category 1 Category 3
Category 2
Category 1: Non Financial Asset
 Non financial asset is an asset without contract.
 Non financial asset shall be valued on the basis of highest
and best use principle.
 Highest and best use must consider:
i. Physically possible alternatives
ii. Legally permissible
iii. Considering all market specific restrictions
iv. Valuation must be based on potential use
v. If potential use can not be ascertained then value
can be taken on the basis of current use.
 Valuation must consider financial feasibility.
 Examples: PPE, Investment property, Intangible asset,
Capital WIP, Intangible under development, biological
assets, inventory etc.
 Category 2: Financial Asset
 Financial asset is an asset with contract.
 Financial asset are either equity or liability for another entity.
 Grading of Fair Value:
i. Level 1: Quoted market closing price at stock exchange
without any adjustment.
ii. Level 2: Other Observable Input from value of similar asset
or liability in market with entity specific adjustment.
iii. Level 3: Valuation technique is used where no observable
value of asset or liability is available.
 Examples: Investment in Equity shares/Debentures/Bonds,
loan receivable, debtors and other receivables.
 Category 3: Liability that is not Asset
for other Party
 The fair value of a financial liability with a demand feature
is not less than the amount payable on demand, discounted
from the first date that the amount could be required to be
paid.
 Fair value shall be calculated using valuation technique
 The fair value of a liability reflects the effect of non-
performance risk. Nonperformance risk includes, but may
not be limited to, an entity's own credit risk
Examples: Demand deposit, Decommissioning Liability
I. Market Approach
 This approach uses prices and other relevant information generated by
market transaction involving identical or comparable asset/liability or group
of asset/liability.
 Fair Market Value = Market Transaction Value of similar/comparable asset
or liability
II. Income Approach
 In this case valuation is based on Present Value Technique.

III. Cost Approach

 In this case valuation shall include replacement cost
approach or historical cost approach
 Forms of market for
calculating fair value
Exchange Dealer Broker Principal
Market Market Market Market

This is the most Dealer means an Here buyer and

Where broker is seller are
efficient/strong entity which is ready aware of the perfect
market. Value is to buy/sell asset at independent.
match between Price is subject to
considered without any time at given buyer and seller.
any adjustment price. But this is not negotiation.
Price is not pure
pure price and hence and hence
adjustment is adjustment is
needed. required.
 Ind AS 113, provides guidelines for basic valuation of assets
and liabilities separately, rather than on net basis.
 However there are situations where net valuation is permitted.
For example- Fair value of Derivative which are being netted
with all existing open position can be made on net basis.
 Valuation Base:
i. Asset Base, if Asset > Liability
ii. Liability Base, if Liability > Asset
 Rule applicable is case of Net Valuation
i. Other participants also manage similar risk on Net basis.
ii. There should be same information and market practice
available for making these assets and liabilities on net
basis.
General Industry Practice of Fair Valuation
S.no Asset/ Level 1 Level 2 Level 3
Liability

1. Property, - Replacement Discounted Cashflow

Plant and price
Equipment
(PPE)
2. Capital WIP - - Discounted Cashflow or cost
approach

3. Investment - Replacement Discounted Cashflow or rent

Property price capitalization

4. Biological - Market Value Discounted Cashflow

Asset
5. Loan given - - Discounted Cashflow
(Asset)
General Industry Practice of Fair Valuation
S.n Asset/ Level 1 Level 2 Level 3
o Liability

6. Debtor or bills - - Original invoice

receivable
7. Investment in Quoted Price Price of similar Dividend/
equity shares on stock asset after Interest/ Earning
or Debentures exchange adjustments Capitalization
(Asset)
8. Equity Shares Quoted Price Price of similar Dividend
and on stock liability after payable/
debentures exchange adjustments Interest
issued (Equity payable/
or Liability) Capitalization
9. Loan liability - - Discounted
Cashflow
10. Creditors or - - Original invoice
bill payable