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Fair Value Measurement

Ind AS - 113 - B. Indian Accounting Standards (Ind AS) - Companies Law - Ind AS - 113 - Indian Accounting Standard (Ind AS) 113 (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles.) Objective 1 This Ind AS: (a) defines fair value; (b) sets out in a single Ind AS a framework for measuring fair value; and (c) requires disclosures about s. 2 Fair value is a market-based measurement, no .....

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ditions (ie an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability). 3 When a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. Because fair value is a market-based measurement, it is measured using the assumptions that market participants would use when .....

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mits s or disclosures about s (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except as specified in paragraphs 6 and 7. 6 The measurement and disclosure requirements of this Ind AS do not apply to the following: (a) share-based payment transactions within the scope of Ind AS 102, Sharebased Payment; (b) leasing transactions within the scope of Ind AS 17, Leases; and (c) measurements that have some similarities to fair value .....

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d subsequent measurement if fair value is required or permitted by other Ind ASs. Measurement Definition of fair value 9 This Ind AS defines fair value as 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. 10 Paragraph B2 describes the overall approach. The asset or liability 11 A is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into accou .....

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arket participants. 13 The asset or liability measured at fair value might be either of the following: (a) a stand-alone asset or liability (eg a financial instrument or a non-financial asset); or (b) a group of assets, a group of liabilities or a group of assets and liabilities (eg a cash-generating unit or a business). 14 Whether the asset or liability is a stand-alone asset or liability, a group of assets, a group of liabilities or a group of assets and liabilities for recognition or disclosu .....

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liability takes place either: (a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for the asset or liability. 17 An entity need not undertake an exhaustive search of all possible markets to identify the principal market or, in the absence of a principal market, the most advantageous market, but it shall take into account all information that is reasonably available. In the absence of evidence to the contrary, the ma .....

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e measurement date. 19 The entity must have access to the principal (or most advantageous) market at the measurement date. Because different entities (and businesses within those entities) with different activities may have access to different markets, the principal (or most advantageous) market for the same asset or liability might be different for different entities (and businesses within those entities). Therefore, the principal (or most advantageous) market (and thus, market participants) sh .....

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or the transfer of a liability at the measurement date, a shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owes the liability. That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability. Market participants 22 An entity shall measure the fair value of an asset or a liability using the assumptions that market participants would use when pricing the ass .....

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a transaction in that market. The price 24 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. 25 The price in the principal (or most advantageous) market used to measure the fair value of the asset or l .....

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e in the principal (or most advantageous) market shall be adjusted for the costs, if any, that would be incurred to transport the asset from its current location to that market. Application to non-financial assets Highest and best use for non-financial assets 27 A of a non-financial asset takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its high .....

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of the asset that market participants would take into account when pricing the asset (eg the zoning regulations applicable to a property). (c) A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that .....

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intend not to use the asset according to its highest and best use. For example, that might be the case for an acquired intangible asset that the entity plans to use defensively by preventing others from using it. Nevertheless, the entity shall measure the fair value of a non-financial asset assuming its highest and best use by market participants. Valuation premise for non-financial assets 31 The highest and best use of a non-financial asset establishes the valuation premise used to measure the .....

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would be received in a current transaction to sell the asset assuming that the asset would be used with other assets or with other assets and liabilities and that those assets and liabilities (ie its complementary assets and the associated liabilities) would be available to market participants. (ii) Liabilities associated with the asset and with the complementary assets include liabilities that fund working capital, but do not include liabilities used to fund assets other than those within the .....

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the asset is the price that would be received in a current transaction to sell the asset to market participants that would use the asset on a stand-alone basis. 32 The of a non-financial asset assumes that the asset is sold consistently with the unit of account specified in other Ind ASs (which may be an individual asset). That is the case even when that assumes that the highest and best use of the asset is to use it in combination with other assets or with other assets and liabilities because a .....

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t the measurement date. The transfer of a liability or an entity s own equity instrument assumes the following: (a) A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation. The liability would not be settled with the counterparty or otherwise extinguished on the measurement date. (b) An entity s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated .....

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. 36 In all cases, an entity shall maximise the use of relevant observable inputs and minimise the use of unobservable inputs to meet the objective of a , which is to estimate the price at which an orderly transaction to transfer the liability or equity instrument would take place between market participants at the measurement date under current market conditions. Liabilities and equity instruments held by other parties as assets 37 When a quoted price for the transfer of an identical or a simil .....

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nother party as an asset, if that price is available. (b) if that price is not available, using other observable inputs, such as the quoted price in a market that is not active for the identical item held by another party as an asset. (c) if the observable prices in (a) and (b) are not available, using another valuation technique, such as: (i) an income approach (eg a present value technique that takes into account the future cash flows that a market participant would expect to receive from hold .....

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that the price of the asset does not reflect the effect of a restriction preventing the sale of that asset. Some factors that may indicate that the quoted price of the asset should be adjusted include the following: (a) The quoted price for the asset relates to a similar (but not identical) liability or equity instrument held by another party as an asset. For example, the liability or equity instrument may have a particular characteristic (eg the credit quality of the issuer) that is different .....

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ir value of the issuer s liability, not the fair value of the combined package. Thus, in such cases, the entity would adjust the observed price for the asset to exclude the effect of the third-party credit enhancement. Liabilities and equity instruments not held by other parties as assets 40 When a quoted price for the transfer of an identical or a similar liability or entity s own equity instrument is not available and the identical item is not held by another party as an asset, an entity shall .....

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obligation (see paragraphs B31-B33). (b) the amount that a market participant would receive to enter into or issue an identical liability or equity instrument, using the assumptions that market participants would use when pricing the identical item (eg having the same credit characteristics) in the principal (or most advantageous) market for issuing a liability or an equity instrument with the same contractual terms. Non-performance risk 42 The fair value of a liability reflects the effect of n .....

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led. That effect may differ depending on the liability, for example: (a) whether the liability is an obligation to deliver cash (a financial liability) or an obligation to deliver goods or services (a non-financial liability). (b) the terms of credit enhancements related to the liability, if any. 44 The fair value of a liability reflects the effect of non-performance risk on the basis of its unit of account. The issuer of a liability issued with an inseparable third-party credit enhancement that .....

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ir value of a liability or an entity s own equity instrument, an entity shall not include a separate input or an adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the item. The effect of a restriction that prevents the transfer of a liability or an entity s own equity instrument is either implicitly or explicitly included in the other inputs to the . 46 For example, at the transaction date, both the creditor and the obligor accepted the transacti .....

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nsfer. Financial liability with a demand feature 47 The fair value of a financial liability with a demand feature (eg a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid. Application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk 48 An entity that holds a group of financial assets and financial liabilities is exposed to market risks (as def .....

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ved to sell a net long position (ie an asset) for a particular risk exposure or paid to transfer a net short position (ie a liability) for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. Accordingly, an entity shall measure the fair value of the group of financial assets and financial liabilities consistently with how market participants would price the net risk exposure at the measurement date. 49 An entit .....

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anagement personnel, as defined in Ind AS 24, Related Party Disclosures; and (c) is required or has elected to measure those financial assets and financial liabilities at fair value in the balance sheet at the end of each reporting period. 50 The exception in paragraph 48 does not pertain to financial statement presentation. In some cases the basis for the presentation of financial instruments in the balance sheet differs from the basis for the measurement of financial instruments, for example, .....

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ity shall make an accounting policy decision in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to use the exception in paragraph 48. An entity that uses the exception shall apply that accounting policy, including its policy for allocating bid-ask adjustments (see paragraphs 53-55) and credit adjustments (see paragraph 56), if applicable, consistently from period to period for a particular portfolio. 52 The exception in paragraph 48 applies only to fina .....

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the exception in paragraph 48 to measure the fair value of a group of financial assets and financial liabilities managed on the basis of the entity s net exposure to a particular market risk (or risks), the entity shall apply the price within the bid-ask spread that is most representative of fair value in the circumstances to the entity s net exposure to those market risks (see paragraphs 70 and 71). 54 When using the exception in paragraph 48, an entity shall ensure that the market risk (or ris .....

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being identical shall be taken into account in the of the financial assets and financial liabilities within the group. 55 Similarly, the duration of the entity s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities shall be substantially the same. For example, an entity that uses a 12-month futures contract against the cash flows associated with 12 months worth of interest rate risk exposure on a five-year financial instrument within a group .....

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he entity s net exposure to the credit risk of that counterparty or the counterparty s net exposure to the credit risk of the entity in the when market participants would take into account any existing arrangements that mitigate credit risk exposure in the event of default (eg a master netting agreement with the counterparty or an agreement that requires the exchange of collateral on the basis of each party s net exposure to the credit risk of the other party). The shall reflect market participa .....

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sfer the liability (an exit price). Entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not necessarily transfer liabilities at the prices received to assume them. 58 In many cases the transaction price will equal the fair value (eg that might be the case when on the transaction date the transaction to buy an asset takes place in the market in which the asset would be sold). 59 When determining whether fair value at initial recognition equals the tr .....

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s unless that Ind AS specifies otherwise. Valuation techniques 61 An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. 62 The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market part .....

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arket for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate (eg that might be the case when valuing a cash-generating unit). If multiple valuation techniques are used to measure fair value, the results (ie respective indications of fair value) shall be evaluated considering the reasonableness of the range of values indicated by those results. A is the point within that range that is most representative of fair value in the circumstances. 64 If th .....

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there might be a characteristic of the asset or liability that is not captured by the valuation technique). After initial recognition, when measuring fair value using a valuation technique or techniques that use unobservable inputs, an entity shall ensure that those valuation techniques reflect observable market data (eg the price for a similar asset or liability) at the measurement date. 65 Valuation techniques used to measure fair value shall be applied consistently. However, a change in a va .....

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e; (d) valuation techniques improve; or (e) market conditions change. 66 Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate in accordance with Ind AS 8. However, the disclosures in Ind AS 8 for a change in accounting estimate are not required for revisions resulting from a change in a valuation technique or its application. Inputs to valuation techniques General principles 67 Valuation techniques used to measu .....

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a transaction for the asset or liability (see paragraphs 11 and 12). In some cases those characteristics result in the application of an adjustment, such as a premium or discount (eg a control premium or non-controlling interest discount). However, a shall not incorporate a premium or discount that is inconsistent with the unit of account in the Ind AS that requires or permits the (see paragraphs 13 and 14). Premiums or discounts that reflect size as a characteristic of the entity s holding (sp .....

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an entity shall use that price without adjustment when measuring fair value, except as specified in paragraph 79. Inputs based on bid and ask prices 70 If an asset or a liability measured at fair value has a bid price and an ask price (eg an input from a dealer market), the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value regardless of where the input is categorised within the fair value hierarchy (ie Level 1, 2 or .....

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evels (see paragraphs 76-90), the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). 73 In some cases, the inputs used to measure the fair value of an asset or a liability might be categorised within different levels of the fair value hierarchy. In those cases, the is categ .....

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alue hierarchy within which a is categorised. 74 The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation techniques (see paragraph 61). However, the fair value hierarchy prioritises the inputs to valuation techniques, not the valuation techniques used to measure fair value. For example, a developed using a present value technique might be categorised within Level 2 or Level 3, depending on the inputs that are significant to the enti .....

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ld adjust the quoted price to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an unobservable input that is significant to the entire measurement, the measurement would be categorised within Level 3 of the fair value hierarchy. Level 1 inputs 76 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. 77 A quoted price in an active market provides t .....

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market, the most advantageous market for the asset or liability; and (b) whether the entity can enter into a transaction for the asset or liability at the price in that market at the measurement date. 79 An entity shall not make an adjustment to a Level 1 input except in the following circumstances: (a) when an entity holds a large number of similar (but not identical) assets or liabilities (eg debt securities) that are measured at fair value and a quoted price in an active market is available .....

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thod results in a categorised within a lower level of the fair value hierarchy. (b) when a quoted price in an active market does not represent fair value at the measurement date. That might be the case if, for example, significant events (such as transactions in a principal-to-principal market, trades in a brokered market or announcements) take place after the close of a market but before the measurement date. An entity shall establish and consistently apply a policy for identifying those events .....

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required, the result is a categorised within Level 1 of the fair value hierarchy. However, any adjustment to the quoted price of the asset results in a categorised within a lower level of the fair value hierarchy. 80 If an entity holds a position in a single asset or liability (including a position comprising a large number of identical assets or liabilities, such as a holding of financial instruments) and the asset or liability is traded in an active market, the fair value of the asset or liabi .....

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directly or indirectly. 82 If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (a) quoted prices for similar assets or liabilities in active markets. (b) quoted prices for identical or similar assets or liabilities in markets that are not active. (c) inputs other than quoted prices that are observable for the asset or liability, for example: (i) interest .....

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vel of activity in the markets within which the inputs are observed. 84 An adjustment to a Level 2 input that is significant to the entire measurement might result in a categorised within Level 3 of the fair value hierarchy if the adjustment uses significant unobservable inputs. 85 Paragraph B35 describes the use of Level 2 inputs for particular assets and liabilities. Level 3 inputs 86 Level 3 inputs are unobservable inputs for the asset or liability. [ 87 Unobservable inputs shall be used to m .....

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asset or liability, including assumptions about risk. 88 Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and the risk inherent in the inputs to the valuation technique. A measurement that does not include an adjustment for risk would not represent a if market participants would include one when pricing the asset or liability. For example, it might be necessary to include a risk adjustment when there is sig .....

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wn data. In developing unobservable inputs, an entity may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the entity that is not available to other market participants (eg an entity-specific synergy). An entity need not undertake exhaustive efforts to obtain information about market participant assumptions. However, an entity shall take into account al .....

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a recurring or non-recurring basis in the balance sheet after initial recognition, the valuation techniques and inputs used to develop those measurements. (b) for recurring s using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period. 92 To meet the objectives in paragraph 91, an entity shall consider all the following: (a) the level of detail necessary to satisfy the disclosure requirements; (b) how much emphas .....

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ty shall disclose, at a minimum, the following information for each class of assets and liabilities (see paragraph 94 for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this Ind AS) in the balance sheet after initial recognition: (a) for recurring and non-recurring s, the at the end of the reporting period, and for non-recurring s, the reasons for the measurement. Recurring s of asse .....

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its carrying amount). (b) for recurring and non-recurring s, the level of the fair value hierarchy within which the s are categorised in their entirety (Level 1, 2 or 3). (c) for assets and liabilities held at the end of the reporting period that are measured at fair value on a recurring basis, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for those transfers and the entity s policy for determining when transfers between levels are deemed to h .....

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that change and the reason(s) for making it. For s categorised within Level 3 of the fair value hierarchy, an entity shall provide quantitative information about the significant unobservable inputs (eg a market multiple or future cash flows) used in the . An entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the entity when measuring fair value (eg when an entity uses prices from prior tran .....

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cognised in profit or loss, and the line item(s) in profit or loss in which those gains or losses are recognised. (ii) total gains or losses for the period recognised in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognised. (iii) purchases, sales, issues and settlements (each of those types of changes disclosed separately). (iv) the amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons for .....

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ities held at the end of the reporting period, and the line item(s) in profit or loss in which those unrealised gains or losses are recognised. (g) for recurring and non-recurring s categorised within Level 3 of the fair value hierarchy, a description of the valuation processes used by the entity (including, for example, how an entity decides its valuation policies and procedures and analyses changes in s from period to period). (h) for recurring s categorised within Level 3 of the fair value hi .....

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y with that disclosure requirement, the narrative description of the sensitivity to changes in unobservable inputs shall include, at a minimum, the unobservable inputs disclosed when complying with 93(d). (ii) for financial assets and financial liabilities, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, an entity shall state that fact and disclose the effect of those changes. The entity shall disclo .....

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is being used in a manner that differs from its highest and best use. 94 An entity shall determine appropriate classes of assets and liabilities on the basis of the following: (a) the nature, characteristics and risks of the asset or liability; and (b) the level of the fair value hierarchy within which the is categorised. The number of classes may need to be greater for s categorised within Level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and su .....

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viding the disclosures required in this Ind AS if that class meets the requirements in this paragraph. 95 An entity shall disclose and consistently follow its policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred in accordance with paragraph 93(c) and (e)(iv). The policy about the timing of recognising transfers shall be the same for transfers into the levels as for transfers out of the levels. Examples of policies for determining the timing .....

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by paragraph 93(b), (d) and (i). However, an entity is not required to provide the quantitative disclosures about significant unobservable inputs used in s categorised within Level 3 of the fair value hierarchy required by paragraph 93(d). For such assets and liabilities, an entity does not need to provide the other disclosures required by this Ind AS. 98 For a liability measured at fair value and issued with an inseparable third-party credit enhancement, an issuer shall disclose the existence o .....

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que that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). entry price The price paid to acquire an asset or received to assume a liability in an exchange transaction. exit price The price that would be received to sell an asset or paid to transfer a liability. expected cash flow The probability-weighted average (ie mean of the distribution) of possible future cash flows. fair value The price that wou .....

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nt. The is determined on the basis of the value indicated by current market expectations about those future amounts. inputs The assumptions that market participants would use when pricing the asset or liability, including assumptions about risk, such as the following: (a) the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model); and (b) the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Level 1 i .....

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able (ie similar) assets, liabilities or a group of assets and liabilities, such as a business. Market corroborated inputs Inputs that are derived principally from or corroborated by observable market data by correlation or other means. market participants Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics: (a) They are independent of each other, ie they are not related parties as defined in Ind AS 24, altho .....

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to enter into a transaction for the asset or liability, ie they are motivated but not forced or otherwise compelled to do so. most advantageous market The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs. non-performance risk The risk that an entity will not fulfill an obligation. Nonperformance risk includes, but may not be limited to, th .....

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ies; it is not a forced transaction (eg a forced liquidation or distress sale). principal market The market with the greatest volume and level of activity for the asset or liability. risk premium Compensation sought by risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability. Also referred to as a 'risk adjustment'. transaction costs The costs to sell an asset or transfer a liability in the principal (or most advantageous) market f .....

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cation to its principal (or most advantageous) market. unit of account The level at which an asset or a liability is aggregated or disaggregated in an Ind AS for recognition purposes. Unobservable inputs Inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability. Appendix B Application guidance This appendix is an integral part of the Ind AS. B1 The judgeme .....

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ar asset or liability that is the subject of the measurement (consistently with its unit of account). (b) for a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use). (c) the principal (or most advantageous) market for the asset or liability. (d) the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participan .....

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the fair value of the asset might be the same whether the asset is used on a standalone basis or in combination with other assets or with other assets and liabilities. That might be the case if the asset is a business that market participants would continue to operate. In that case, the transaction would involve valuing the business in its entirety. The use of the assets as a group in an ongoing business would generate synergies that would be available to market participants (ie market participa .....

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ed or otherwise configured for use), adjusted for transport and installation costs so that the reflects the current condition and location of the machine (installed and configured for use). (c) an asset s use in combination with other assets or with other assets and liabilities might be incorporated into the through the market participant assumptions used to measure the fair value of the asset. For example, if the asset is work in progress inventory that is unique and market participants would c .....

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air value of an intangible asset because that valuation technique specifically takes into account the contribution of any complementary assets and the associated liabilities in the group in which such an intangible asset would be used. (e) in more limited situations, when an entity uses an asset within a group of assets, the entity might measure the asset at an amount that approximates its fair value when allocating the fair value of the asset group to the individual assets of the group. That mi .....

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e of an asset or a liability at initial recognition if any of the following conditions exist: (a) The transaction is between related parties, although the price in a related party transaction may be used as an input into a if the entity has evidence that the transaction was entered into at market terms. (b) The transaction takes place under duress or the seller is forced to accept the price in the transaction. For example, that might be the case if the seller is experiencing financial difficulty .....

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ket in which the transaction takes place is different from the principal market (or most advantageous market). For example, those markets might be different if the entity is a dealer that enters into transactions with customers in the retail market, but the principal (or most advantageous) market for the exit transaction is with other dealers in the dealer market. Valuation techniques (paragraphs 61-66) Market approach B5 The market approach uses prices and other relevant information generated b .....

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e measurement. B7 Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value some types of financial instruments, such as debt securities, without relying exclusively on quoted prices for the specific securities, but rather relying on the securities relationship to other benchmark quoted securities. Cost approach B8 The cost approach reflects the amount that would be required currently to replace the servi .....

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hysical deterioration, functional (technological) obsolescence and economic (external) obsolescence and is broader than depreciation for financial reporting purposes (an allocation of historical cost) or tax purposes (using specified service lives). In many cases the current replacement cost method is used to measure the fair value of tangible assets that are used in combination with other assets or with other assets and liabilities. Income approach B10 The income approach converts future amount .....

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he intrinsic value of an option; and (c) the multi-period excess earnings method, which is used to measure the fair value of some intangible assets. Present value techniques B12 Paragraphs B13-B30 describe the use of present value techniques to measure fair value. Those paragraphs focus on a discount rate adjustment technique and an expected cashflow (expected present value) technique. Those paragraphs neither prescribe the use of a single specific present value technique nor limit the use of pr .....

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flows or values) to a present amount using a discount rate. A of an asset or a liability using a present value technique captures all the following elements from the perspective of market participants at the measurement date: (a) an estimate of future cash flows for the asset or liability being measured. (b) expectations about possible variations in the amount and timing of the cash flows representing the uncertainty inherent in the cash flows. (c) the time value of money, represented by the rat .....

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ity s (ie the obligor s) own credit risk. General principles B14 Present value techniques differ in how they capture the elements in paragraph B13. However, all the following general principles govern the application of any present value technique used to measure fair value: (a) Cash flows and discount rates should reflect assumptions that market participants would use when pricing the asset or liability. (b) Cash flows and discount rates should take into account only the factors attributable to .....

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an expected present value technique) because the expected cash flows already reflect assumptions about the uncertainty in future defaults; instead, a discount rate that is commensurate with the risk inherent in the expected cash flows should be used. (d) Assumptions about cash flows and discount rates should be internally consistent. For example, nominal cash flows, which include the effect of inflation, should be discounted at a rate that includes the effect of inflation. The nominal risk-free .....

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B15 A using present value techniques is made under conditions of uncertainty because the cash flows used are estimates rather than known amounts. In many cases both the amount and timing of the cash flows are uncertain. Even contractually fixed amounts, such as the payments on a loan, are uncertain if there is risk of default. B16 Market participants generally seek compensation (ie a risk premium) for bearing the uncertainty inherent in the cash flows of an asset or a liability. A should includ .....

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The discount rate adjustment technique (see paragraphs B18-B22) uses a riskadjusted discount rate and contractual, promised or most likely cash flows. (b) Method 1 of the expected present value technique (see paragraph B25) uses riskadjusted expected cash flows and a risk-free rate. (c) Method 2 of the expected present value technique (see paragraph B26) uses expected cash flows that are not risk-adjusted and a discount rate adjusted to include the risk premium that market participants require. .....

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default by the debtor). The discount rate used in the discount rate adjustment technique is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Accordingly, the contractual, promised or most likely cash flows are discounted at an observed or estimated market rate for such conditional cash flows (ie a market rate of return). B19 The discount rate adjustment technique requires an analysis of market data for comparable assets or liabilities. Co .....

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discount rate using data for several comparable assets or liabilities in conjunction with the risk-free yield curve (ie using a buildup approach). B20 To illustrate a build-up approach, assume that Asset A is a contractual right to receive ₹ 800 in one year (ie there is no timing uncertainty). There is an established market for comparable assets, and information about those assets, including price information, is available. Of those comparable assets: (a) Asset B is a contractual right to .....

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ion of possible pay-offs and credit). B21 On the basis of the timing of the contractual payments to be received for Asset A relative to the timing for Asset B and Asset C (ie one year for Asset B versus two years for Asset C), Asset B is deemed more comparable to Asset A. Using the contractual payment to be received for Asset A (Rs. 800) and the one-year market rate derived from Asset B (10.8 per cent), the fair value of Asset A is ₹ 722 (Rs. 800/1.108). Alternatively, in the absence of av .....

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o-year assets are not the same, the two-year market rate of return would be further adjusted for that effect. B22 When the discount rate adjustment technique is applied to fixed receipts or payments, the adjustment for risk inherent in the cash flows of the asset or liability being measured is included in the discount rate. In some applications of the discount rate adjustment technique to cash flows that are not fixed receipts or payments, an adjustment to the cash flows may be necessary to achi .....

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ive probabilities as the weights. Because all possible cash flows are probability-weighted, the resulting expected cash flow is not conditional upon the occurrence of any specified event (unlike the cash flows used in the discount rate adjustment technique). B24 In making an investment decision, risk-averse market participants would take into account the risk that the actual cash flows may differ from the expected cash flows. Portfolio theory distinguishes between two types of risk: (a) unsystem .....

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be available.) B25 Method 1 of the expected present value technique adjusts the expected cash flows of an asset for systematic (ie market) risk by subtracting a cash risk premium (ie risk-adjusted expected cash flows). Those risk-adjusted expected cash flows represent a certainty-equivalent cash flow, which is discounted at a risk-free interest rate. A certainty-equivalent cash flow refers to an expected cash flow (as defined), adjusted for risk so that a market participant is indifferent to tra .....

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sk by applying a risk premium to the risk-free interest rate. Accordingly, the expected cash flows are discounted at a rate that corresponds to an expected rate associated with probability-weighted cash flows (ie an expected rate of return). Models used for pricing risky assets, such as the capital asset pricing model, can be used to estimate the expected rate of return. Because the discount rate used in the discount rate adjustment technique is a rate of return relating to conditional cash flow .....

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tic risk premium for an asset with the same risk profile is 3 per cent. Possible cash flows Probability Probability-weighted cash flows ₹ 500 15% ₹ 75 ₹ 800 60% ₹ 480 ₹ 900 25% ₹ 225 Expected cash flows ₹ 780 B28 In this simple illustration, the expected cash flows (Rs. 780) represent the probability-weighted average of the three possible outcomes. In more realistic situations, there could be many possible outcomes. However, to apply the expected present .....

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tions, industry trends and competition as well as changes in internal factors affecting the entity more specifically), taking into account the assumptions of market participants. B29 In theory, the present value (ie the fair value) of the asset s cash flows is the same whether determined using Method 1 or Method 2, as follows: (a) Using Method 1, the expected cash flows are adjusted for systematic (ie market) risk. In the absence of market data directly indicating the amount of the risk adjustme .....

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The present value (ie the fair value) of the asset is ₹ 722 (Rs. 758/1.05). (b) Using Method 2, the expected cash flows are not adjusted for systematic (ie market) risk. Rather, the adjustment for that risk is included in the discount rate. Thus, the expected cash flows are discounted at an expected rate of return of 8 per cent (ie the 5 per cent risk-free interest rate plus the 3 per cent systematic risk premium). The present value (ie the fair value) of the asset is ₹ 722 (Rs. 780/ .....

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t value technique to measure the fair value of a liability that is not held by another party as an asset (eg a decommissioning liability), an entity shall, among other things, estimate the future cash outflows that market participants would expect to incur in fulfilling the obligation. Those future cash outflows shall include market participants expectations about the costs of fulfilling the obligation and the compensation that a market participant would require for taking on the obligation. Suc .....

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rate of return and there is no observable market yield for that liability. In some cases the components of the return that market participants would require will be indistinguishable from one another (eg when using the price a third party contractor would charge on a fixed fee basis). In other cases an entity needs to estimate those components separately (eg when using the price a third party contractor would charge on a cost plus basis because the contractor in that case would not bear the risk .....

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risk. For example, if the estimated cash flows are increased to take into account the compensation for assuming the risk associated with the obligation, the discount rate should not be adjusted to reflect that risk. Inputs to valuation techniques (paragraphs 67-71) B34 Examples of markets in which inputs might be observable for some assets and liabilities (eg financial instruments) include the following: (a) Exchange markets. In an exchange market, closing prices are both readily available and .....

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ily available than closing prices. Over-the-counter markets (for which prices are publicly reported) are dealer markets. Dealer markets also exist for some other assets and liabilities, including some financial instruments, commodities and physical assets (eg used equipment). (c) Brokered markets. In a brokered market, brokers attempt to match buyers with sellers but do not stand ready to trade for their own account. In other words, brokers do not use their own capital to hold an inventory of th .....

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d resales, are negotiated independently with no intermediary. Little information about those transactions may be made available publicly. Fair value hierarchy (paragraphs 72-90) Level 2 inputs (paragraphs 81-85) B35 Examples of Level 2 inputs for particular assets and liabilities include the following: (a) Receive-fixed, pay-variable interest rate swap based on the Mumbai Interbank Offered Rate (MIBOR) swap rate. A Level 2 input would be the MIBOR swap rate if that rate is observable at commonly .....

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hat any reasonable extrapolation of the yield curve for year 10 would not be significant to the of the swap in its entirety. (c) Receive-fixed, pay-variable interest rate swap based on a specific bank s prime rate. A Level 2 input would be the bank s prime rate derived through extrapolation if the extrapolated values are corroborated by observable market data, for example, by correlation with an interest rate that is observable over substantially the full term of the swap. (d) Three-year option .....

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f the one-year and two-year options on the shares and corroborated by the implied volatility for three-year options on comparable entities shares, provided that correlation with the one-year and two-year implied volatilities is established. (e) Licensing arrangement. For a licensing arrangement that is acquired in a business combination and was recently negotiated with an unrelated party by the acquired entity (the party to the licensing arrangement), a Level 2 input would be the royalty rate in .....

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a transaction to sell the inventory to another retailer that would complete the requisite selling efforts. Conceptually, the will be the same, whether adjustments are made to a retail price (downward) or to a wholesale price (upward). Generally, the price that requires the least amount of subjective adjustments should be used for the . (g) Building held and used. A Level 2 input would be the price per square metre for the building (a valuation multiple) derived from observable market data, eg mu .....

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ragraphs 86-90) B36 Examples of Level 3 inputs for particular assets and liabilities include the following: (a) Long-dated currency swap. A Level 3 input would be an interest rate in a specified currency that is not observable and cannot be corroborated by observable market data at commonly quoted intervals or otherwise for substantially the full term of the currency swap. The interest rates in a currency swap are the swap rates calculated from the respective countries yield curves. (b) Three-ye .....

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irectly observable and cannot otherwise be corroborated by observable market data. (d) Decommissioning liability assumed in a business combination. A Level 3 input would be a current estimate using the entity s own data about the future cash outflows to be paid to fulfill the obligation (including market participants expectations about the costs of fulfilling the obligation and the compensation that a market participant would require for taking on the obligation to dismantle the asset) if there .....

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cial forecast (eg of cash flows or profit or loss) developed using the entity s own data if there is no reasonably available information that indicates that market participants would use different assumptions. Measuring fair value when the volume or level of activity for an asset or a liability has significantly decreased B37 The fair value of an asset or a liability might be affected when there has been a significant decrease in the volume or level of activity for that asset or liability in rel .....

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over time or among market-makers (eg some brokered markets). (d) Indices that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability. (e) There is a significant increase in implied liquidity risk premiums, yields or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the entity s estimate of expec .....

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l-to-principal market). B38 If an entity concludes that there has been a significant decrease in the volume or level of activity for the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities), further analysis of the transactions or quoted prices is needed. A decrease in the volume or level of activity on its own may not indicate that a transaction price or quoted price does not represent fair value or that a transaction in that mar .....

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make it comparable to the asset being measured or when the price is stale). B39 This Ind AS does not prescribe a methodology for making significant adjustments to transactions or quoted prices. See paragraphs 61-66 and B5-B11 for a discussion of the use of valuation techniques when measuring fair value. Regardless of the valuation technique used, an entity shall include appropriate risk adjustments, including a risk premium reflecting the amount that market participants would demand as compensat .....

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. B40 If there has been a significant decrease in the volume or level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate (eg the use of a market approach and a present value technique). When weighting indications of fair value resulting from the use of multiple valuation techniques, an entity shall consider the reasonableness of the range of s. The objective is to determine the point within the range that is most .....

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nt date under current market conditions. B42 Estimating the price at which market participants would be willing to enter into a transaction at the measurement date under current market conditions if there has been a significant decrease in the volume or level of activity for the asset or liability depends on the facts and circumstances at the measurement date and requires judgement. An entity s intention to hold the asset or to settle or otherwise fulfill the liability is not relevant when measu .....

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ude that all transactions in that market are not orderly (ie forced liquidations or distress sales). Circumstances that may indicate that a transaction is not orderly include the following: (a) There was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions. (b) There was a usual and customary marketing period, but the seller .....

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nsaction is orderly. B44 An entity shall consider all the following when measuring fair value or estimating market risk premiums: (a) If the evidence indicates that a transaction is not orderly, an entity shall place little, if any, weight (compared with other indications of fair value) on that transaction price. (b) If the evidence indicates that a transaction is orderly, an entity shall take into account that transaction price. The amount of weight placed on that transaction price when compare .....

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(ie the transaction price is not necessarily the sole or primary basis for measuring fair value or estimating market risk premiums). When an entity does not have sufficient information to conclude whether particular transactions are orderly, the entity shall place less weight on those transactions when compared with other transactions that are known to be orderly. An entity need not undertake exhaustive efforts to determine whether a transaction is orderly, but it shall not ignore information th .....

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se in the volume or level of activity for the asset or liability, an entity shall evaluate whether the quoted prices provided by third parties are developed using current information that reflects orderly transactions or a valuation technique that reflects market participant assumptions (including assumptions about risk). In weighting a quoted price as an input to a , an entity places less weight (when compared with other indications of fair value that reflect the results of transactions) on quo .....

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