Fair Value Measurement - CA Journal April 07

8/9/2019 Fair Value Measurement - CA Journal April 07

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1564 The Chartered Accountant April 2007

Account ing

Fair Value Measurement

There are dierent types o measurement at-

tributes in nancial reporting. These include

historical cost, (e.g. cash and liabilities in

general), modied historical cost (e.g. property,

plant and equipment and receivables), air values

(derivatives and asset revaluations), and entity-

specic value (impaired inventories and impaired

property, plant and equipment).

In the recent years, there seem to be a perceived

movement rom historical cost, the traditional ba-

sis o measurement towards the air value basis.

There have been debates and discussions on both

the approaches and there are strong proponents

o each basis o measurement. Proponents o air

value argue that the method o valuing assets and

liabilities should be based on an economically sat-

isying (read air value) method instead o the tra-ditional historical cost basis.

Reerence, denitions and application o air

value is ound in various pronouncements o

United States Generally Accepted Accounting

Principles (US GAAP), International Accounting

Standards (IAS & IFRS) and Indian Accounting

Standards (AS).

The use o air value is not new. The old Inter-

national Accounting Standards Committee usedit, or example in IAS 22 on business combina-

tions, originally issued in 1983. However, the no-

tion o air value was not much developed, and

the old IAS used a number o dierent measure-

ment approaches. In the United States however,

the situation is dierent. The Financial Account-

ing Standards Board (FASB) has said that it be-

lieves air value inormation is useul in making

rational investment decisions. Fair value appears

in a large number o US standards, and the FASB

noted that dierences in the guidance dispersed

across these standards created inconsistencies

which added to the complexity o GAAP.

FASB decided to issue a standard on air value

measurement, which would provide a single seto rules to be applied whenever other standards

require the use o air value. This was issued as an

exposure drat in June 2004, and published in -

nal orm in September 2006 as the Statement o

Financial Accounting Standard (SFAS) No.157 on

Fair Value Measurements (FAS 157)

Signicance o FAS 157 or IndianChartered Accountants

Fair Value Measurement Guidance is one o theConvergence Projects undertaken by the FASB o

United States and IASB. IASB has said it will use FAS

157 as the exposure drat or a new International

Financial Reporting Standard (IFRS) on Fair Value

Measurement, and with which, logically, it should

be thinking o converging. (IASB Work Plan - pro-

jected timetable as at 30 September 2006 estimates

that the statement will be fnal by the year 2008)

ICAI is considering convergence to IFRS. A ull

convergence would mean adoption o IFRS in its

ull orm. In any case AS are ormulated on the

basis o IAS/IFRS principles. Thereore, one could

draw the conclusion that FAS 157 would be rel-

evant to the Indian accounting proessionals.

Statement o Financial AccountingStandard No.157 on Fair ValueMeasurements

Introduction

Reerence to Fair Value is ound in 67 pro-

nouncements o FASB and Accounting Principles

Measurement in nancial reporting has been a subject o debate in the last ew years.This article discusses the new FAS 157 or Fair Value Measurement issued by FASB and

also briefy looks at the existing Fair Value reerences in IAS / IFRS and Indian Account-ing Standards.

(The author is a member of the Instituteas well as AICPA. He can be reached at

[email protected]

CA. Shrikant Sortur


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The Chartered Accountant 1565April 2007

Account ing

Board (APB), which include Statements, Opinions, Interpreta-

tions and Technical Bulletins. This new standard (FAS 157) does

not add to the assets or liabilities that are covered or air value

measurements, i.e. does not require any new air value measure-

ment, but instead provides the Measurement ramework orFair Value. Twenty-eight pronouncements have been amended

as a result o this standard. This statement codies related guid-

ance within GAAP.

The objective o the statement is to dene air value, estab-

lish a ramework or measuring air value, and expand disclo-

sures about air value measurements. Companies will need to

adopt FAS 157 or nancial statements issued or scal years

beginning ater November 15, 2007 (e.g., in 2008 or a calendar

year-end company). The basic structure o listing the objective,scope, measurement, denitions is ollowed by Valuation tech-

niques, Inputs, air value hierarchy and disclosure requirements.

A signicant portion o the statement is taken up by the ap-

pendix that has the implementation guidance, present value

techniques and the background inormation and basis or con-

clusions (which is a common eature or all SFAS).

Applicability

This standard is not applicable or:

i) Share based payment transactions (eg: APB No.25, FASNo.123 and FAS 123 (R))

ii) Accounting pronouncements that require or permitmeasurements that are similar to air value but that are notintended to measure air value, including the ollowing:

a. Standards that address revenue-recognition transac-tions that are measured based on vendor-specic ob-

jective evidence (VSOE) o air value, including State-ment o Position 97-2, Sotware Revenue Recognition,

as modied by Statement o Position 98-9, SotwareRevenue Recognition, With Respect to Certain Trans-actions; EITF Issue No. 00-21, Revenue Arrangementswith Multiple Deliverables; etc

b. Accounting Research Bulletin No. 43, Chapter 4, In-ventory Pricing.

Measurement & Its Explanation

FAS 157 denes air value as Fair value is the price that

would be received to sell an asset or paid to transer a liability in

an orderly transaction between market participants at the mea-surement date


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Account ing

While the words may have a similar tone to

past denitions, on closer observation we can

nd some key dierences. First and oremost is

the act that the denition is based on an Exit

price (price that would be received to Sell an as-set) and not an entry price (price at which an as-

set would be bought) regardless o whether the

entity plans to hold or sell the asset.

Contrast this with the present denition under

IAS / IFRS and Indian Accounting Standards Fair

Value is the amount or which an asset could be

exchanged, or a liability settled, between knowl-

edgeable, willing parties in an arms length trans-

action. The words exchanged in this denitioncan either be an exit price or an entry price. FAS

157 specically denes price to be an exit price.

A brie discussion on the terminology and

denitions in FAS 157 that helps us understand

ollows:

The objective o air value measurement is to

determine the price that would be received to

sell the asset or paid to transer the liability at the

measurement date i.e. an Exit Price. Application othe exit price to an Asset or Liability would depend

on the Unit of Account i.e. Either as stand alone

(or example, a nancial instrument or an operat-

ing asset) or as a group o assets and /or liabilities

(or example, an asset group, a reporting unit, or

a business) determined in accordance with other

applicable accounting standards.

Orderly Transaction: is a transaction that as-

sumes exposure to the market or a period prior

to the measurement date to allow or marketingactivities that are usual and customary or trans-

actions involving such assets or liabilities; it is not

a orced transaction (or example, a orced liqui-

dation or distress sale).

The Principal (or Most Advantageous) Mar-

ket is a new concept that is being introduced by

FAS 157. A air value measurement assumes that

the transaction to sell the asset or transer the li-

ability occurs in the principal market or the assetor liability or, in the absence o a principal market,

the most advantageous market or the asset or li-

ability. Principal marketis the market in which the

reporting entity would sell the asset or transer

the liability with the greatest volume and level o

activity or the asset or liability. The most advanta-geous marketis the market in which the reporting

entity would sell the asset or transer the liability

with the price that maximizes the amount that

would be received or the asset or minimizes the

amount that would be paid to transer the liabil-

ity.

Determining the appropriate market is done

rom the perspective o the company, thereby

allowing or dierences among companies andthe markets in which those companies transact.

For example, the principal market or a manuac-

turing company that enters into an interest rate

swap is the retail market or swaps, while the

principal market or an investment bank is the

wholesale market or swaps. FAS 157 species

that i there is a principal market or the asset or li-

ability, the price in that market should be used to

measure air value even i the price in a dierent

market is potentially more advantageous at themeasurement date. The Board concluded that in

most cases, the principal market would represent

the most advantageous market and did not want

to require a company to continuously evaluate

multiple prices or an asset or a liability in order

to determine the most advantageous market.

Thereore, the price rom the most advantageous

market should be used only when there is no

principal market or the asset or liability.

Note: Transaction Costs vs. Transportation

Costs: The price in the principal or most advanta-

geous market should not be adjusted to reect

transaction costs (example: a commission or a ee

that a broker charges). The price should, however,

be adjusted to reect transportation costs i the lo-

cation o the asset or liability that is being measured

is a characteristic o that asset or liability (example:

the cost o transporting a physical-commodity rom

its current location to the market).

Market Participants are buyers or sellers in


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Account ing

the Principal (or the most advantageous) market or the asset

or liability. The market participants should be (a) Unrelated (b)

Knowledgeable about actors relevant to the asset or liability and

the transaction; (c) Able to transact (i.e., have the legal and nan-

cial ability to do so); and (d) Willing to transact (i.e., motivated butnot orced or otherwise compelled to transact).

Measurement Date: The measurement date, as specied

in each accounting standard requiring or permitting air value

measures, is the eective valuation date. Accordingly, a valua-

tion should reect only acts and circumstances that exist on the

specied measurement date so that the valuation is appropriate

or a transaction that would occur on that date.

Application to Assets: The air value measurement assumes

the assets highest and best use by the market participants. Thecompanys intended use o an asset is not necessarily indicative

o the highest and best use as determined by a market partici-

pant; thereore, the air value measure is not an entity-specic

measure that reects only the companys expectations or the as-

set. For example, a companys management may intend to oper-

ate a property as a parking lot, while market participants would

consider a Storage acility as the highest and best use o the

property. In that case, the propertys air value measure should

be based on the propertys use as a Storage Unit.

The highest and best use o the asset establishes the valuation

premise used to measure the air value o the asset. Namely, Fair

value In-Use and Fair Value In-Exchange.

l Fair value in-use: The highest and best use o an asset isin-use i the asset would provide maximum value to marketparticipants principally through its use with other assets as agroup. That may be the case or an operating (non-nancial)asset that provides maximum value principally through itsuse in combination with all (or some) o the other operating

assets o the company as a group. In that case, the air valueo the asset group is determined using the in-use valuationpremise. FAS 157 claries that even in a situation where thein-use valuation premise is applicable, the air value measureis still a market-based measure determined based on the useo the asset by market participants, not a value determinedbased solely on the use o the asset by the company (i.e., it isnot an entity-specic measure).

l Fair value in-exchange:The highest and best use o an assetis in-exchange i the asset would provide maximum value tomarket participants principally on a stand-alone basis. Thatmay be the case or an asset that provides maximum valueseparate and apart rom the other assets o the company.


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Account ing

In other words, the asset is separable orsubstitutable with other equivalent assets(or example, some nancial assets).

Application to Liabilities: For a liability, a

air value measure assumes that the liability is

transerred to a market participant at the mea-

surement date and that the nonperormance risk

relating to the liability is the same beore and a-

ter its transer. Nonperormance risk reers to the

risk that the obligation will not be ullled, and

thereore, aects the value at which the liability

is transerred. Nonperormance risk includes but

may not be limited to a companys own credit

risk. Accordingly, liability remeasurements at air

value should reect the eect o changes in the

companys credit standing. The air value measure

o a liability is not aected by how a company in-

tends to settle the liability.

Note: This is already being termed as a contro-

versial provision since entities are required to take

into account the efect o changes in their own credit

standing when they measure one or more liabilities

at air value.

The next part o FAS 157 lists out the Valuation

Technique, Inputs to Valuation Techniques and

the Fair Value Hierarchy. Each o these is seen in

brie:

Valuation Techniques:

SFAS 157 identies three approaches to Valua-

tion Techniques (i.e. or estimating exit prices):

a) Market approach: uses prices and

other relevant inormation generated bymarket transactions involving identical orcomparable assets or liabilities. Valuationtechniques include market multiples andmatrix pricing.

b) Income approach: uses valuation techniquesto convert uture amounts (or example, cashows or earnings) to a single present amount(discounted). The measurement is basedon the value indicated by current market

expectations about those uture amounts.Valuation techniques include present valuetechniques; option-pricing models, suchas the Black-Scholes-Merton ormula and

lattice models; and the multi-period excess-earnings method.

c) Cost approach: uses current replacementcost. i.e. is based on the amount that currentlywould be required to replace the servicecapacity o an asset oten reerred to as currentreplacement cost. The approach assumesthat the air value would not exceed what itwould cost a market participant to acquire orconstruct a substitute asset o comparable

utility, adjusted or obsolescence.In all cases, companies should measure air

value by using a valuation technique (or a combi-

nation o valuation techniques) that is appropri-

ate in the companys given circumstances and or

which sufcient data is available. When multiple

valuation techniques are used to measure air

value, the company should evaluate and weigh,

as appropriate, the results to determine a single

best air value measure.

The evaluation and weighting process should

not be mechanical and requires a signicant

amount o proessional judgment. Valuation

techniques used to measure air value should be

applied consistently. However, it is appropriate to

change a valuation technique or its application

i the change will result in a measure that better

represents air value or instance, a change in a

particular techniques weighting when multiple

valuation techniques are used. A change in valu-ation technique might also be warranted as new

markets develop, new inormation becomes avail-

able, and valuation techniques improve. Revised

valuations resulting rom a change in the valua-

tion technique or its application are accounted

or as changes in accounting estimates in either

(1) the period o change, i the change aects that

period only, or (2) the period o change and u-

ture periods, i the change aects both.


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Inputs to Valuation Techniques:

SFAS 157 denes inputs into various valuation techniques, as

the assumptions market participants would use in pricing the

asset or liability, including assumptions about risk. Inputs are otwo types, observable or unobservable:

A) Observable inputs: are inputs that reect the assumptionsmarket participants would use in pricing the asset or liabilitydeveloped based on market data obtained rom sourcesindependent o the reporting entity.

Markets in which inputs might be observable or some assets

and liabilities (e.g., nancial instruments) include the ollowing: a)

Exchange Market: or example, the New York Stock Exchange, the

Mumbai Stock Exchange, b) Dealer Market Dealer markets exist

or assets and liabilities, such as nancial instruments, commodi-ties, and physical assets, c) Brokered Market: In a brokered market,

brokers attempt to match buyers with sellers, do not stand ready

to trade or their own account and do not use their own capital

to hold an inventory o the items or which they make a market

and d) Principal-to-Principal Market: No intermediary. Oten, very

little inormation about these transactions is publicly available.

B) Unobservable inputs: are inputs that reect the reportingentitys own assumptions about the assumptions market

participants would use in pricing the asset or liabilitydeveloped based on the best inormation available in thecircumstances.

The standard specically requires that the valuation tech-

niques used to measure air value should maximize the use o ob-

servable inputs and minimize the use o unobservable inputs.

Fair Value Hierarchy:

To increase consistency and comparability in air value mea-

surements and related disclosures, the air value hierarchy pri-

oritizes the inputs to valuation techniques used to measure airvalue into three broad levels. Level 1 is the highest priority and

Level 3 the lowest. The details o which are as ollows:

Level 1 inputs are quoted prices (unadjusted) in active mar-

kets or identical assets or liabilities that the reporting entity has

the ability to access at the measurement date

Eg: Quoted price (unadjusted) in an active market. Say, Com-

pany A common stock / share traded and quoted on the New

York Stock Exchange / Mumbai Stock Exchange

Level 2 inputs are inputs other than quoted prices included

within Level 1 that are observable or the asset or liability, either


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Account ing

directly or indirectly. Level 2 inputs include the

ollowing:

a) Quoted prices or similar assets or liabilities

in active markets

b) Quoted prices or identical or similar assets

or liabilities in markets that are not active

that is, markets in which (i) there are ew

transactions or the asset or liability; (ii) the

prices are not current; (iii) price quotations

vary substantially either over time or among

market; or (iv) little inormation is publicly

available

c) Inputs other than quoted prices that are

observable or the asset or liability (or e.g.,interest rates and yield curves observable

at commonly quoted intervals, volatilities,

prepayment speeds, and deault rates)

d) Inputs that are derived principally rom or

corroborated by other observable market

data through correlation or by other means

(market corroborated inputs)

Eg: i) Company Y common stock / share trad-

ed and quoted only on an inactive market in anemerging country. ii) A privately placed bond /

debenture o XY whose value is derived rom a

similar XY bond / debenture that is publicly trad-

ed.

Level 3 inputs are unobservable inputs or

the asset or liability. Thereore, unobservable in-

puts shall reect the reporting entitys own as-

sumptions about the assumptions that market

participants would use in pricing the asset or li-

ability. Unobservable inputs shall be developedbased on the best inormation available in the

circumstances, which might include the report-

ing entitys own data. In developing unobserv-

able inputs, the reporting entity need not un-

dertake all possible eorts to obtain inormation

about market participant assumptions. However,

the reporting entity shall not ignore inormation

about market participant assumptions that is rea-

sonably available without undue cost and eort.

Thereore, the reporting entitys own data usedto develop unobservable inputs shall be adjust-

ed i inormation is reasonably available without

undue cost and eort that indicates that market

participants would use dierent assumptions.

Eg: i) Shares o a privately held company

whose value is based on projected cash ows. ii)

A long dated commodity swap whose orward

price curve, used in valuation model, is not di-

rectly observable or correlated with observable

market data.

Fair Value o an Asset or Liability - InitialRecognition

Some o the accounting standards require that

an asset or a liability be initially recognized at airvalue. A company should determine whether the

transaction price represents the air value o the

asset or the liability at initial recognition. In simple

terms, the question is whether the exchange price

is to be recognized as the Fair Value. I an asset is

acquired or a liability is assumed in an exchange

transaction, the transaction price represents the

price that was paid or the asset or that was re-

ceived to assume the liability (i.e., the entry price).

In contrast, the air value o the asset or the liabil-ity represents the price that would be received or

the asset or paid to transer the liability (i.e., the

exit price). Conceptually, those two prices are di-

erent. Companies do not necessarily sell or oth-

erwise dispose o assets at the prices that they

paid to acquire them. Similarly, companies do not

necessarily transer a liability at the price that they

received to assume the liability. In some situations,

the transaction price will equal the exit price and,

thereore, represent the air value o the asset or

liability at initial recognition.

FAS 157 cite our instances that might indicate

that the transaction price does not represent air

value. The said instances are helpul in determin-

ing the air value at initial recognition, but not

necessarily all-inclusive. The reporting entity

should consider actors specic to the transaction

and to the asset or the liability. The our instances

when the transaction price might not represent

the air value o an asset or liability at initial rec-ognition are:


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i) The transaction is between related parties

ii) The transaction occurs under duress or the seller is orced toaccept the transaction price because o some urgency

iii) The unit o account represented by the transaction price isdierent rom the unit o account or the asset or the liabilitythat is measured at air value. (For e.g., say, the transactionprice includes transaction costs)

iv) The market in which the transaction occurs is dierent romthe principal (or most advantageous) market in which thereporting entity would sell or otherwise dispose o the assetor transer the liability.

Disclosures

The reporting entity needs to disclose inormation so as to en-able the users o nancial statements to assess the inputs used to

develop those measurements. Towards that objective the report-

ing entity needs to disclose or each interim and annual period

separately or each major category o assets and liabilities:

I. For Recurring Fair Value Measurements:

a. The air value measurements at the reporting date

b. The level within the air value hierarchy in which theair value measurements in their entirety all, segregat-

ing Level 1, Level 2 and Level 3c. For air value measures using Level 3 inputs, a reconcili-

ation o the beginning and ending balances includingtotal gains and losses (realized and unrealized) or theperiod is required, except or derivative assets and li-abilities, which may be presented net.

d. In annual periods, companies should disclose the valua-tion techniques used to measure air value and includea discussion o changes in the techniques employed, iany.

II. For Non Recurring Fair Value Measurements: (Point b& d remains the same as required by Recurring Fair ValueMeasurement disclosure.) Instead o a & c above the dierenceis as ollows:

a. The air value measurements recorded during the pe-riod and the reasons or the measurements

b. For air value measurements using signicant unob-servable inputs (Level 3), a description o the inputsand the inormation used to develop the inputs

Quantitative disclosures should be presented using a tabular

ormat and are required in all interim and annual periods. Quali-


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tative disclosures about the valuation techniques

used to measure air value are required in all an-

nual periods. FAS 157 encourages companies to

combine the air value measurement disclosures

with the air value disclosures required underother accounting standards (e.g., FAS 107), i

practicable.

Fair Value under International AccountingStandards

Let us now see the Fair Value concept under

International Accounting Standards (IAS) and

how FAS 157 and the convergence project are

impacting the same.

Fair Value is dened and reerenced in vari-

ous IAS / IFRS. (See Table 1 or the listing). Spe-

cic denition in various standards (e.g.: IAS

16,17,18,19,20,21,22, 33, 38, 40, 41 etc) is as ol-

lows:

Fair Value: is the amount or which an asset

could be exchanged, or a liability settled, between

knowledgeable, willing parties in an arms length

transaction. In some o the standards there are

alternative measurement that can be taken or

air value (e.g.: IAS 38 Para 9 (b) states The reval-

ued amount should be the air value o the as-

set and IAS 26: Para 32 In the case o marketable

securities air value is market value). In act IFRS

3, Business Combinations prescribes a number o

alternatives that can be used as air value which

includes estimated value, present value, current

replacement cost, depreciated replacement cost,

selling price less the costs o disposal plus a rea-

sonable prot allowance etc.

IAS / IFRS currently do not have a single hierar-

chy that applies to all air value measures. Instead

individual standards indicate preerences or cer-

tain inputs and measures o air value over others

and lacks consistency.

In a meeting o IASB in December 2005, (ex-

posure drat o FAS 157 was already issued) The

sta o IASB presented a paper identiying and

comparing the dierences between the deni-

tions o air value in the FASBs drat Fair Value

Measurements (FVM) standard to the denition

in IFRS. This comparison was meant to assist the

Board in concluding whether or not to replace

the current IFRS denition o air value with the

FVM standard denition.

In a subsequent meeting in May 2006 the

Board concurred with the Sta view that the re-

vised denition o air value (i.e. FASBs denition

o air value is FAS 157) is substantively similar to

the one tentatively approved by the IASB in De-

cember 2005. Based on that, the IASB agreed that

the revised denition is consistent with the mea-

surement objective. In the same meeting, the

Board agreed with the stas conclusion that theFAS 157 Fair Value Hierarchy is consistent with

the principles in IFRS and represents an improve-

ment over the disparate and inconsistent guid-

ance currently in IFRS.

There have been issues and debates on this

subject within the board and its constituents.

The big ones being on Price, the exit price no-

tion and also about market etc. IASB has said it

will use FAS 157 as the exposure drat or a newInternational Financial Reporting Standard (IFRS)

on Fair Value Measurement to be published next

year, with changes and reerences to IFRS stan-

dards instead o the US GAAP. The objective will

be to invite comments on possible issues that

would arise in adopting FAS 157 principles into

the new IFRS. Indications are that the divergences

will be bare minimal, i any. Thereore IFRS would

have the same measurement criteria, Valuation

techniques and Fair Value Hierarchy as set out inFAS 157.

Fair Value under Indian AccountingStandards

Indian Accounting standards (AS) are ormu-lated on the basis o IAS / IFRS. Fair value mea-surement is required by many o the standards,some o the standards dene Fair value while insome others it is reerenced.

We look at the Fair Value denition in AS inbrie:


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Account ing

A. The following standards were noted asrequiring assets or liabilities to be measured

at fair value in certain circumstances:1. IAS 11 - Construction Contracts

2. IAS 16 - Property, Plant and Equipment

3. IAS 17 - Leases

4. IAS 18* - Revenue

5. IAS 19 - Employee Benets

6. IAS 20 - Accounting or GovernmentGrants and Disclosure o Government

Assistance

7. IAS 26 - Accounting and Reporting byRetirement Benet Plans

8. IAS 33 - Earnings per Share

9. IAS 36 - Impairment o Assets

10. IAS 38 - Intangible Assets

11. IAS 39 - Financial Instruments: Recogni-tion and Measurement

12. IAS 40 - Investment Property

13. IAS 41 - Agriculture

14. IFRS 1 - First-time Adoption o Interna-tional Financial Reporting Standards

15. IFRS 2* - Share-based Payment

16. IFRS 3 - Business Combinations

17. IFRS 5 - Non-current Assets Held or Saleand Discontinued Operations

* For IAS 18 and IFRS 2 the measurement objective listedtherein is not consistent with FAS 157 and hence beingexcluded rom the scope or now. (may change based ondeliberations)

B. Standards that require fair valuemeasurement by reference to another

standard

A. IAS 2 - Inventory

B. IAS 21 - The Eects o Changes in For-eign Exchange Rates

C. IAS 27 - Consolidated and Separate Fi-nancial Statements

D. IAS 28 - Investment in Associates

E. IAS 31 - Interests in Joint Ventures

F. IAS 32 - Financial Instruments: Presen-tation and Disclosure

G. IFRS 4 - Insurance Contracts

H. IFRS 7 - Financial Instruments

C. Standards that do not require fair valuemeasurement

i. IAS 1 - Presentation o Financial State-ments

ii. IAS 7 - Cash Flow Statements

iii. IAS 8 - Accounting Policies, Changes inAccounting Estimates and Errors

iv. IAS 10 - Events Ater the Balance Sheet

Date

v. IAS 12 - Income Taxes

vi. IAS 14 - Segment Reporting

vii. IAS 23 - Borrowing Costs

viii. IAS 24 - Related Party Disclosures

ix. IAS 29 - Financial Reporting in Hyperin-ationary Economies

x. IAS 30 - Disclosures in the FinancialStatements o Banks and Similar Finan-cial Institutions

xi. IAS 34 - Interim Financial Reporting

xii. IAS 37 - Provisions, Contingent Liabili-ties and Contingent Assets

xiii. IFRS 6 - Exploration or and Evaluationso Mineral Reserves

Table 1: International Accounting Standards that require air value measurement


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Account ing

The most oten used denition has the exactwording that exist in IAS / IFRS as o now. AS 19On Leases, AS 20: Earnings per share & AS 26, Intan-gible Assets dene Fair Value is the amount or

which an asset could be exchanged, or a liabilitysettled, between knowledgeable, willing partiesin an arms length transaction. The same deni-tion is used with the additional wordings o Un-der appropriate circumstances, market valueor net realisable value provides an evidence oair value in AS 13: Accounting or Investments &

AS 29: Provisions, Contingent Liabilities and Con-tingent Assets. However, in AS 14: Accounting or

Amalgamations the wording Or a liability settledis missing rom the regular denition.

Other standards use reerence / alternativesor Fair Value measurements in AS 2, AS 11,AS 28etc.

Example: AS 11: Accounting or the efects ochanges in Foreign Exchange Rates

Para 7 (c) non-monetary items other thanxed assets, which are carried in terms o airvalue or other similar valuation, e.g. net realiz-able value, denominated in a oreign currency,

should be reported using the exchange ratesthat existed when the values were determined(e.g. i the air value is determined as on the bal-ance sheet date, the exchange rate on the bal-ance sheet date may be used);

From the above, one can observe that IndianAS do not list a uniorm air value denition andmeasurement criteria. So the question wouldbe, will Indian Accounting ollow FAS 157 andproposed IFRS Fair Value measurement criteria

at some point in time?Indian Accounting Standards (AS) are ormu-

lated on the basis o the IFRSs. Changes to ASare made to consider among others, the state oeconomic environment in the country and thelegal and regulatory ramework prevailing in thecountry. ICAI has set up an 11-member task orceto examine the issues involved in ull conver-gence to IFRS. Full convergence would involveadoption o IFRS in the same orm as issued by

the IASB. At present, practical difculties, legaland regulatory implications would be the majorroadblocks to overcome.

What are also relevant are the economic en-

vironment, business practices and lack o ap-

propriate market measures in comparison to

other countries (read United States and certain

European countries) to the Fair Value Measure-ment criteria that can be adopted by India. In act

member countries within Europe also will nd it

very difcult to implement the new standard.

In the Indian context, it would be appro-

priate to quote the Past President o ICAI, Sri

T.N.Manoharan rom his presentation at OECD

on the topic International Standards and Prac-

tices or Accounting, Audit and Non-nancial

Disclosures. The challenges that would be

aced or air value would be The markets omany economies such as India normally do not

have adequate depth and breadth or reliable

determination o air values. Another relevant

point that was made was Till date, no viable so-

lution o objective air value measures is avail-

able. This sums up the present situation in the

Indian context.

Conclusion

Valuing tangible and intangible assets at airvalue could be difcult and time-consuming.

Current nancial accounting standards, how-

ever, require the use o estimates every day; or

example, the allowance or doubtul accounts,

contingent liabilities, projected pension obliga-

tions, and goodwill impairment. It is not a sig-

nicant leap to require companies to provide

some measurement o the air market value o

both tangible and intangible assets, even i this

inormation is reported only in the ootnotes. Inthe Indian context, what would be pertinent is

how exit price, markets, and inputs are readily

and appropriately available to make the mea-

surement is what is to be seen.

FAS 157 has set the ball rolling on this highly

debated subject. IASB has picked up that ball,

now the question is whether the Indian Accoun-

tant also becomes a part o the play. Eventually

it will happen in one orm or the other. It would

make sense to gear ourselves with the change

that FAS 157 will bring. r

Documents

Fair Value Measurement - CA Journal April 07