CA. Ranjay Mishra (FCA) 3.

3. Fair Value Measurement (Ind AS 113)

Q.1. Write short note on Fair-value hierachy. (June 2019 - 4 Marks)

Q.2. (SM-CA) An asset is sold in 2 different active market at different prices. An entity enters into transactions in both
markets and can access the price in those markes for the asset at the measurement date.
In Market A :
The price that would be received is 26, transaction costs in that market are 3 and the costs to transport the asset
to that market is ` 2.
In Market B :
The price that would be received is 25, transaction costs in that market are 1 and the costs to transport the asset
to that market are 2.
You are required to calculate
(i) the fair value of the asset, if market A is principal market, and
(ii) the fair value of the asset, if non of the market is principal market. (Nov., 2018 - 5 Marks)
Ans. :- Fair value (i) ` 24, (ii) most advantageous market is B and fair value is ` 23.

Q.3. (SM-CA) Company J acquires land in a business combination. The land is currently developed for industrial use
as a factory site. Although the land’s current use is presumed to be its highest and best use unless market or other
factors suggest a different use. Company J considers the fact that nearby sites have recently been developed for
residential use as high-rise apartment buildings.
On the basis of that development and recent zoning and other changes to facilitate that development, Company J
determines that the land currently used as a factory site could be developed as a residential site (e.g., for high-rise
apartment buildings) and that market participants would taken into account the potential to develop the site for
residential use when pricing the land.
Determine the highest and best use of land.
Ans. :- Fair value is the highest price under two alternative.

Q.4. (SM-CA) ABC Ltd. acquired 5% equity shares of XYZ for ` 10 crore in the year 2011-12. The company is in
process of preparing the financial statements for the year 2012-2013 and is assessing the fair value at subsequent
measurement of the investment made in XYZ Ltd. Based on the observable input, the ABC Ltd. identified a similar
nature of transaction in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for ` 60 crore. The price of such
transaction was determined on the basis of Comparable Companies Method (CCM) - Enterprice value (EV) /
EBITDA which was 8. For the current year, the EBITDA of XYZ Ltd. is ` 40 crore. At the time acquisition, the
valuation was determined after considering 5% of liquidity discount and 5% of non-controlling stake discount.
What will be the fair value of ABC Ltd.’s investment in XYZ Ltd. as on the balance sheet date ?
Ans. :- Fair value - 14.4.

Q.5. (SM-CA) UK Ltd. is in the process of acquisition of shares of PT Ltd. as part of business reorganization plan. The
projected free cash flow of PT Ltd. for the next 5 years are as follows :
` in crore)
(`
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Cash Flows 187.1 187.6 121.8 269 278.8
Terminal value 3,965
The weightage average cost of capital of PT Ltd. is 11%. The total debt as on measurement date is ` 1,465 crore
and the surplus cash & cash equivalent is ` 106.14 crore.
The total numbers of shares of PT Ltd. as on the measurement date is 8,52,84,223 shares.
Determine value per share of PT Ltd. as per Income Approach.
Ans. :- Value per share 204.83.

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 3.2 Ind AS 113 - Fair Value
Q.6. (SM-CA) You are a senior consultant of your firm and are in process of determining the valuation of KK Ltd. You
have determined the valuation of the company by two approaches i.e. Market Approach and Income approach
and selected the highest as the final value. However, based upon the discussion with your partner you have been
requested to assign equal weights to both the approaches and determine a fair value of shares of KK Ltd. The
details of the KK Ltd. are as follows :
Particulars ` in crore
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9
Surplus cash & Cash equivalent 106.14
Fair value of surplus assets and liabilities 312.4
Number of shares of KK Ltd. 8,52,84,223 shares
Determine the Equity Value of KK Ltd. as on the measurement date on the basis of above details.
Ans. :- Value per share - 375.72.

Q.7. An asset is sold in two different active markets at different prices. Manor Ltd. enters into transactions in both
markets and can access the price in those markets for the asset at the measurement date.
In Mumbai market, the price that would be received is Rs. 290, transaction costs in that market are ` 40 and the
costs to transport the asset to that market are ` 30. Thus the net amount that would be received is ` 220.
In Kolkata market the price that would be received is ` 280, transaction costs in that market are ` 20 and the costs
to transport the asset to that market are ` 30. Thus the net amount that would be received in Kolkata market is `
230.
(i) What should be the fair value of the asset if Mumbai Market is the principal market? What should be fair
value if none of the markets is principle market?
(ii) If the net realisation after expenses is more in export market, say ` 280, but Government allows only 15% of
the production to be exported out of India. Discuss what would be fair value in such case
(Nov. 2019 - 8 Marks)

Q.8. (RTP - Nov.,2019) Comment on the following by quoting references from appropriate Ind AS.
(i) DS Limited holds some vacant land for which the use is not yet determined the land is situated in a prominent
area of the city where lot of commercial complexes are coming up and there is no legal restriction to convert
the land into a commercial land.
The company is not interested in developing the land to a commercial complex as it is not its business
objective. Currently the land has been let out as a parking lot for the commercial complexes around.
The Company has classified the above property as investment property. It has approached you, an expert in
valuation, to obtain fair value of the land for the purpose of disclosure under Ind AS.
On what basis will the land be fair valued under Ind AS ?
(ii) DS Limited holds equity shares of a private company. In order to determine the fair value of the shares, the
company used discounted cash flow method as there were no similar shares available in the market.
Under which level of the fair value hierachy will the above inputs be classified ?
What will be your answer if the quoted price of similar companies were available and can be used for fair
valuation of the shares?
Ans. :- Fair value based on commercial complex, Level 2 input.

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 CA. Ranjay Mishra (FCA) 3.3

Q.9. Yanong owns several farms and also owns a division which sells agricultural vehicles. It is considering selling this
agricultural retail division and wishes to measure the fair value of the inventory of vehicles for the purpose of the
sale. Three markets currently exist for the vehicles. Yanong has transacted regularly in all three markets. At 30
April 2015, Yanong wishes to find the fair value of 150 new vehicles, which are identical. The current volume and
prices in the three markets are as follows :
Market Sales price Historical Total volume Transaction costs Transport cost
per vehicle volume – of vehicles – per vehicle to the market
` vehicles sold sold in ` – per vehicle
by Yanong market `
Europe 40,000 6,000 150,000 500 400
Asia 38,000 2,500 750,000 400 700
Africa 34,000 1,500 100,000 300 600
Yanong wishes to value the vehicles at `39,100 per vehicle as these are the highest net proceeds per vehicle, and
Europe is the largest market for Yanong’s product. Yanong would like advice as to whether this valuation would be
acceptable under IFRS 13 Fair Value Measurement.
(Int. CR June, 2015 - 6 marks)
Ans. :-
 IFRS 13, says that fair value is an exit price in the principal market, which is the market with the highest
volume and level of activity.
 It is not determined based on the volume or level of activity of the reporting entity’s transactions in a particular
market. Once the accessible markets are identified, market-based volume and activity determines the principal
market.
 There is a presumption that the principal market is the one in which the entity would normally enter into a
transaction to sell the asset or transfer the liability, unless there is evidence to the contrary.
 In practice, an entity would first consider the markets it can access. In the absence of a principal market, it is
assumed that the transaction would occur in the most advantageous market.
 This is the market which would maximise the amount which would be received to sell an asset or minimise
the amount which would be paid to transfer a liability, taking into consideration transport and transaction
costs. In either case, the entity must have access to the market on the measurement date.
 Although an entity must be able to access the market at the measurement date, IFRS 13 does not require an
entity to be able to sell the particular asset or transfer the particular liability on that date.
 If there is a principal market for the asset or liability, the fair value measurement represents the price in that
market at the measurement date regardless of whether that price is directly observable or estimated using
another valuation technique and even if the price in a different market is potentially more advantageous.
 The principal (or most advantageous) market price for the same asset or liability might be different for
different entities and therefore, the principal (or most advantageous) market is considered from the entity’s
perspective which may result in different prices for the same asset.
 In Yanong’s case, Asia would be the principal market as this is the market in which the majority of transactions
for the vehicles occur. As such, the fair value of the 150 vehicles would be `5,595,000 (`38,000 – `700 =
`37,300 x 150).
 Actual sales of the vehicles in either Europe or Africa would result in a gain or loss to Yanong when compared
with the fair value, i.e. `37,300. The most advantageous market would be Europe where a net price of
`39,100 (after all costs) would be gained by selling there and the number of vehicles sold in this market by
Yanong is at its highest.
 Yanong would therefore utilise the fair value calculated by reference to the Asian market as this is the
principal market.
 The IASB decided to prioritise the price in the most liquid market (i.e. the principal market) as this market
provides the most reliable price to determine fair value and also serves to increase consistency among
reporting entities.
 IFRS 13 makes it clear that the price used to measure fair value must not be adjusted for transaction costs,
but should consider transportation costs.

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 3.4 Ind AS 113 - Fair Value
 Yanong has currently deducted transaction costs in its valuation of the vehicles. Transaction costs are not
deemed to be a characteristic of an asset or a liability but they are specific to a transaction and will differ
depending on how an entity enters into a transaction.
 While not deducted from fair value, an entity considers transaction costs in the context of determining the
most advantageous market because the entity is seeking to determine the market which would maximise the
net amount which would be received for the asset.

Q.10. The company uses quarterly reporting for its farms as they grow short-lived crops such as maize. Yanong planted
the maize fields during the quarter to 31 October 2014 at an operating cost of `10 million. The fields originally cost
`20 million. There is no active market for partly grown fields of maize and therefore Yanong proposes to use a
discounted cash flow method to value the maize fields. As at 31 October 2014, the following were the cash flow
projections relating to the maize fields:
3 months to 3 months to Total
31 January 2015 30 April 2015
` million ` million ` million
Cash inflows 80 80
Cash outflows (8) (19) (27)
Notional rental charge for land usage (1) (1) (2)
Net cash flows (9) 60 51
In the three months to 31 January 2015, the actual operating costs amounted to `8 million and at that date Yanong
revised its future projections for the cash inflows to `76 million for the three months to April 2015. At the point of
harvest at 31 March 2015, the maize was worth `82 million and it was sold for `84 million (net of costs to sell) on
15 April 2015. In the measurement of fair value of the maize, Yanong includes a notional cash flow expense for the
‘rent’ of the land where it is self-owned.
The directors of Yanong wish to know how they should have accounted for the above biological asset at 31
October 2014, 31 January 2015, 31 March 2015 and when the produce was sold. Assume a discount rate of 2%
per quarter as follows :
Factor
Period 1 0·980
Period 2 0·961
(Int. CR June, 2015 - 6 marks)
Ans. :-
 Where reliable market-based prices or values are not available for a biological asset in its present location
and condition, fair value should be measured using a valuation technique. Relevant observable inputs should
be maximised whilst unobservable inputs should be minimised .
 An appropriate valuation technique would be the present value of expected net cash flows from the asset,
discounted at a current market-based rate. In the measurement of fair value of growing crops, a notional
cash flow expense should be included for the ‘rent’ of the land where it is owned in order that the value is
comparable to an entity which rents its land. The fair value of the biological asset is separate from the value
of the land on which it grows.
3 months to 3 months to Total
31 January 2015 30 April 2015
` million ` million ` million
Cash inflows 80 80
Cash outflows (8) (19) (27)
Notional rental charge for land (1) (1) (2)
Net cash flows (9) 60 51
Discounted at 2% (8·82) 57·67 48·85

 Thus in the quarterly accounts at 31 October 2014, the maize fields should be recognised at `68·85 million
(`20 million land plus `48·85 million maize). A fair value gain of `48·85 million should be shown in profit or
loss less the operating costs of `10 million.

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 CA. Ranjay Mishra (FCA) 3.5

 At 31 January, Yanong has revised its projections for cash inflows to `76 million, which means that the net
cash flows at that date were projected to be `(76 – 19 – 1) million, i.e. `56 million. Discounted at 2%, this
amounts to `54·9 million.
 Thus a fair value gain of `(54·9 – 48·85) million, i.e. `6·05 million, should be shown in profit or loss together
with the actual operating costs of `8 million.
 At the point of harvest, on 31 March 2015, the maize is valued at `82 million which means that a fair value
gain of `(82 – 54·9) million, i.e. `27·1 million, is recognised in profit or loss and the maize is classified as
inventory. The actual operating costs for the quarter would also be shown in profit or loss. When the maize
is sold, a further profit of `(84 – 82) million, i.e. `2 million, is made on sale.

Q.11. On 30 September 2012, Kappa delivered a machine to a customer that had been manufactured to that customer’s
requirements. The machine cost Kappa `600,000 to manufacture and the agreed selling price was `1,007,557.
Kappa agreed to accept payment on 30 September 2015. Kappa would expect an annual rate of return of 8% on
loan investments. The present value of `1 receivable in three years’ time at an annual discount rate of 8% is
approximately 79·4 cents.
Calculate Fair Value under IFRS 13 Fair Value Measurement.
(Dip. IFR - June, 2013 - 4 marks)
Ans. :-
 Kappa would recognise revenue on 30 September 2012 because the risks and rewards of ownership have
been transferred and Kappa has no continuing managerial involvement with the machine.
 The amount recognised should be the fair value of the consideration receivable which, under the principles
of IFRS 13 – Fair Value Measurement –, involves discounting the consideration to present value.
 The amount of revenue recognised is `800,000 (`1,007,557 x 0·794).
 Kappa would recognise `600,000 in cost of sales.
 Kappa would recognise finance income of `32,000 (`800,000 x 8% x 6/12). This will be shown in the statement
of profit or loss.
 Kappa would recognise a closing receivable of `832,000 (`800,000 + `32,000). This will be shown as a non-
current asset.

Q.12. You are the financial controller of Omega, a listed company which prepares consolidated financial statements in
accordance with IFRS. Your managing director, who is not an accountant, has recently attended a seminar and
has prepared a number of questions for you concerning two issues raised at the seminar :
‘I was confused regarding a number of references to fair value and a new accounting standard on the subject. I
thought financial statements were prepared on a historical cost basis. Please give me three examples of where
fair value might be relevant for us. I was told the new standard removed an inconsistency in the definition of fair
value and applied three levels of input into the measurement of fair value. Please explain how the new standard
defines fair value and what the previous inconsistency was. Please also explain each level of input and how each
level is applied in measuring the fair value of a particular item in the financial statements.’
(Dip. IFR - June, 2013 - 10 marks)
Ans. :-
 Although it is true that the majority of assets and liabilities that are recognised in financial statements are measured
based on their original cost, there are a number that are measured at fair value. Three examples of the use of the
‘fair value basis’ are :
 The assets and liabilities of a newly acquired subsidiary are measured in the consolidated financial statements
at their fair values at the date of acquisition.
 Many financial instruments are measured at fair value.
 Property, plant and equipment can be measured at fair value on a class by class basis.
 IFRS 13, defines fair value as the amount that would be received to sell an asset, or paid to transfer a liability,
in an orderly transaction between market participants.
 The IFRS 13, definition removes the uncertainty that was previously an issue in that it confirms that fair value
is an exit measure, not an entry measure.

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 3.6 Ind AS 113 - Fair Value
 The fair value hierarchy refers to three levels of input into the measurement of fair value. These three levels vary
in their reliability, starting with the most reliable and ending with the least reliable:
 Level 1 inputs are market prices where the asset or liability is quoted in an active market. These inputs are
given the highest priority when measuring fair values and are not normally subject to any adjustment. An
example would be the use of quoted prices to measure the fair value of equity instruments.
 Level 2 inputs are inputs into the calculation of fair value that, whilst not market values, are observable to an
external user. An example would be the quoted prices of shares in similar entities when measuring the fair
value of an unquoted share. Level 2 inputs are sometimes adjusted to reflect differential circumstances.
 Level 3 inputs are those that are not observable to an external user. An example would be the assumptions
regarding future profits when measuring the fair value of an unquoted share. When measuring fair values,
use of Level 3 inputs should be kept to a minimum.

Q.13. Jayach, a public limited company, is reviewing the fair valuation of certain assets and liabilities in light of the
introduction of IFRS 13 Fair Value Measurement
It carries an asset that is traded in different markets and is uncertain as to which valuation to use. The asset has
to be valued at fair value under Indian Accounting Standards. Jayach currently only buys and sells the asset in the
Australasian market. The data relating to the asset are set out below :
Year to 30 November 2012 Asian European Australasian
Market Market Market
Volume of market – units 4 million 2 million 1 million
Price `19 `16 `22
Costs of entering the market `2 `2 `3
Transaction costs `1 `2 `2
Additionally, Jayach had acquired an entity on 30 November 2012 and is required to fair value a decommissioning
liability. The entity has to decommission a mine at the end of its useful life, which is in three years’ time. Jayach
has determined that it will use a valuation technique to measure the fair value of the liability. If Jayach were
allowed to transfer the liability to another market participant, then the following data would be used.
Input Amount
Labour and material cost `2 million
Overhead 30% of labour and material cost
Third party mark-up – industry average 20%
Annual inflation rate 5%
Risk adjustment – uncertainty relating to cash flows 6%
Risk-free rate of government bonds 4%
Entity’s non-performance risk 2%
Jayach needs advice on how to fair value the liability.
Required :
Discuss, with relevant computations, how Jayach should fair value the above asset and liability under Ind AS 113.
(Int. CR - Dec., 2012 - 10 marks)
Ans. :-
(i) Determination of Fair Value of Asset
Year to 31 December 2012 Asian Market European Market Australasian Market
Volume of market – units 4 million 2 million 1 million
Price `19 `16 `22
Costs of entering the market (`2) (`2) (n/a) see note
Potential fair value `17 `14 `22
Transaction costs (`1) (`2) (`2)
Net profit `16 `12 `20
Note : As Jayach buys and sells in Australasia, the costs of entering the market are not relevant as these would
not be incurred.

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 CA. Ranjay Mishra (FCA) 3.7

Further transaction costs are not considered as these are not included as part of the valuation. The principal
market for the asset is the Asian market because of the fact that it has the highest level of activity due to the
highest volume of units sold. The most advantageous market is the Australasian market because it returns the
best profit per unit. If the information about the markets is reasonably available, then Jayach should base its fair
value on prices in the Asian market due to it being the principal market, assuming that Jayach can access the
market. The pricing is taken from this market even though the entity does not currently transact in the market and
is not the most advantageous. The fair value would be `17, as transport costs would be taken into account but not
transaction costs.
If the entity cannot access the Asian or European market, or reliable information about the markets is not available,
Jayach would use the data from the Australasian market and the fair value would be `22. The principal market is
not always the market in which the entity transacts. Market participants must be independent of each other and
knowledgeable, and able and willing to enter into transactions.

(ii) Determination of Fair Value of De-commissioning Liability

Input ` 000)
Amount (`
Labour and material cost 2,000
Overhead (30%) 600
Third party mark-up – industry average (20% of 2,600) 520
Total 3,120
Annual inflation rate (3,120 x 5% compounded for three years) 492
Total 3,612
Risk adjustment – 6% 217
Total 3,829
Discounted at risk free rate of government bonds plus entity’s non-performance risk – 6% 3,215

The fair value of a liability assumes that it is transferred to a market participant at the measurement date. In many
cases there is no observable market to provide pricing information. In this case, the fair value is based on the
perspective of a market participant who holds the identical instrument as an asset. If there is no corresponding
asset, then a valuation technique is used. This would be the case with the decommissioning activity. The fair value
of a liability reflects any compensation for risk and profit margin that a market participant might require to undertake
the activity plus the non-performance risk based on the entity’s own credit standing. Thus the fair value of the
decommissioning liability would be `3,215,000.

Q.14. Mehran, a public limited company, has just acquired a company, which comprises a farming and mining business.
Mehran wishes advice on how to fair value some of the assets acquired.
One such asset is a piece of land, which is currently used for farming. The fair value of the land if used for farming
is `5 million. If the land is used for farming purposes, a tax credit currently arises annually, which is based upon the
lower of 15% of the fair market value of land or `500,000 at the current tax rate. The current tax rate in the
jurisdiction is 20%.
Mehran has determined that market participants would consider that the land could have an alternative use for
residential purposes. The fair value of the land for residential purposes before associated costs is thought to be
`7·4 million. In order to transform the land from farming to residential use, there would be legal costs of `200,000,
a viability analysis cost of `300,000 and costs of demolition of the farm buildings of `100,000.
Additionally, permission for residential use has not been formally given by the legal authority and because of this,
market participants have indicated that the fair value of the land, after the above costs, would be discounted by
20% because of the risk of not obtaining planning permission.
In addition, Mehran has acquired the brand name associated with the produce from the farm. Mehran has decided
to discontinue the brand on the assumption that it will gain increased revenues from its own brands.
Mehran has determined that if it ceases to use the brand, then the indirect benefits will be `20 million. If it continues
to use the brand, then the direct benefit will be `17 million.
Required :
Discuss the way in which Mehran should fair value the above assets with reference to the principles of IFRS 13
Fair Value Measurement
(Int. (CR) - June, 2016 - 8 marks)

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 3.8 Ind AS 113 - Fair Value
Ans. :-

 IFRS 13, requires the fair value of a non-financial asset to be measured based on its highest and best use
from a market participant’s perspective. This requirement does not apply to financial instruments, liabilities
or equity.
 The highest and best use takes into account the use of the asset which is physically possible, legally permissible
and financially feasible. The highest and best use of a non-financial asset is determined by reference to its
use and not its classification and is determined from the perspective of market participants. It does not
matter whether the entity intends to use the asset differently. .
 IFRS 13 allows management to presume that the current use of an asset is the highest and best use unless
market or other factors suggest otherwise.
 In this case, the agricultural land appears to have an alternative use as market participants have considered
its alternative use for residential purposes. If the land zoned for agricultural use is currently used for farming,
the fair value should reflect the cost structure to continue operating the land for farming, including any tax
credits which could be realised by market participants. Thus the fair value of the land if used for farming
would be `(5 + (20% of 0·5)) million, i.e. `5·1 million.
 If used for residential purposes, the value should include all costs associated with changing the land to the
market participant’s intended use.
 In addition, demolition and other costs associated with preparing the land for a different use should be
included in the valuation. These costs would include the uncertainty related to whether the approval needed
for changing the usage would be obtained, because market participants would take that into account when
pricing value of the land if it had a different use. Thus the fair value of the land if used for residential purposes
would be `(7·4 – 0·2 – 0·3 – 0·1) million x 80%, i.e. `5·44 million.

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