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IND-AS: Fair Valuation of Financial Instruments

August 26, 2017[2017] 84 taxmann.com 229 (Article)


1. From an era of non-existent mandated accounting standards on financial instruments and fair valuation to early adoption in India of the revamped IFRS9 – Financial Instruments has meant challenges to the corporare financial reporting of financial instruments.

The implementation of the accounting standards on financial instruments is mandatory under the IND-AS framework. IND-AS 113 in line with its IFRS counterpart IFRS 13 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". Fair value as a measurement basis is pervasive in the IFRS framework in the financial instruments space, albeit its use is optional for certain other items in the balance sheet.

Herein below are discussed certain practical aspects of financial instruments in the context of the usage of fair value under IND-AS.

IND-AS Background

2. Indian companies that are part of Phase 2 of convergence with Indian Accounting Standards (IND-AS) have to prepare their first full set of annual financial statements in compliance with the Indian version of IFRS from the current fiscal ending March 31, 2018.

Fair Valuation and Financial Assets

3. The usage of fair value for measurement of financial assets and financial liabilities has been discussed herein below.

3.1 Financial assets measured at fair value

  Under IND-AS, Financial assets are measured at Fair Value Through Other Comprehensive Income(FVTOCI) if these financial assets are held:
  Within a business model whose objective is to hold these assets
  In order to collect contractual cash flows, or
  To sell these financial assets, and
  The contractual terms of the financial asset give rise on specified dates to cash flows that are:
  Solely payments of principal, and
  Interest on the principal amount outstanding.
  Financial asset not measured at amortized cost or at fair value through other comprehensive income carried at Fair Value Through The Statement Of Profit And Loss (FVTPL).
  An entity may in respect of equity investments (other than in subsidiaries, associates and joint ventures),that are not held for trading may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of such equity instruments. Such an election is required to be made on an instrument-by-instrument basis at the time of initial recognition of such equity investments.

3.2 Financial Liabilities and Fair Values

  Trade and other payables are initially required to be measured at fair value, net of transaction costs, and are subsequently measured at amortized cost, using the effective interest rate method where the time value of money is significant.
  Financial liabilities including interest bearing bank loans, overdrafts and issued debt are initially measured at fair value and are subsequently measured at amortized cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings are recognized over the term of the borrowings in the statement of profit and loss.

3.3 Derivative financial instruments and hedge accounting

  Derivatives are initially accounted for and measured at fair value from the date the derivative contract is entered into and, subsequently, is required to be re-measured to fair value at the end of each reporting period taking into consideration hedge relationships, if any.

Fair Value Hierarchy

4. The fair valuation hierarchy with respect to financial instruments is discussed in the table herein below.

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

Financial Asset Valuation Techniques

5. An illustrative list of financial assets and their respective measurement bases are provided in the table herein below.

Financial Assets 
Amortized Cost Fair Value Through Profit Or Loss Fair Value Through OCI
Cash And Cash Equivalents Liquid Mutual Fund Units Equity And Preference Securities
Tax-Free Bonds And Government Bonds Convertible Promissory Notes Non-Convertible Debentures
Trade Receivables Fixed Maturity Plan Securities Certificates Of Deposits
Other Financial Assets      


Financial Liabilities
Amortized Cost Fair Value Through Profit Or Loss
Trade Payables Derivative Financial Instruments – Forward and Option Contracts
Liability towards Contingent Consideration involved in a business combination per IND-AS 103

Fair Valuation And Individual Financial Instruments

6. An illustrative list of financial instruments and their IND-AS valuation techniques is provided herein below.

  The fair value of liquid mutual funds is based on published NAV quoted prices.
  The fair value of tax-free bonds and government bonds is based on quoted prices and market observable inputs.
  The fair value of non-convertible debentures is based on quoted prices and market observable inputs.
  The fair value of fixed maturity plan securities and certificates of deposit is based on market observable inputs.
  Derivative financial instruments are valued based on quoted prices for similar assets and liabilities in active markets or inputs that are directly or indirectly observable in the marketplace. Certain derivative Financial Instruments are fair valued using MTM data from banks.
  The fair value of investments in unquoted equity, preference and other securities is determined using Level 3 inputs like Discounted cash flows, Market multiple method, Option pricing model, etc.
  Short-term financial assets and liabilities are stated at carrying value which are approximately equal to their fair value.
  Investments carried at fair value are generally based on market price quotations.
  Fair value of borrowings that have a quoted market price in an active market is based on its market price, which is categorized as level 1. Fair value of borrowings which do not have an active market or are unquoted is estimated by discounting expected future cash flows using a discount rate equivalent to the risk-free rate of return adjusted for credit spread considered by lenders for instruments of similar maturities which is categorized as level 2 in the fair value hierarchy.
  Investments in Non Convertible Debenture with Non-Banking Financial Companies are fair valued using broker quotes.
  Deposits with Non-Banking Financial Companies are fair values using the present Value of expected cash flows using an appropriate discount rate
  Commercial Paper issued by the Company is fair valued using the present value of expected cash flows using an appropriate discount rate.
  Zero Coupon, Unsecured, Redeemable, Non Convertible Debenture issued by the Company are fair valued using present value of expected cash flows using an appropriate discount rate.



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