The market: Fair value would be based on a
hypothetical transaction that would take place in
the principal market or, in its absence, the most
advantageous market.


The market participants: Fair value measurement
requires considering the same assumptions that
market participants would use when pricing
the asset or liability, assuming that market
participants act in their best economic interest.

The standards board issued IFRS
13 in 2011 to unify measurement
requirements across various
principles. With many organisations
facing hurdles towards this transition,
Veena Hingarh provides practical
solutions to help overcome these


The price: Fair value would be based on the exit
price and not the transaction price or the entry

The standard also provides certain specific
requirements for non-financial assets, liabilities,
equity and financial instruments.
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.

HE ACCOUNTING standard boards
and the professional bodies of
accounting all over the world are
grappling to define and redefine
various concepts of accountancy.


Post Luca Pacioli’s introduction of the double entry
system not much has changed – debits remain
debits and credits remain credits. Recording of
past transactions, to reflect them faithfully, has
been the motto of accounting ever since.

This could have remained a very routine and
repetitive process, straightforward and problem
free. Yet, over the years, accounting standards
have been diverse across countries, dealing with
numerous complex issues and many a times being
economically and politically sensitive and even
becoming controversial. What should have been
straightforward ended being a meandering road
to debate and doubt.
Perspective of the market
Accountants have always had options to select
from multitudes of measurement techniques
ranging from historic cost, through value-inuse, to fair value and many shades in between.
The International Accounting Standards Board
(IASB) issued International Financial Reporting
42 September 2013

Standards (IFRS) 13 on May 12, 2011 unifying
the fair value measurement requirements across
various IFRSs. It came into effect on January
1, 2013 and must be implemented in financial
periods beginning on or after January 1, 2013.

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.” (IFRS
13.9). The fair value measurement is from the
perspective of the market participant rather than
the entity itself, it is the exit price of the asset or
liability. When an entity is fair valuing any asset
or liability the following factors would need to be
The asset or liability: Characteristics of an asset
or liability that a market participant takes into
account for pricing would need to be considered
by the entity, for instance condition, location and
restrictions, if any, on sale or use. A single asset or
liability or a group of assets or liabilities may be
fair valued.

Every organisation needs
to sensitise their personnel
on the impact that fair
valuation would bring on
the look and interpretation
of their financial statement.

A fair value measurement assumes that a financial
or non-financial liability or an entity’s own equity
instrument is transferred to a market participant
at the measurement date. It assumes that the
liability/entity’s own equity instrument would
remain outstanding and the market participant
transferee would be required to fulfill the
obligation/ take on the rights and responsibilities
associated with the instrument.

Valuation techniques
When a quoted price for the transfer of a liability
or the entity’s own equity instruments is not
available but the instrument is held by another
investor as an asset, management should measure
fair value from the perspective of the investor.

If a market is not available for the liability, a
valuation technique is required to measure the fair
value from the perspective of the liability issuer.
The valuation techniques should be appropriate

Over the years, accounting standards have
been diverse across countries, dealing with
numerous complex issues and many a times
being economically and politically sensitive
and even becoming controversial.

in the circumstances and have sufficient data
available to measure fair value, maximising the
use of relevant observable inputs and minimising
the use of unobservable inputs.
Based on the quality of the inputs the standard
established a fair value hierarchy- Level 1 for
quoted price of identical assets, Level 2 for directly
or indirectly observable inputs other than quoted
prices and Level 3 using unobservable inputs for
The fair value of a liability reflects the effect of
non-performance risk. Non-performance risk
includes, but may not be limited to, an entity’s own
credit risk.

IFRS 13 implementation challenges
In this section I have discussed some of the
challenges faced while implementing fair
value measurement. Being the first year of
implementation data gathering, selection of the
valuation technique, changing the mind set to
an exit price orientation, and measuring the risk
premium have been some of the common areas
of deliberation. Paucity of detailed knowledge
is another major challenge. I have provided a
summary of select practical problems faced by
industries across different verticals and would
like to remind the readers that no single entity
might have faced all of them.
The identification of the appropriate market, that
is, the principal market and the advantageous
market may not be as straight forward. Further,
management may need to make assumptions
about the type of market participants that may
be interested in a particular asset or liability.
They would need to consider multiple factors
such as the specific location, condition and other
characteristics of the asset or liability, growth
rates, risk free rate and the risk premium, impact
of inflation and so on.

Non-performance risk
Management may require considering alternative
uses of those assets to determine whether the
current use of the assets commands the highest
price and is the best use.
The price being based on an exit price brings in
a hypothetical sale and requires adoption of an
estimation methodology. The extent to which
market data is available varies with different
assets and liabilities. A rigorous process would be
required to study various market assumptions, key

Even though the first challenge seems to be to have the computational framework ready. Estimates and judgments are an integral part of the subject. but the real challenge will emerge once the first set of accounts is ready and its impact starts percolating down the profit and loss account of subsequent years. The portfolio impact in such cases needs to be determined. Fair value measurements would give rise to unrealised gains once recorded through profit and loss account. Disclosures requirement are intensive including the details of judgments. Accountancy is not a subject of mathematical precision. measurement methodologies. The fair value of a liability should reflect nonperformance risk and should take into account the effect of an entity's own credit risk and the counterparty’s credit risk. It is a riddle how diverse accounting techniques. The standard permits fair value measurement of a group of assets or liabilities. It may be Coke’s content formula or Facebook’s business concept. Therefore there were two implications (1) that fair value measurements must take counterparty risk into account and therefore a credit valuation adjustment should apply to the ‘risk free’ yield curve. However. The value of the asset would oscillate with the market oscillations. and (2) a debit valuation adjustment would need to be made for the entity’s own credit status. our accounting standards can now cause the same 44 September 2013 Effective monetary capital Valuation is as much of an art as a science and we are fully aware of that. Development and selection of the correct valuation technique is critical. When the market is booming assets valued at the exit price would be an overestimation and underestimated in case of market failures. Estimates and judgments are an integral part of the subject. Internally generated intangibles are no doubt valuable. and varied accounting policies on fair valuation can result in truly comparative statements. Market transparency Apart from credit risk a comprehensive risk assessment may be required by the entity while determining the non-performance risk. and so is valuation. Accountancy is not a subject of mathematical precision. . Another challenge to fair value accounting is intangible assets. asset or liability to have multiple values. Uncertainty and estimation is inherent in the entire process. A process in the entity would need to be established for periodically tracking and applying the movements in the credit value adjustment and the debit value adjustment. Availability of local data and statistical deficiencies has been an impediment resulting in usage of proxy values and resulting in many assets and liabilities being measured using unobservable inputs. The entity must have a documented risk management strategy and risk quantification methodology established. It would depend upon the estimate of numerous factors and the choice of the valuation technique according to which they are being recognised. Every organisation needs to sensitise their personnel on the impact that fair valuation would bring on the look and interpretation of their financial statement. but fair valuation may not be fair to all entities. That is.STANDARDS & PRACTICES features of each transaction and their influencing factors to be able to determine a reliable fair value for an arms-length transaction. Beauty is in the eye of the beholder. The accounting standards no doubt provide transparency to the market and users of financial statements. The statistical –financial models developed for the valuation should be such that it can be consistently used in the future. but these find no representation or fair value in accountancy. Use of the fair value hierarchy may become a data intensive and complex exercise. The accounting standards no doubt provide transparency to the market and users of financial statements. Comparability is another feature of the financial statements. Alarming though. Distribution of the unrealised gains may endanger the enterprise capital and pose a challenge to the maintenance of effective monetary capital. methodologies and related issues. at Level 3.