In: Accounting
Discuss the issues associated with the measurement and use of fair values and the need for an accounting standard on fair value measurement.
Discuss this topic in line with at least one relevant theory explained in this unit and provide examples to support comments and include references to relevant accounting standards.
Fair Market Value is a market based value rather than an entity specific prices and this price should be received to sell an asset or paid to transfer a liability in a normal transaction (e.g. other than any stressed sale etc).Fair value is 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 Measurement Techniques:
1. MARKET APPROACH: The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business.
Example : Quoted prices are indicative values of any business if it exchanges in an active market.
2. INCOME APPROACH: The income approach converts future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount. When the income approach is used, the fair value measurement reflects current market expectations about those future amounts. It is a present value of all future earnings from an entity whose fair values are being evaluated or in other words all future cash flows to be discounted at current date to get fair value of the asset / liability.
3. COST APPROACH: This method describes how much cost is required to replace existing asset/ liability in order to make it in a working condition. All related costs will be its fair value. It actually considers replacement cost of the asset/ liability for which we need to find fair value.
Need of Ind AS 113:
EXAMPLE :
An entity sells certain commodity which are available actively at location A and which is considered to be its principal market (being significant volume of transactions and activities takes place). However, fair value of the commodity is required to be assessed for location B which is far from location A and requires a transport cost of INR 100. Since the transport cost is not a transaction cost and it is not specific to any transaction but it is inherent cost which requires to be incurred while bringing such commodity from location A to location B, it will be considered while evaluating fair value from the principal market.
Thus IFRS 13 Fair Value Measurement was an very essential to be introduced to find the real and fair price in the transaction conducted. The Various methods and inputs used in the transaction does also helps in evaluating the correctness of the fair value arrived at using the steps.