Ind AS 113 – Fair Value Measurement Interview Q&A
A. Core Concepts & Scope
Q1: What is the objective of Ind AS 113, and how does it differ from historical cost measurement?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting standards and your ability to articulate the differences between fair value and historical cost accounting.
- Objective of Ind AS 113
- Fair value measurement
- Differences from historical cost
The objective of Ind AS 113 is to establish a framework for fair value measurement and disclosure requirements. It differs from historical cost measurement by focusing on the current market conditions and the exit price of an asset or liability, rather than the original purchase price, which may not reflect the asset's current economic value.
Q2: How is 'fair value' defined in Ind AS 113?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting standards and valuation methods.
- Definition of fair value
- Ind AS 113 compliance
- Market participant perspective
In Ind AS 113, 'fair value' is defined 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. This definition emphasizes the market participant perspective and requires consideration of the highest and best use of the asset.
Q3: What is the scope of Ind AS 113—what types of items does it apply to?
What the interviewer tests: The interviewer is looking for your knowledge of accounting standards and their applicability to various financial instruments.
- Definition of Ind AS 113
- Types of items covered
- Fair value measurement principles
Ind AS 113 applies to all financial instruments and non-financial assets that are measured at fair value, including derivatives, investment properties, and certain liabilities, providing a framework for consistent valuation.
Q4: How does Ind AS 113 apply when another standard requires or permits fair value measurement?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement principles under Ind AS.
- Understanding of Ind AS 113
- Interaction with other standards
- Application in financial reporting
Ind AS 113 provides a framework for fair value measurement that should be applied consistently across all standards that permit or require it. When another standard allows for fair value measurement, Ind AS 113's definitions and measurement techniques must be followed to ensure consistency and transparency in financial reporting.
Q5: What is the difference between fair value and market value under Ind AS 113?
What the interviewer tests: The interviewer is testing your understanding of valuation concepts and their application under Indian Accounting Standards.
- Definition of fair value
- Definition of market value
- Application under Ind AS 113
Fair value under Ind AS 113 is defined as the price that would be received to sell an asset in an orderly transaction between market participants, while market value refers to the price at which an asset would trade in a competitive auction setting. Fair value is more aligned with the concept of a transaction under current market conditions, emphasizing the perspective of market participants.
B. Fair Value Measurement Principles
Q6: Explain the three-level fair value hierarchy introduced in Ind AS 113.
What the interviewer tests: The interviewer is checking your understanding of fair value measurement and its application in financial reporting.
- Level 1: Quoted prices in active markets
- Level 2: Observable inputs other than quoted prices
- Level 3: Unobservable inputs
The three-level fair value hierarchy in Ind AS 113 categorizes inputs used in valuation techniques. Level 1 includes quoted prices for identical assets or liabilities in active markets, providing the highest level of reliability. Level 2 encompasses observable inputs, such as quoted prices for similar assets in active markets or other market data, while Level 3 consists of unobservable inputs, relying on the entity's own assumptions and estimates. This hierarchy ensures transparency and consistency in fair value measurements.
Q7: How is an exit price determined under Ind AS 113?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement principles.
- Market approach
- Income approach
- Cost approach
Under Ind AS 113, an exit price is determined based on the fair value of an asset or liability, which can be assessed using the market approach, income approach, or cost approach, depending on the availability of data and the nature of the asset.
Q8: What is the 'principal market' and how does it impact fair value measurement?
What the interviewer tests: The interviewer is testing your understanding of fair value measurement and market concepts in accounting.
- Definition of principal market
- Impact on fair value
- Market participants
The 'principal market' is defined as the market with the greatest volume and level of activity for the asset or liability. It impacts fair value measurement by providing the most reliable price information, ensuring that valuations are based on actual market conditions and expectations of market participants.
Q9: What should an entity do if there is no principal market available for a fair value asset?
What the interviewer tests: The interviewer wants to gauge your knowledge of fair value measurement and the application of valuation techniques.
- Identification of the most advantageous market
- Use of alternative valuation techniques
- Disclosure requirements
If there is no principal market available for a fair value asset, the entity should determine the most advantageous market for the asset and use that for valuation. If no active market exists, the entity can apply alternative valuation techniques such as discounted cash flow analysis or comparable transactions, while ensuring appropriate disclosures are made regarding the valuation methods used.
Q10: How should non-performance risk be factored into the fair value of a liability?
What the interviewer tests: The interviewer is testing your knowledge of fair value measurement principles, specifically how to incorporate risk factors into liability valuations.
- Fair value measurement
- Non-performance risk
- Liability valuation
Non-performance risk should be factored into the fair value of a liability by adjusting the discount rate or the expected cash flows. This involves considering the likelihood of default by the entity and incorporating that risk into the valuation model to ensure an accurate representation of the liability's fair value.
C. Inputs & Valuation Techniques
Q11: What are the three main valuation techniques identified in Ind AS 113?
What the interviewer tests: The interviewer is checking your knowledge of fair value measurement and the specific techniques outlined in the accounting standards.
- Market approach
- Income approach
- Cost approach
The three main valuation techniques identified in Ind AS 113 are the Market Approach, which uses prices and other relevant information generated by market transactions; the Income Approach, which converts future cash flows to a single present value; and the Cost Approach, which reflects the amount that would be required to replace the service capacity of an asset.
Q12: When would the income approach be more appropriate than the market or cost approach?
What the interviewer tests: The interviewer wants to know your understanding of valuation methods and their appropriate contexts.
- Income approach definition
- Contextual application
- Comparison with other approaches
The income approach is more appropriate when valuing income-generating assets, such as rental properties or businesses with stable cash flows. This method focuses on the present value of expected future cash flows, making it useful when market comparables are scarce or when the asset's value is primarily derived from its income potential, unlike the market or cost approaches.
Q13: How do observable and unobservable inputs differ, and what is their relevance in the hierarchy?
What the interviewer tests: The interviewer is testing your understanding of valuation techniques and the fair value measurement hierarchy.
- Observable inputs
- Unobservable inputs
- Fair value hierarchy
Observable inputs are market data obtained from transactions or pricing in active markets, while unobservable inputs are based on the entity's own assumptions when market data is not available. Their relevance in the fair value hierarchy is crucial as it determines the level of reliability and transparency in valuations.
Q14: How should inputs be adjusted when using Level 2 fair value measurements?
What the interviewer tests: The interviewer is looking for your knowledge of fair value hierarchy and the adjustments necessary for Level 2 measurements.
- Understanding of Level 2 inputs
- Market conditions
- Adjustment techniques
When using Level 2 fair value measurements, inputs should be adjusted based on observable market data for similar assets or liabilities. This includes considering factors like market liquidity, credit risk, and any relevant adjustments for differences in terms or conditions compared to the observed market transactions.
Q15: How does the use of internally developed models affect classification in the fair value hierarchy?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement and the implications of using internal models.
- Understanding of fair value hierarchy
- Impact of internal models
- Regulatory considerations
Internally developed models can influence classification within the fair value hierarchy by potentially moving an asset or liability from Level 1 to Level 2 or Level 3, depending on the inputs used. If the model relies on observable market data, it may align with Level 2. However, if significant unobservable inputs are involved, it may fall under Level 3, which requires more disclosure and may indicate higher uncertainty in valuation.
D. Special Cases & Adjustments
Q16: How should fair value be measured when an asset is used in combination with other assets?
What the interviewer tests: The interviewer is evaluating your knowledge of valuation techniques and accounting standards related to asset measurement.
- Market approach
- Income approach
- Cost approach
Fair value should be measured based on the highest and best use of the asset in combination with other assets, utilizing valuation techniques such as the market approach for comparable sales, the income approach for expected future cash flows, or the cost approach for replacement costs, ensuring the measurement reflects the asset's contribution to the overall value.
Q17: What is the fair value treatment for a financial instrument with a restriction on sale?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement and its implications under financial reporting standards.
- Fair value definition
- Market restrictions impact
- Relevant accounting standards
The fair value treatment for a financial instrument with a restriction on sale involves considering the restriction's impact on marketability. While fair value is typically based on market transactions, adjustments may be necessary to reflect the lack of liquidity and potential price discounts due to the sale restriction, in accordance with relevant accounting standards such as IFRS 13.
Q18: How is fair value measured for a liability or an entity’s own equity instrument?
What the interviewer tests: The interviewer is testing your understanding of fair value measurements and the relevant accounting standards.
- Market approach
- Income approach
- Cost approach
Fair value for a liability is typically measured using the market approach by observing prices in active markets for similar liabilities, or through the income approach, which discounts future cash flows associated with the liability. For an entity’s own equity instruments, fair value is generally determined based on market prices if available, or through valuation techniques that incorporate relevant information.
Q19: Can the transaction price be presumed to equal fair value? If so, when might that not be true?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement and the conditions under which transaction prices may not reflect fair value.
- Understanding of fair value
- Conditions affecting fair value
- Market conditions
The transaction price can be presumed to equal fair value in an orderly transaction between market participants. However, this may not hold true in cases of distressed sales, transactions involving related parties, or market inefficiencies where external factors influence pricing.
Q20: How should bid-ask spreads be handled in fair value measurement?
What the interviewer tests: The interviewer is examining your knowledge of fair value measurement principles and your ability to apply them in practical scenarios.
- Understanding of bid-ask spreads
- Application of fair value concepts
- Market conditions consideration
Bid-ask spreads in fair value measurement should be considered as they reflect the liquidity and market conditions of the asset. When measuring fair value, I would typically use the midpoint of the bid-ask spread, unless there is evidence that suggests a different valuation is more appropriate based on market activity or specific transaction details.
E. Disclosure Requirements
Q21: What disclosures are required for each class of assets and liabilities measured at fair value?
What the interviewer tests: The interviewer is assessing your knowledge of fair value measurement and disclosure requirements under relevant accounting standards.
- Understanding of fair value hierarchy
- Knowledge of disclosure requirements
- Ability to apply standards to different asset classes
Each class of assets and liabilities measured at fair value requires disclosures about the valuation techniques and inputs used, the level of the fair value hierarchy, and any transfers between levels. This ensures transparency and helps users of financial statements understand the valuation process.
Q22: How should Level 3 fair value measurements be disclosed under Ind AS 113?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement disclosures and compliance with accounting standards.
- Understanding of Ind AS 113
- Level 3 measurement criteria
- Disclosure requirements
Level 3 fair value measurements should be disclosed by providing qualitative and quantitative information about the significant unobservable inputs used in the valuation. This includes a description of the valuation techniques, the rationale for their use, and the sensitivity of the fair value measurement to changes in those inputs.
Q23: What information must be disclosed about valuation techniques and inputs used?
What the interviewer tests: The interviewer seeks to evaluate your knowledge of financial reporting standards and transparency in financial statements.
- Valuation techniques
- Inputs used
- Disclosure requirements
Valuation techniques and inputs must be disclosed in accordance with relevant accounting standards, detailing the methods applied, the significant inputs used in the valuation, and any assumptions made. This includes information on the hierarchy of inputs, whether they are observable or unobservable, and how changes in inputs could affect the valuation.
Q24: What sensitivity analysis is required for significant unobservable inputs?
What the interviewer tests: The interviewer is testing your knowledge of valuation techniques and how to handle uncertainty in financial models.
- Identification of inputs
- Range of outcomes
- Impact assessment
For significant unobservable inputs, sensitivity analysis should identify the inputs that have the greatest impact on valuation. It involves assessing a range of potential outcomes based on varying these inputs and analyzing how changes affect the overall valuation, which helps in understanding the risks involved.
Q25: How does Ind AS 113 help ensure transparency and comparability in fair value disclosures?
What the interviewer tests: The interviewer is assessing your understanding of financial reporting standards and their implications.
- Fair value measurement
- Market participant assumptions
- Disclosure requirements
Ind AS 113 establishes a framework for measuring fair value and requires entities to disclose information that helps users understand the valuation techniques and inputs used. This enhances transparency and comparability across entities by standardizing how fair value is determined.