Fair value hierarchy mentioned as per Ind AS 113

What is the fair value hierarchy mentioned in Ind AS 113?

Ind AS 113 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

Level 1 inputs

  1. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
  2. A quoted price in an active market provides the most reliable evidence of fair value and shall be used without adjustment to measure fair value whenever available.
  3. Emphasis within Level 1 is on determining both of the following:
  4. the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability; and
  5.  whether the entity can enter into a transaction for the asset or liability at the price in that market at the measurement date.
  6. If an entity holds a position in a single asset or liability that is traded in an active market, the fair value shall be measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity. That is the case even if a market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price.
  7. No adjustment to a Level 1 input.

Level 2 inputs

1)  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

2)  If the asset or liability has a specified contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability.

Level 2 inputs include the following:

a)  Quoted prices for similar assets or liabilities in active markets.

b)  Quoted prices for identical or similar assets or liabilities in markets that are not active.

c)   Inputs other than quoted prices that are observable for the asset or liability, for example:

i.   interest rates and yield curves observable at commonly quoted intervals;

ii.  implied volatilities; and

iii.  credit spreads.

d)  Market-corroborated inputs.

3)  Adjustments to Level 2 inputs will vary depending on factors specific to the asset or liability. Those factors include the following:

a)  the condition or location of the asset;

b)  the extent to which inputs relate to items that are comparable to the asset or liability; and

c)   the volume or level of activity in the markets within which the inputs are observed.

4)   An adjustment to a Level 2 input that is significant to the entire measurement might result in a fair value measurement categorised within Level 3 of the fair value hierarchy if the adjustment uses significant unobservable inputs.

Level 3 inputs

  1. Level 3 inputs are unobservable inputs for the asset or liability.
  2. Unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, the fair value measurement objective remains the same, ie, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability.
  3. Assumptions about risk include the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and the risk inherent in the inputs to the valuation technique.
  4. An entity shall use the best information available in the circumstances, which might include the entity’s own data. In developing unobservable inputs, an entity may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the entity that is not available to other market participants (eg, an entity-specific synergy).

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