Fair Valuation Method Ind As 113

Under Ind AS 113 (Fair Value Measurement), the objective is to estimate the price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date (an "exit price").

Here is the guidance regarding your specific questions about Preference Shares (such as Optionally Convertible Preference Shares - OCPS):

1. Does Ind AS 113 permit the use of the Net Asset Method?

Yes, Ind AS 113 permits the use of the Adjusted Net Asset Method (also known as the Net Asset Value approach), provided it is the most appropriate valuation technique under the circumstances.

• Valuation Techniques: Ind AS 113 does not mandate a single method. Instead, it requires entities to use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

• Approaches: The standard categorizes these into three main approaches:

  • Market Approach: Uses prices and other relevant information generated by market transactions involving identical or comparable assets/liabilities.

  • Income Approach: Converts future amounts (e.g., cash flows or income and expenses) to a single current (i.e., discounted) amount.

  • Cost Approach: Reflects the amount that would be required currently to replace the service capacity of an asset (often called current replacement cost).

• Suitability: The Adjusted Net Asset Method falls under the umbrella of techniques used when valuing equity instruments (like unquoted preference shares) where market-based transaction data for identical instruments may be limited. It is often considered a "Cost Approach" or a hybrid approach where the fair value is derived from the net value of the underlying assets and liabilities of the investee.

2. How to fair value Preference Shares (OCPS)?

Valuing instruments like OCPS involves considering both the debt and equity components (the "option" to convert). The choice of method depends on the nature of the instrument and the availability of data:

• If the instrument is complex: If the preference shares have conversion options, you may need to use an Income Approach (e.g., Discounted Cash Flow - DCF). You would discount the expected future cash flows (dividends + redemption value or the value upon conversion) at an appropriate risk-adjusted discount rate.

• Using the Adjusted Net Asset Method: This is generally used when the entity's value is primarily driven by its underlying assets rather than its earnings potential. To use this for preference shares:

  1. Determine the fair value of the entity's total assets and liabilities.

  2. Allocate that value to the various classes of equity/preference holders based on their specific rights (e.g., liquidation preference, dividend rights, and conversion terms).

  3. Adjust the value to account for factors like liquidity risk and the probability of conversion.

• Hierarchy Priority: Remember that under Ind AS 113, you must prioritize observable inputs. If there are recent arm's-length transactions in the company's shares (or similar companies' shares), that should be given higher priority than the Net Asset Method (which is often a Level 3, unobservable input approach).

Summary for your reference:

• Methodology: You may use the Adjusted Net Asset Method if it reliably reflects the exit price and other approaches are less suitable. However, ensure you adjust the net assets for any specific rights attached to the preference shares (e.g., preference in winding up).

• Compliance: Always document why the chosen technique is the most appropriate and ensure it captures the assumptions a "market participant" would make, rather than entity-specific intentions.

Summary: Ind AS 113 does not forbid the use of the Adjusted Net Asset Method. It allows for any valuation technique—Market, Income, or Cost (which includes the Adjusted Net Asset approach)—provided it maximizes observable inputs and reflects market participant assumptions. When valuing preference shares, you must account for the specific rights (liquidation/conversion) and determine if an Income Approach (DCF) or Market Approach might be more representative of an "exit price" than a static Net Asset calculation.