Introduction
- IND AS 36 “Impairment of Assets”:
These standard mandates the regular assessment of assets to determine if they are impaired, meaning their carrying amount exceeds their recoverable amount. Valuations help companies identify and account for impairments, ensuring assets are reported at their accurate, lower value to prevent overstating their worth. - IND AS 38 “Intangible Assets”:
Intangible assets such as patents, trademarks, and copyrights require periodic revaluation to reflect their true value accurately. These valuations help companies assess potential declines in the value of intangible assets and maintain accurate financial statements. - IND AS 40 “Investment Property”:
This standard pertains to properties held to earn rentals or for capital appreciation. Regular valuations are crucial to assess the fair value of these properties, ensuring they are reported at their current market value, which is essential for accurate financial reporting. - IND AS 109 “Financial Instruments”:
IND AS 109 covers the valuation of financial instruments such as loans, investments, and derivatives. These instruments often have fluctuating market values, and accurate valuation is critical to reflect their current fair value on the balance sheet. This standard helps guard against financial misrepresentation.
IND AS 36 “Impairment of Assets”
| To observe if indications of impairment | To measure Recoverable amount and compare it with carrying amount | Impair, if the carrying amount is greater than recoverable amount |
IND AS 36 – At a glance
Impairment Indicators
Indicators for impairment may exist due to external factors or internal factors that are specific to the entity. If any such indications exist, the asset needs to go for impairment testing.
For certain assets like an intangible asset with an indefinite useful life or an intangible asset which is not yet available for use or goodwill acquired in business combination, impairment testing should be mandatorily carried out, at least annually, even if no indications for impairment exist.
Measurement
Recoverable amount is the higher of Value in Use (VIU) or Fair Value Less Cost of Disposal (FVLCD).
Fair value less costs of disposal (FVLCD)
It is the amount from the sale of an asset or Cash Generating Unit (CGU) in an arm’s length transaction, less the cost of disposal. The cost of disposal includes legal costs, stamp duty and similar transaction taxes, the cost of removing the asset, and direct incremental costs to bring an asset into a condition for sale.
Value in Use (VIU)
VIU is calculated by estimating the future cash flows that can be received from continuous use of the asset, including realizable value upon the disposal, and discounting it at an appropriate rate after considering risks, premiums or discounts that are applicable.
The recoverable amount is compared with carrying value and if the carrying value is higher, the difference from carrying value to the recoverable amount is determined as an impairment loss.
Key Disclosures
- Amount of impairment loss determined or reversed during the period.
- Basis used for determining recoverable amount.
- Key assumptions and the discount rate considered for determining the Value in Use.
Who can do the valuation?
A Merchant Banker shall be appointed for the valuation purposes.
IND AS 38 “Intangible Assets”
| Recognition of assets | Determination of the carrying amount | Amortisation and impairment to be recognised |
IND AS 38 – At a glance
Measurement at recognition
An asset that qualifies for recognition as an intangible asset shall be measured at its cost.
- Acquisition: If acquired in a separate acquisition, cost includes the purchase price and any directly attributable cost of bringing the asset to working condition for its intended use.
- Business Combinations: If acquired in business combinations, the cost shall be the fair value at the acquisition date.
- Government Grant: If acquired by way of a government grant, an entity should recognize both the intangible asset and the grant initially at fair value.
- Acquisition for a non-monetary consideration: If acquired in an exchange of non-monetary considerations, the cost shall be the fair value of the asset given up or the fair value of the asset received, whichever is more evident. If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.
Measurement after recognition
An entity shall choose either the ‘Cost model’ or the ‘Revaluation model’ as its accounting policy for an entire class of intangible assets.
Key Disclosures
- Gross carrying value and amount of accumulated amortization.
- Line items of statement of profit & loss in which amortization is included.
- Reconciliation statement of the carrying value at the beginning and the end of the period.
- Basis for ascertaining that an intangible has an indefinite life.
- Description and carrying amount of individual material intangible asset.
- Specific disclosures about intangible assets that are acquired by way of government grants.
- Information about those intangible assets whose title is restricted.
- Contractual commitments to acquire intangible assets.
- Intangible assets carried at revalued amounts.
- The amount of research and development expenditure recognized as an expense in the current period.
Who can do the valuation?
A Merchant Banker shall be appointed for the valuation purposes.
IND AS 40 “Investment Property”
| Recognition of the investment property | Determination of the carrying amount | Derecognition of asset in certain cases |
IND AS 40 – At a glance
Measurement at recognition
Initial recognition of the asset is at cost. If it is a purchased invested property, the cost includes purchase price and adds any directly attributable expenditure including transaction costs. Cost excludes any start-up costs, operating losses incurred before the investment property achieves the planned level of occupancy and any abnormal losses incurred during the construction or developing period of the property.
Measurement after recognition
An entity shall follow ‘Cost model’ as its accounting policy for all the investment property. However, the fair value of the investment property is to be disclosed, even the cost model is followed, and the impairment is to be done in accordance with IND AS 36 if the carrying value is greater than the fair value.
Key Disclosures
- Accounting policy for the measurement of investment property and amounts recognized as profit or loss for the year, if any.
- Disclosure of fair value of the property based on the valuation of the independent valuation professional who holds a recognized and relevant professional qualification.
Who can do the valuation?
A Registered Valuer shall be appointed for the valuation purposes.
IND AS 109 “Financial Instruments”
| Establish principles for presenting financial instruments as liabilities or equity | Establish principles for financial reporting of financial assets and financial liabilities |
IND AS 109 – At a glance
Measurement at recognition
All financial assets and liabilities are measured initially at fair value under IND AS 109. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable and willing parties in an arm’s length transaction.
It is normally the transaction price. The way financial instruments are classified under IND AS 109 drives how they are measured and where measurement changes are accounted for.
Measurement after recognition
Measurement of financial instruments depends on their respective classification and should be valued on the measurement date.
Key Disclosures
- Financial instrument nature and risk, comprising a description of the types of financial instruments held by the entity, their risk characteristics, and the techniques employed to mitigate such risks.
- A description of the methodologies used to calculate the fair value of financial instruments, as well as a reconciliation of changes in fair value.
- Impairment Losses, which include any impairment losses recorded for financial instruments, the technique used to assess the impairment, and any substantial changes in the impairment computations.
- Market analysis, which includes a maturity analysis of financial instruments, which displays predicted cash flows and maturities depending on the instruments’ contractual conditions.
Who can do the valuation?
A Merchant Banker shall be appointed for the valuation purposes.
Conclusion
Mandatory valuations under these IND AS standards not only uphold transparency and consistency in financial reporting but also protect stakeholders’ interests by preventing the misrepresentation of a company’s financial health. These valuations are grounded in sound principles and ensure that financial statements accurately represent the true financial position of a company, even as the financial landscape continues to evolve. As a result, companies adhering to these mandatory valuations can maintain the trust and confidence of investors, creditors, and the broader financial community.
Under Indian Accounting Standards (IND AS), which are accounting standards applicable in India, the valuation of certain assets and liabilities is often required. To ensure that these valuations are carried out accurately and in compliance with the applicable accounting standards, a Merchant Banker or a Registered Valuer may be appointed for the valuation purposes.