1. IFRS in India
Migrating to Fair Value concept
By:
Valuation Group
SPA Merchant Bankers Limited
2. FAIR VALUE PRACTICES OUTLINED BY IFRS
In the past company balance sheets have shown asset and liability
values as per their original price, but come April 2011, this is set to
change. As per the fair value practices outlined by the IFRS, assets and
liabilities have to be valued at their current market value.
There could be intangibles like brands, trademarks, and customer
relations which would now show up in the balance sheet of the acquirer.
So the composition of the balance sheet will change.
IFRS also dictates that companies will have to charge these components
to profits in the future.
IFRS defines Fair value as under:
“Fair value is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s
length transaction.”
3. What is Fair Value
IFRS defines Fair value as under:
“Fair value is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s
length transaction.”
Major Components:
• Could be exchanged or settled
• Knowledgeable & willing Parties
• Arms length transaction
Requisites to be a valuer
A person:
• Who holds a recognized & relevant Professional qualification
• Has sufficient experience in the field of valuation
• Has requisite market knowledge & understanding
• Is independent to give fair views
4. Use of Fair Values in IFRS
IFRS 2 Share based Payment
• Requires share based payments to be measured at fair value. For equity-settled
transactions, this fair value is measured at the date of grant only. For cash settled
and share-based payments with cash alternatives, the fair value of the liability is
measured at fair value at each balance sheet date.
IFRS 3 Business Combinations
• IFRS 3 Business Combinations, requires the allocation of the purchase price in a
purchase combination to be allocated between tangible and intangible assets
based on fair value. IFRS 3 will require the identification of more intangible assets
than is currently the norm.
• The fair value concept applies on all acquisitions of subsidiaries, associates and
joint ventures
IAS 16 Property, Plant and Equipment
• allows property to be carried at re-valued amount, which is the item’s fair value.
5. Use of Fair Values in IFRS
IAS 38 Intangible Assets
• allows the use of fair value when an active market exists for those intangibles
IAS 39 Financial Instruments: Recognition and Measurement
• requires certain financial assets and financial liabilities to be measured at fair
value. These include derivative instruments, assets available for sale, and assets
held for trading. In addition, IAS 39 provides an option to fair value certain
financial assets and financial liabilities that are not required to be measured at fair
value.
IAS 40 Investment Property
• allows investment property to be measured under a fair value model or cost
model.
IAS 41 Agriculture
• requires that biological assets and agricultural produce be carried at fair value.
6. IAS 39 - Financial Instruments: Recognition and Measurement
Financial Assets - Summary
Category HTM Receivables /
FVTPL AFS *
Measurement assets Payables *
Initial Fair FV FV FV
Value +/- TC +/- TC +/- TC
Subsequent Fair Amortised Amortised Fair
value cost cost value
Gains / Losses P&L P&L P&L Equity
Impairment /
P&L P&L P&L P&L
Derecognition
Not Not
Reclassification AFS HTM
permitted applicable
* Short term receivables / payables & unquoted equity instruments for which fair value is not ascertainable,
measurement should be at cost
8. Valuation-
Valuation- under IFRS/ IAS
With IFRS all set to come to India, emphasis will be more on fair value accounting
than cost based accounting. Some of the standards where there will be need of fair
valuation opinions are:
Share-based Payment (IFRS 2)
Business Combination (IFRS 3)
Financial Instruments Presentation (IAS 32 & IFRS 7)
Impairment of Assets (IAS 36)
Property Plant & Equipment (IAS 16)
Employee Benefits (IAS 19)
Financial Instruments Measurement (IAS 39)
Investment Properties (IAS 40)
Agriculture (IAS 41)
SPA provides valuation report, which serves the purpose of financial reporting,
report reporting
including, but not limited to, the effective date of valuation, the methods and
significant assumptions applied in estimating fair value and if applicable, the extent
to which the values were determined by reference to observable prices in an active
market or recent market transactions at arm’s length terms or were estimated using
other valuation techniques, which enables the client to make decisions on the most
appropriate accounting treatment and to account for the different assets (or
liabilities) employed in the enterprise in a compatible fashion.
9. SPA Valuation Services
We provide independent valuation services utilizing accepted valuation methodology
to produce well reasoned, supportable valuation and financial consulting services.
Our valuation passes two tests. First, it reaches an accurate value conclusion.
Second, it clearly and convincingly establishes how the conclusion was reached. A
good business valuation can be successfully defended and supported under critical
scrutiny.
The Team
Quality valuations are performed by experienced, capable appraisers. SPA prides
itself on its professional experience and expertise in the field of corporate valuations.
As a financial consulting firm, our major specialty is valuing businesses and corporate
securities. The team consists of Chartered Accountants, CFAs, Company Secretaries
and ICAI Certified Valuation experts.
experts.
Clients Who Count On Us
We have done more than 1000 valuations across industries. Our clientele consist of
domestic and multinational companies including various Fortune 500 companies.
companies.
Referrals from existing clients constitute the largest single source of clients for SPA.
Other valued reference sources for new assignments include, accounting firms, law
firms, and investment banking organizations.
10. Mélange of Valuation Services
The valuation services we provide broadly cover the following:
Business Valuation
• Acquisition- Domestic & Cross Border
• Assessment of Merger Swap Ratio
• Fairness Opinion
• Valuation of business segments/divisions for spin off/restructuring
• Share Purchase/Investment/Fund Raising
• Good will & Asset Impairment testing (US GAAP/IFRS/Indian GAAP)
• Investment Impairment testing for accounting purposes
• Fair valuation for statutory/regulatory purposes
Intangible Asset valuation
• Brand valuation
• Intellectual property valuation
• Asset valuation for purchase price allocation for accounting for business
combinations (US GAAP/IFRS)
• Carried Interest valuation
• Derivative Valuation under IFRS
• Recognition and Measurement of financial assets and liabilities
Employee Stock Options Valuation
• Equity Shares/Common Stock for Perquisites taxation
• Sweat Equity
• Stock Options through Black-Scholes and Binomial or Lattice technique
• Share based payment awards valuation under IFRS
11. Intangible Asset Valuation- Brand, IPR etc.
Valuation-
Market Relief From
Approach Royalty
Real Options
Intangible Income Discounted
Asset Valuation Approach Cash Flow
Replacement
Cost
Cost Approach Actual Cost
We, at SPA, provide Valuation Report which uses internationally accepted
complex methods but is still easily understandable.
12. Derivatives valuation under IFRS
IAS 39 requires that all derivatives are marked at fair value (mark to market)
IAS sets out a hierarchy for the determination of fair value:
• For instruments traded in active markets, use a quoted price.
• For instruments for which there is not an active market, use a recent market
transaction.
• For instruments for which there is neither an active market nor a recent market
transaction, use a valuation technique.
Implications:
• A large section of the derivatives market use valuation techniques with
parameters implied from known points.
• If valuation technique cannot be calibrated back to market (e.g. complex
products) then fair value is the price at which the trade was done -> Initial “Day
One” P&L cannot be recognised.
13. Derivatives valuation under IFRS
Stock Options valuation techniques
The Black-Scholes model is a mathematical model based on the notion that prices
Black-
of stock follow a stochastic process, in other words the price of a stock in time t+1 is
independent from the price in time t. This is also referred to as random walk
The Binomial options pricing model approach is widely used as it is able to handle a
variety of conditions for which other models cannot easily be applied. This is largely
because the BOPM is based on the description of an underlying instrument over a
period of time rather than a single point. As a consequence, it is used to value
American options that are exercisable at any time in a given interval as well as
European options that are exercisable at specific instances of time.
In terms of theory, Monte Carlo valuation relies on risk neutral valuation.[1] Here the
price of the option is its discounted expected value; see risk neutrality and Rational
pricing: Risk Neutral Valuation. The technique applied then, is (1) to generate
several thousand possible (but random) price paths for the underlying (or
underlying) via simulation, and (2) to then calculate the associated exercise value
(i.e. "payoff") of the option for each path. (3) These payoffs are then averaged and
(4) discounted to today. This result is the value of the option.
Deciding on the appropriate valuation model is a key decision for accounting for stock options
14. Derivatives valuation under IFRS
Foreign Exchange Option valuation techniques
FX options are generally European and hence can use a standard B&S model. Like
an equity option, currency options can be priced using a standard black and scholes
option model with a dividend yield. With a currency option, the dividend yield
represents the foreign currency's continually compounded risk-free interest rate. In
the same way, FOREX option pricing will need to consider:
Underlying Price (the Spot FOREX rate), Interest Rate = Local Currency Interest Rate
Dividend Yield = Foreign Currency Interest Rate, Strike Price = The cross rate at which
the currency will be exchanged, Expiration Date = The expiry date of the option
Volatility = The expected future volatility of the exchange rate over the life of the
option
Garman and Kohlhagen extended the Black-Scholes model to cope with the
presence of two interest rates (one for each currency). Suppose that rd is the risk-
free interest rate to expiry of the domestic currency and rf is the foreign currency
risk-free interest rate (where domestic currency is the currency in which we obtain
the value of the option; the formula also requires that FX rates - both strike and
current spot be quoted in terms of "units of domestic currency per unit of foreign
currency").
Then the domestic currency value of a call option into the foreign currency is:
15. Valuation for Business Combination
• Traded financial instruments (eg. investments) at market values
• Unquoted financial instruments based on estimated values such as price-earning
ratio, dividend yield, growth rates of similar traded instruments
• Long-term receivables and other long-term assets at present values determined
at appropriate current interest rates less allowances for doubtful receivables and
collection costs
• Inventories- Finished goods at selling price less sum of cost of disposal and profit
allowance for acquirer’s effort
Work-in-progress at selling price of finished goods less sum of cost to
complete, cost of disposal and profit allowance for acquirer’s effort
Raw materials at replacement cost
• Land and building at market values
• Plant and equipment at market values determined by an appraiser. In absence
of market value depreciated replacement cost
• Net employee defined benefit asset or liability at present value less fair value of
plan assets
• Long-term liability at present values at appropriate interest rates
Cost of Fair Value of >0 Goodwill
Business - assets, liabilities
and contingent Negative
Combination
liabilities assumed <0 Goodwill*
* Reassess the fair values originally determined, Any remaining excess is recognised in P & L immediately
16. Valuation Group: Select Clientele
ACME TELE POWER LTD ARUBA NETWORKS, INC
AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD
BHARATI AIRTEL LTD.
DOMINOS BECTON, DICKINSON AND COMPANY
ESCORTS LTD. CREDIT SUISSE GROUP
ECO SECURITIES GROUP PLC
EVEREST INDUSTRIES LTD.
EMC CORPORATION
HIMALYA INTERNATIONAL
CGI GROUP INC
JINDAL POLYFILMS LTD
FIRST CONSULTING GROUP, INC
JINDAL STEEL & POWER LTD
HEWITT ASSOCIATES, INC
LUMINOUS POWER
INTEL CORPORATION
MAX HEALTHCARE
JOHNSON MATTHEY
MOSER BAER LTD LSI CORPORATION
NATIONAL GENERAL INDUSTRIES LTD MOSAIC COMPANY
NATIONAL SEMICONDUCTOR CORPORATION, INC
SONATA SOFTWARE
NDS GROUP PLC
TELEVISION EIGHTEEN INDIA LTD.
NETWORK 18 FINCAP LTD NETLOGIC MICROSYSTEMS INC
TV TODAY NETWORK LTD
PRINCIPAL FINANCIAL GROUP INC.
VIKAS WSP QUALITY ENGINEERING AND SOFTWARE
TECHNOLOGIES INC.
17. Why SPA ?
Experience & Clientele: SPA prides itself on its professional experience and
Clientele:
expertise in the field of corporate valuations. We have done more than 500
valuations across industries. Our clientele consist of domestic and multinational
companies including various Fortune 500 companies.
Team:
Team: Quality valuations are performed by experienced, capable appraisers.
The team consists of Chartered Accountants, CFAs, Company Secretaries and
ICAI Certified Valuation experts.
Quality output: As a result of clear understanding of applicable laws and passion
output:
to excel and deliver, our valuation passes two tests. First, it reaches an accurate
value conclusion. Second, it clearly and convincingly establishes how the
conclusion was reached. Our valuation can be successfully defended and
supported under critical scrutiny.
Touch of advisory: We understand that, clients require more than just the report.
advisory:
We are more than willing to provide advisory and support before and after the
rendering of services.
18. Key Execution Team- Valuations
Team-
Sudhir Chandi, Senior Vice President
FCA – 14 years of experience in financial services industry related to Investment
Banking, Project Financing, Loan Syndication, forex & Corporate Valuations.
Certified Valuer from Institute of Chartered Accountants of India.
Mona Sutrave, Assistant Vice President
MBA, B. com having more than 8 years experience in the field of Merchant Banking,
& Corporate Valuations.
Nitin Somani, Company Secretary
ACS - 6 years of experience in handling corporate compliances, Merchant Banking
and distribution of public issues .
Sourabh Garg, Senior Manager
ACA, B. com having more than 5 years experience in the field of Merchant Banking,
Project Financing, Corporate Valuations & Taxation. Certified Valuer from Institute of
Chartered Accountants of India.
Mohit Jain, Senior Manager
MBA(Finance) , B.Com(H) having more than 4 years of experience in the field of
Corporate Finance and Investment Banking with Bulge Bracket Investment Bank
Leepika Bakshi, Manager
MBA, BBA having 1 year experience in field of Merchant Banking, Project Financing,
Loan Syndication & Corporate Valuations.
19. CLIENT QUOTES
“Very professional and prompt in services” - CFO, of an IT Major
Very
“Kept to deadlines, and excellent self explanatory report” - Director
Kept
Finance, of Media Company
“Timely and clear communication, during process and final product
was worth the money - CFO, Telecommunication Company
money”
“What they delivered was beyond the assignment, it had a touch of
advisory, which was priceless CEO, Healthcare Company
priceless”-
20. Other Services Offered By SPA Group
Investment Banking Distribution of Securities Broking Insurance
Financial Products Broking
Management of Public Mutual Funds Cash Market Life Insurance
& Rights Offer Public Issues Wholesale Broking
Private Placement of Bonds Debt Market Non-Life
equity & debt Fixed Deposits Futures & Insurance
Managers to Options Broking
Debt Issues
Takeovers/Mergers/
Acquisitions Other financial
products
Delisting & Buyback
offers
Equity Research
Overseas listing (FCCB)
ESOPs Advisory
Debt Restructuring
Financial structuring
Loan syndication
Short Term Debt
21. Corporate Offices
Branch Offices
Valuation Group
SPA Merchant Bankers
Limited
25, C - Block,
Community Centre
Janak Puri,
New Delhi - 110 058
+91 11 4567 5587, 4567 5585,
45675558
9911308123, 9958992453,
9871345811
valuations@spacapital.com
