promoter director, since 2001, ofbaroda-icai.org/word file/16.pdf · - for the subjects of...

Bharat P. Gajjar / Oct. 2010 of 2

Bharat P. GAJJAR Chartered Accountant,

Master of Valuation (Real Estate) (Gold Medal)

Master of Valuation (Plant & Machinery) (Gold Medal)

Govt. Regd. Valuer (Real Estate/Immovable Property)

Govt. Regd. Valuer (Stock, Share, Business & Intangible)

Diploma in Computer Application,

FIV, AIISLA, Lead Auditor (ISO),

Insurance Surveyor & Loss Assessor

# 9824046985, [email protected], www.gajjarconsultants.com, 0265+2335549/50

A-104, Sangrilla, Opp. HDFC Bank, Radha Krishna Park Cross Roads, Off Old Padra Road, Akota, Vadodara-390020

Age : 40 Years

Promoter Director, since 2001, of

GAJJAR TECHNO-ECONOMIC CONSULTANTS PVT. LTD.

Head Quarters at Vadodara and Branches at various locations -

And

Has been the cohesive and composite qualified Economic Advisor and Valuation Expert for both Tangible &

Intangible Business Asset Class

Has witnessed and appraised over 5000 Valuation Assignments and over 300 Projects’ Techno-Economic

Feasibility Study, for wide spectrum of Industries & Service Organizations

Leadership acknowledged by over 30 Banks and Financial Institutions for a decade long consistent quality &

trustworthy professional service

Educational Qualifications

Bachelor of Commerce B. Com. ( in 1989 from H L College of Comm., Gujarat University )

Chartered Accountant C. A. ( in 1995 from I.C.A.I. )

Insurance Surveyor & Loss Assessor ( since 1997 issued by the IRDA, India )

Lead Auditor (ISO ) - ( since 2001 from International Regi. of Certified Auditors - IRCA)

Diploma in Computer Applications ( in 1986 from ITI, Gandhinagar, Govt. of Gujarat)

Master of Valuation (Real Estate) ( in 2006 from ISTAR, S. P. University, Vallabh Vidya Nagar)

Master of Valuation (Plant & Machinery) ( in 2009 from ISTAR, S. P. University, Vallabh Vidya Nagar)

Registrations and Memberships

Govt. Regd. Valuer (Real Estate) Cat. No. 89/2009-10 (Regd. With CBDT, Govt. of India)

Govt. Regd. Valuer (Stock, Share, Business & Intangible)

Cat. No. 81/2009-10 (Regd. With CBDT, Govt. of India)

# Eligible to even become the Govt. Regd. Valuer of Plant & Machinery also, by June 2011.

FCA Mem. No. 100277 (Fellow Member of Institute of Chartered Accountants of India)

FIV Mem. No. F-10022 (Approved Valuer, Fellow Member of Institution of Valuers, India)

Lead Auditor (ISO) Regn. No. A-17044 (Regd. with IRCA-International Register of Certificated Auditors, UK)

AIISLA Mem. No. AW-02076 (Member of Indian Institute of Insurance Surveyors & Loss Assessor, India)

Baroda CPE Study Circle

http://www.gajjarconsultants.com/

Bharat P. Gajjar / Oct. 2010 of 2

Insurance Surveyor Lic. No. SLA-59156 (Issued By Insurance Regulatory & Development Authority, IRDA, India)

Administrator / Custodian / Investigator of Co-operative Societies & Banks

(Selected & Empanelled by Registrar of Co-op. Societies, Govt. of Gujarat

having privilege to be one of 3 selected professionals on State Level Panel)

Educational & Professional Merits

Gold Medals awarded , in a row, for consecutive TWO Master Degrees

and University ranker from S P University during Post Graduate courses of

[a] Masters of Valuation (Real Estate) and [b] Masters of Valuation (Plant & Machinery)

First in Gandhinagar Centre in HSC Exams of Gujarat HSC Board, appeared from St. Xavier’s School

Awarded National Merit Scholarship (Govt. of India) for 1987 & 1988

Second in Gandhinagar Centre in Computer Course Exam., conducted by ITI (Govt. of Gujarat)

Passed Hindi Language Examinations & Preliminary Drawing Exams, conducted by the Govt. of Gujarat

Awarded Sports Certificate by the Sport Authority of India (Govt. of India)

Attended Certified Course of ‘Computer Hardware & Maintenance’ conducted by

the Canada-India Institute Industry Linkage Project, Gandhinagar

Hon. Lecturer and Faculty Member for

MBA Courses at the Dept. of Industrial & Business Mgmt., South Gujarat University, Surat

- for the Subjects of ‘Financial Mgmt.’ & ‘Company Law’.

- remained the Chairman of Board of Paper Setters for subjects of MBA Dept. of South Gujarat Uni.

Valuation Courses at the Centre for Valuation Studies, Sardar Patel University - for various Subjects of ‘Valuation’ and ‘Laws’ - remained the Chairman of Board of Paper Setters for subjects of Valuation Dept. of S. P. Uni.

ICWA Chapter, to the Classes of Final Group

- for the Subject of ‘Corporate Taxation’.

Various Management Associations, Local Productivity Councils, Entrepreneur Development Programs

- for the Subjects of Accountancy, Financial Management and Valuation.

Delivered Talks & Papers at

Various Seminars & Workshops, on the subjects of - ₲ Valuation, ₲ Financial Management, ₲ Project Finance, ₲ Stock Audits, ₲ IFRS, ₲ Techno-Economic Feasibility of Projects, ₲ Revival & Rehabilitation of Industry, ₲ Statutory Compliance for Industry etc., at various platforms & gathering of fraternities of Valuers, CAs, Technocrats, Bankers, Management Professionals,

Students, etc.


CA Bharat P. Gajjar 10/26/2010

1

FAIR VALUE CONCEPT

Bharat P. GAJJAR

CA Bharat P. Gajjar

Chartered AccountantMaster of Valuation (Real Estate) (Gold Medal)Master of Valuation (Plant & Machinery) (Gold Medal)Govt. Regd. Valuer (Real Estate/Immovable Property)Govt. Regd. Valuer (Stock, Share, Business & Intangible)FIV, AIISLA, DCA, Lead Auditor (ISO)Insurance Surveyor & Loss Assessor

Website www.gajjarconsultants.comE Mail [email protected] 98240 46985Phone 0265+2335549/50

1

FAIR VALUE CONCEPT

Topics

IFRS – RationalIASB’s ObjectiveIndian RoadmapFin. Statements and DefinitionsHistory of Recognition PrinciplesFair Value IVS & IFRS

CA Bharat P. Gajjar

p Fair Value – IVS & IFRSValuerBasis of Value, Terminology & FacetsFair Value Applications in IFRSIssues to Fair Value and IFRS

CA Bharat P. Gajjar / [email protected] / 9824046985 / Paper on Fair Value Concept 2

IFRS ‐ RationalInternational Financial Reporting Standards (IFRS) issued by theInternational Accounting Standards Board (IASB) are nowrecognized as a sound global set of accounting standards.

A growing number of countries around the world use IFRS aseither their adopted national generally accepted accounting

CA Bharat P. Gajjar

either their adopted national generally accepted accountingprinciples (GAAP) or require listed companies in the country tocomply with IFRS.




2

IFRS ~ IASB’s Objective[a] to develop, in the public interest, a single set of high quality,

understandable and enforceable global accounting standardsthat require high quality, transparent and comparableinformation in financial statements and other financialreporting to help participants in the various capital markets ofthe world and other users of the information to make

i d i i

CA Bharat P. Gajjar

economic decisions.[b] to promote the use and rigorous application of those

standards; and[c] to work actively with national standard‐setters to bring about

convergence of national accounting standards and IFRSs tohigh quality solutions.”


IFRS ~ Indian Roadmap for ConvergenceClass of

Companies

Companies in NIFTY & Sensex

Net Worth > R 1000 C

Listed (India)

Phase I

Phase I

Listed (Outside)

Phase I

Phase I

Unlimited

NA

Phase I

EffectiveAccounting

Year

Phase I

CA Bharat P. Gajjar

Rs. 1000 Cr.

Net Worth < Rs. 1000 Cr & > Rs.500 Cr.

Net Worth < Rs. 500 Cr.

Phase I

Phase II

Phase III

Phase I

Phase I

Phase I

Phase I

Phase II

Exempted

FY 2011‐12

Phase IIFY 2013‐14

Phase IIIFY 2014‐15

Net Worth , as of March 31, 2009Net Worth , means Sh. Capital + Reserve – Revalu. Reserve – Misc. Exp. – Dr. Bal. P & L


IFRS ~ Indian Roadmap for Convergence

Industry

Insurance

B ki

Criteria

All Insurance Companies

All Scheduled Comm. Bank

U b C NW R 300 C

1st FY

2012‐13

2013‐14

CA Bharat P. Gajjar

Banking

NBFC

Urban Co‐op., NW>Rs.300 Cr.

Urban Co‐op., NW Rs.200‐300 Cr.

Listed/Unlisted, NW>Rs.1000 Cr

All Listed/Unlisted, NW>Rs.500 Cr.

2014‐15

2013‐14

2014‐15




3

IFRS ~ ApplicationIFRS Framework applies to

₪ All commercial, industrial and business reporting entities, whether in the public or the private sectors.

₪ Not applied to Non Profit Organizations

CA Bharat P. Gajjar

₪ Not applied to Non‐Profit Organizations.


IFRS ~ Underlying AssumptionsThere are two assumptions underlying financial statements,

ACCRUALS

and

CA Bharat P. Gajjar

GOING CONCERN.


IFRS ~ Underlying AssumptionsThe four main characteristics of a set of financial statementsare

€ Understandability

€ Relevance – materiality

CA Bharat P. Gajjar

€ Relevance – materiality

€ Reliability

€ Comparability




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IFRS ~ True & Fair View v/s Fair Presentation !

The Framework does not specifically include “True and Fair” requirement

CA Bharat P. Gajjar

It further states that “Fair Presentation”

requirement


IFRS ~ Financial Statements€ Statement of Financial Position (erstwhile Balance Sheet)€ Statement of Change in Equity€ Statement of Comprehensive Income (erstwhile P & L)€ Statement of Other Comprehensive Income (OCI)€ Statement of Cash Flow€ Notes –

CA Bharat P. Gajjar

€ Notes –Significant Accounting PoliciesManagement JudgementOther Explanatory NotesNotes on Estimation UncertaintyComparative Information


IFRS ~ Elements of Fin. StatementsElements are the ‘broad classes’ that the financial effects oftransactions and other events are grouped into in FinancialStatements. There are two main groups of elements, such as

€ Measuring an entity’s financial positioni e Assets Liabilities and Equity

CA Bharat P. Gajjar

i.e. Assets, Liabilities and EquitySub Group ~ by degree of liquidity

€ Measuring an entity’s performancei.e. Income and ExpenditureSub Group ~ Exp. By Function or Nature




5

Elements of Fin. Statements, viz. Asset, Liability, Equity,Income or Expenditure, are to pass through following phases,in accounting

IFRS ~ Fundamental Principles

Ph‐1 Recognition as per definition of elements

CA Bharat P. Gajjar


Ph‐2 Measurement process of determining monetary amt.

Ph‐3 Presentation guidance on overall structure of Fin. States.

Ph‐4 Disclosure mandatory & recommendatory, as per Std.

orical Cost • All Assets

and Liabilities at its Historical or

ical Cost • Certain

Assets, such as Land & Bldg are FA

IR Value •Major &

Most of the Assets are its Fair

Phases of Measurement Principles CA Bharat P. Gajjar


Histo Historical

Cost

Mod

ified

Histo Bldg., are

at Fair Value and rest at its Historical Cost.

F its Fair Value

Fair ValueFASB/IAS (Fair Value Accounting Standard Board/IndianAccounting Standards) has issued numerous standards in recentyears to require the use of or provide guidance for calculatingfair‐value measurements in financial accounting.

This change from prior practice signifies to many a deliberate

CA Bharat P. Gajjar

This change from prior practice signifies to many a deliberatemovement away from historical‐cost financial statements andtoward fair market value statements.




6

Development is on path that will provide insight into a moreefficient system for presenting financial information andeconomic transactions to boards of directors, analysts, andinvestors.

First, fair‐value accounting would produce balance sheets that are

Fair Value contd..CA Bharat P. Gajjar

First, fair value accounting would produce balance sheets that aremore representative of a company’s/ entity’s value.


Fair Value contd..Specifically, unless the values of fixed assets are assumed toremain the same over time, historical cost information isrelevant only upon obtaining the asset.

Furthermore, because historical‐cost measures remainunchanged over time, users do not get valuable feedback about

CA Bharat P. Gajjar

unchanged over time, users do not get valuable feedback aboutappreciation or depreciation following the purchase of the asset.


Fair Value ~ Definition under Valuation Standards“Fair Market Value is the estimated amount for which an assetought to exchange on the date of valuation between a willingbuyer & a willing seller in an arm’s length transaction after propermarketing where in the parties had each acted knowledgeably,prudently & without compulsion.”

Major Elements ~

CA Bharat P. Gajjar

Major Elements1. estimated amount 2. asset ought to exchange3. date of valuation 4. willing buyer5. willing seller 6. proper marketing7. arm’s length transaction8. parties each acted knowledgeably, prudently




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Fair Value ~ Definition under IFRSFair Value is defined in IAS 39, Finance instruments;

Recognition and measurement’, as“ the amount for which an asset could be exchanged, ofliability settled, between knowledgeable, willing parties in anarm’s length transaction “

CA Bharat P. Gajjar

arm s length transaction

Major Elements ~

1. could be exchanged 2. knowledgeable parties3. willing parties 4. arm’s length transaction


ValuerValuation of assets is normally undertaken by a professionallyqualified valuer.(IAS 16 PARA 32).

That is, a person who: Holds a recognized and relevant professional qualification

CA Bharat P. Gajjar

Has recent relevant post‐qualification experience. Has sufficient knowledge of the state of the market in the

location and category of the being valued.


Definitions of Valuation Terminology

Worth

Value

Cost

CA Bharat P. Gajjar

Market Value

Fair Value




8

Standards those incorporate the use of Fair Values most include ‐

Fair Value ~ Applications in various Standards

IAS 2 Inventory

IAS 16 Property, Plant & Equipment

IAS 19 Employee Benefits

d f

CA Bharat P. Gajjar

IAS 39 Recognition and Measurement of Finance Instruments

IAS 40 Investment property

IAS 41 Agriculture

IFRS 2 Share‐based payment


Elements of Fin. Statements, viz. Asset, Liability, Equity,Income or Expenditure, are to pass through following phases,in accounting

IFRS ~ Fundamental Principles

Phase‐1 Recognition

h

CA Bharat P. Gajjar

Phase‐2 Measurement

Phase‐3 Presentation, and

Phase‐4 Disclosure


Fair Value

Definition of Property, Plant and Equipment

“…tangible items that : are held for use in the productionor supply of goods or services, for rental to others, or foradministrative purposes; and are expected to be used during

IAS 16 Property, Plant and Equipment

CA Bharat P. Gajjar

more than one period ”.




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Fair Value

Definition of Cost

“….the amount of cash or cash equivalent paid or the fair valueof the other consideration given to acquire an asset at the timeof its acquisition or construction”.


CA Bharat P. Gajjar


Fair Value

Residual Value ~ the estimated amount that entity wouldcurrently obtain from disposal of the asset, after deducting theestimated costs of disposal

Useful Life ~ the period over which an asset is expected to use


CA Bharat P. Gajjar

/ unit produce

Depreciation ~ [Cost/FV – Residual Value] / Useful Life


Fair Value

Measurement after Recognition


Cost Model

• After recognition

Revaluation Model

• An item of PPE,

Deemed Cost Model

• A first time adopter

CA Bharat P. Gajjar

gas an asset, an item of PPE shall be carried at its Cost less any accumulated dep. and any accumulated impairment losses

whose Fair Value can be measured reliably shall be carried at Revalued amount

pof IFRS has an option to voluntarily account as per Deemed Cost Model




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Fair Value

Disclosures required in case of Fair Value Model (Revaluation)

Õ The effective date of the revaluationÕ Whether an independent valuer was involvedÕ The methods and significant assumptions used in


CA Bharat P. Gajjar

estimating fair values.Õ The extent to which fair value were determined directly by

reference to observable prices in an active market orrecent market transactions at an arm’s length basis orwere estimated using other valuation techniques. Contd..


Fair Value

Disclosures required in case of Fair Value Model (Revaluation)

Contd..

Õ The carrying amount of each class of property, plant and


CA Bharat P. Gajjar

equipment determined under the cost model (historicalcost less depreciation measurement basis).

Õ The revaluation surplus, showing the change for theperiod and any restrictions on the distribution of thebalance to shareholders.


Fair Value

Definition of Financial Asset

Ω CashΩ An Equity Instrument of another EntityΩ A contractual right – to receive cash or another financial

IAS 39 Recognition & Measurement of Financial Instruments

CA Bharat P. Gajjar

asset from another entity, or to exchange financial assetsor financial liability with another entity under conditionsthat are potentially favorable to the entity.

Ω A contract that will or may be settled in the equityinstrument




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Fair Value

Definition of Financial Liability

Ω A contractual obligation – to deliver cash or anotherfinancial asset from another entity, or to exchange financialassets or financial liability with another entity under


CA Bharat P. Gajjar

conditions that are potentially unfavorable to the entity.Ω A contract that will or may be settled in the entity’s own

equity instrument


Fair Value contd..

Recognition ~ at Fair Value (plus Transaction Cost)as cost of face value may not be fair value at alltime, as may include the Interest, and otherfuture economic benefit or loss


CA Bharat P. Gajjar

For e.g. Receivables /Creditors (allowed beyond normalcredit) Interest Free Loan given /taken


Fair Value contd..

Fair value is the most relevant measure for most financialinstrumentsThe importance of fair value in the measurement processarises because it is a market‐based notion that is unaffectedby the history of the asset or liability


CA Bharat P. Gajjar

It represents an unbiased measure that is consistent fromyear to yearFair value is an estimate of the market ‘exit’ price that isdetermined by reference to a current hypotheticaltransaction between willing parties




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Fair Value contd..

Three‐level hierarchy to all fair value measurements


1st ‐ Active Market – Quoted Market Price

CA Bharat P. Gajjar

2nd ‐ No Active Market – Valuation Techniques

3rd ‐ Cost Less Impairment


Fair Value shadow on IFRSΦ The use of Fair Value measurements in IFRS is much higher

than compares to Indian GAAP.

Φ It is not correct to state that IFRS requires all Assets andLiabilities measured at Fair Value. There is an option to anentity to use either the Cost Model to measure the Fixed

CA Bharat P. Gajjar

entity to use either the Cost Model to measure the FixedAssets. Even the Re‐Valuation method can be adopted forcertain class of assets, not on all.


Fair Value shadow on IFRSΦ The Inventories are valued at lower of cost or net

reversible value, as the same as in Indian GAAP as in IFRS.

Φ IRRS uses the Fair Value Model for initial measurement ofFinancial Assets and Financial Liabilities. Subsequently,Equity Instruments and derivatives are measured at Fair

CA Bharat P. Gajjar

Equity Instruments and derivatives are measured at FairValue.

Φ Fair Value is also used to record Assets and Liabilities,acquired in a business combination.




13

Fair Value shadow on IFRSΦ Fair Value is an important and difficult concept in

accounting. The determination of Fair Value involvesjudgment and prudent application of professional skill,data and methodology.

Φ The Fair Value assessment involves the inferences related

CA Bharat P. Gajjar

Φ The Fair Value assessment involves the inferences relatedto willingness of parties, knowledge of parties and “arm’slength distance” between parties.


Fair Value shadow on IFRSΦ Therefore, all the time, Fair Value is not same as Market

Value. For example, in case of security issued by closelyheld Companies, the Market Value may not be available,but the Fair Value can be estimated. Sometimes, even theMarket Value does not represent the Fair Value.

CA Bharat P. Gajjar


Fair Value shadow on IFRSΦ The estimation of Fair Value is to be made based on the

available information in the hierarchies. The quoted pricefrom the active market for IDENTICAL assets are to begiven first preference for estimating the Fair Value, as thequoted price of SIMILAR assets from the active market isto be considered

CA Bharat P. Gajjar

to be considered.

Φ Sometimes, the price quoted in the active market does notrepresent the Fair Value, if the Volume and Level ofactivity have been varying significantly. Therefore, theVolume, Demand and Supply are also to be considered.




14

Fair Value ‐ Conflict with ObjectiveΦ Not all companies follow the same business model, even

within the same industry.

Φ Some primarily hold the asset for Sale (H‐F‐S) and somefor Maturity (H‐T‐M).

CA Bharat P. Gajjar

These different models can significantly different the Value. And this can make Comparison impractical / impossible.


Issues to tackle while Fair Value¿ Tax Implications ?

¿ The higher the asset base, higher the impact on BalanceSheet Figures.

¿ The difficult & critical assessment of Residual Useful Life

CA Bharat P. Gajjar

¿ The difficult & critical assessment of Residual Useful Lifeand Depreciation accordingly, for different differentcomponents of assets.


Issues to tackle while Fair Value¿ The periodical calibration of Fair Value.

¿ The Surface Value of Balance Sheet figures for Bankers,especially those who have given a Termed and WorkingCapital facilities.

CA Bharat P. Gajjar

¿ The Computer System for managing the Books of Accountsand Fixed Assets are to be overhauled.

Beyond all the above, the assessment of Fair Value is not always a difficult task

when there are prudent Valuers.




15

FAIR VALUE CONCEPTCA Bharat P. Gajjar

Claimer : CA Bharat P. GAJJARWebsite www.gajjarconsultants.comE Mail [email protected] 98240 46985Phone 0265+2335549/50

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