I. VARIOUS OPTIONS FOR CONVERGENCE WITH IFRSs IN INDIA

P I. VARIOUS OPTIONS FOR CONVERGENCE WITH IFRSs IN INDIA 1. Background 1.1 International Financial Reporting Standards (IFRSs), issued by the International Accounting Standards Board (IASB), which are increasingly being recognized as global accounting standards, are in use in over 100 countries and about 40 more are in the process of either adopting or converging with them. While some countries have adopted the IFRSs without modifications, others have tailored the IFRSs to their country-specific conditions during the process of convergence. 1.2 G-20 in its Washington, London and Pittsburg Summits has also called upon the international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting-process; and complete their convergence projects by June 2011. 1.3 In India, gap between Indian and International Financial Reporting Standards (IFRSs) has been narrowing. Subsequent to Companies (Amendment) Act, 1999, when the Central Government was vested with the powers to notify Accounting Standards, the process of harmonization with International Accounting Standards (now IFRSs), was taken up. After preparation of the draft by ICAI and due consultation with NACAS, the Companies (Accounting Standards) Rules 2006, which are substantially harmonized with IFRSs were issued in December 2006 for application to F.Y. commencing 1.4.2007. 1.4 As per Government policy announced in 2008, the Indian Accounting Standards are expected to be fully convergent with IFRSs wef April 1, 2011. The Ministry of th Corporate Affairs, Government of India Press Note vide No. 1/5/2001-CL.V dated 13P May, 2008 states that the initiative for harmonization of the Indian accounting standards with IFRS, taken up in 2001 and implemented through notification of accounting standards by the Central Government in 2006, would be continued by the Government with the intention of achieving convergence with IFRSs by 2011. 2. Preparation for Convergence with IFRSs in India 2.1 In July 2009, with a view to designing a definitive roadmap for convergence with IFRSs and co-ordinating the process, a Core Group was set-up under the Chairmanship of the Secretary, Ministry of Corporate Affairs with participation from RBI, SEBI, IRDA, ICAI, NACAS and industry representatives. Further, two Sub-groups were also 1 IICA Forum on Financial Reporting and Disclosures

P October, constituted. First Sub-group was set-up under the Chairmanship of Shri Y. H. Malegam, with a view to identifying the various legal and regulatory changes required for convergence and to prepare a roadmap for achieving the same. Second Sub-group, comprising of industry CFOs, was also set-up under the Chairmanship of Shri T V Mohandas Pai to interact with various stakeholders from business and industry to understand their concerns on the issue of convergence with IFRSs, identify problem areas and ascertain the preparedness of the industry for such convergence. Deliberations took place in these Groups with a view to lay down the roadmap for the convergence with IFRS in India. The second Sub-group has forwarded its suggestions and recommendations to Sub-group I, which is now engaged in finalizing its recommendations. 2.2 A meeting of the Core Group to monitor convergence with IFRSs in India took th place on 15P 2009 under the Chairmanship of Shri R. Bandyopadhyay, Secretary, Ministry of Corporate Affairs. During the meeting, the Core Group : reviewed the progress made by the two Sub-Groups set-up in July, 2009 to examine various issues relating to convergence with IFRSs and requested Subgroup I to finalise its Report shortly; decided to lay down the roadmap for achieving the convergence with IFRSs in India after examining the Report of the Sub-Group - I in consultation with the concerned Regulators so as to meet the targeted deadline of 1st April, 2011 for convergence; decided that critical areas in the Companies (Accounting Standards) Rules, 2006 where there is divergence from the IFRSs may be taken up with International Accounting Standards Board (IASB) at the earliest and addressed effectively; decided that banking and insurance companies would also be covered in the requirement for applying the converged accounting standards; and addressing the transitional issues including business and industry preparedness and capacity building, reviewed the capacity building initiatives taken up by ICAI and requested ICAI and other Regulators to continue to initiate extensive training programmes and other capacity building measures for preparing professionals for a smooth convergence with IFRSs. 2 IICA Forum on Financial Reporting and Disclosures

3. Issues for Consideration 3.1 Convergence with IFRSs Public Interest Entities 3.1.1 Application of IFRSs to various types of entities needs to be considered in view of their complexities in terms of recognition and measurement requirements and the extent of disclosures required therein. It may be noted that those countries which have already adopted IFRSs, i.e., countries which are fully IFRS-complaint, have done so primarily for public interest entities including listed and large-sized entities. In the EU, the use of IFRS was made mandatory for listed companies in the EU since January 2005. Furthermore, the use of IFRS or equivalent accounting standards is mandatory for third country issuers outside the EU in January 2009. In jurisdictions other than the EU, the use of IFRS is being enabled through a variety of modalities, such as (1) allowing use of IFRS by domestic listed companies; (2) mandating use by a part of domestic listed companies; or (3) mandating use of IFRS for all domestic listed companies. 3.1.2 In the United States, the Securities and Exchange Commission (USSEC) published in April 2005 its Roadmap aimed at elimination of the reconciliation requirements to non-us registrants in the US market using IFRS, following the fact that IFRS has been made mandatory for all listed EU companies. However, the USSEC published its final rule in December 2007 allowing IFRS application without the reconciliation requirements for non-us registrants, which became effective on the financial statement for the fiscal year ending after November 15, 2007. Furthermore, the USSEC proposed its Roadmap for US issuers in November 2008, aimed at optional use and mandated use of IFRS for US issuers. Under the Roadmap, issuers that satisfy certain requirements are allowed to use IFRS for filing after early 2010 and the USSEC will determine in 2011 whether to require all US issuers to use IFRS beginning in 2014. 3.1.3 International Accounting Standards Board (IASB) has also recently issued a separate IFRS for Small and Medium-sized Entities. Therefore, whether India should also become IFRS compliant only for public interest entities, and, if so done, whether India would be regarded as IFRS-compliant in terms of the IASB guidelines. 3.1.4 In view of the above, which entities should be considered as public interest entities for the purpose of application of IFRSs is an issue that would need some clarity. 3 IICA Forum on Financial Reporting and Disclosures

3.2 Convergence with IFRSs Small and Medium sized Entities 3.2.1 The issue of application of IFRSs to Small and medium sized Entities has also engaged the attention of the Regulators in India. The approach adopted in the Companies (Accounting Standards) Rules, 2006 are enshrined in the General Instructions part, according to which Small and Medium Companies (SMCs) shall follow the following instructions while complying with the Accounting Standards under these rules:- (i) The SMC which does not disclose certain information pursuant to the exemptions or relaxations given to it shall disclose (by way of a note to its financial statements) the fact that it is an SMC and has complied with the Accounting Standards insofar as they are applicable to an SMC on the following lines: The Company is a Small and Medium Sized Company (SMC) as defined in the General Instructions in respect of Accounting Standards notified under the Companies Act, 1956. Accordingly, the Company has complied with the Accounting Standards as applicable to a Small and Medium Sized Company. (ii) Where a company, being an SMC, has qualified for any exemption ofrrelaxation previously but no longer qualifies for the relevant exemption or relaxation in the current accounting period, the relevant standards or requirements become applicable from the current period and the figures for the corresponding period of the pervious accounting period need not be revised merely by reason of its having ceased to be an SMC. The fact that the company was an SMC in the previous period and it had availed of the exemptions or relaxations available to SMCs shall be disclosed in the notes to the financial statements. (iii) If an SMC opts not to avail of the exemptions or relaxations available to an SMC in respect of any but not all of the Accounting Standards, it shall disclose the standards(s) in respect of which it has availed the exemption or relaxation. (iv) If an SMC desires to disclose the information not required to be disclosed pursuant to the exemptions or relaxations available to the SMCs, it shall disclose that information in compliance with the relevant accounting standard. (v) The SMC may opt for availing certain exemptions or relaxations from compliance with the requirements prescribed in an Accounting Standard: Provided that such a partial exemption or relaxation and disclosure shall not be permitted to mislead any person or public. 4 IICA Forum on Financial Reporting and Disclosures

3.2.2 Rule 2(f) of the Companies (Accounting Standards) Rules, 2006 defines a Small and Medium Company (SMC) as a company which satisfies all the following five conditions as at the end of the accounting period: (i) (ii) (iii) (iv) (v) the equity or debt securities of the company are not listed or in the process of listing on any stock exchange, whether in India or outside India; the company is not a bank or financial institution or insurance company; the company s turnover (excluding other income) does not exceed rupees fifty crore in the immediately preceding accounting year; the company does not have borrowings (including public deposits exceeding Rs.10 crore at any time during the immediately preceding accounting year); and the company is not a holding company or subsidiary of a non-smc company. According to Rule 5, an existing non-smc company which subsequently becomes an SMC shall not qualify for exemptions/relaxations in applicability of notified ASs until the company remains an SMC for 2 consecutive accounting periods. 3.2.3 Once the IFRSs are applied to public interest entities, an issue arises as to which Accounting Standards would be applicable to the other entities such as Small and Medium-sized Entities (SMEs)). The following three alternatives can be considered: (i) The IFRSs should be modified to provide exemptions/relaxations as has been done in the existing Accounting Standards issued by the ICAI/ notified by the Government of India under Companies (Accounting Standards) Rules, 2006; (ii) The existing accounting standards with exemptions/relaxations as at present, should continue to apply; (iii) Apply the IFRS for SMEs (which has been issued recently in July 2009 with or without modifications to suit Indian conditions.) 3.2.4 Since the IASB itself recognizes that the IFRSs are too onerous for small and medium-sized entities, it would not be appropriate to apply the IFRSs with exemptions/relaxations to SMEs. Continuing to apply the existing Accounting Standards in India to SMEs with the existing exemptions/relaxations would not be appropriate as it would mean that they would have to be modified as soon as a change is made in the corresponding IFRSs after considering the appropriateness thereof in the context of 5 IICA Forum on Financial Reporting and Disclosures

P April, P April, Indian SME condition. Accordingly, whether the IFRS for SMEs should be adopted, in toto or with modifications, needs to be examined in the light of following perspective: (i) The small and medium-sized entities would not have to consider all the IFRSs which are too voluminous; and (ii) It would ensure convergence, to the extent possible, with the IFRS for Small and Medium-sized Entities issued by IASB, even for this class of entities. 3.2.5 In this context, it also needs to be considered whether, in order to be an IFRScompliant country, it is necessary to adopt the IFRS for Small and Medium-sized Entities issued by IASB. 3.3 Phasing plan for application of IFRSs to various entities 3.3.1 Therefore, while deciding on the roadmap for convergence, a view would need to be taken whether convergence with IFRSs needs to be achieved for only certain specified st entities based on their type and/ or size wef projected schedule of 1 P 2011 and the application of IFRSs to other entities may be phased to enhanced time period. This may give enough time to all the participants in the financial reporting process to help in building the environment supporting the convergence with IFRSs. However, it would have to be ensured that such phasing does not detract from India s commitment to converge with IFRSs by the year 2011. 3.3.2 Subject to the above, a phasing plan needs to be devised for convergence with st IFRSs even in respect of the companies in India. Convergence wef 1P 2011 may be achieved as per either of the criteria as listed below:- (i) All listed companies in India and public interest entities; (ii) Big listed companies and public interest entities initially and for the medium sized companies after a gap of say 3 years and so on; (iii) Large sized entities based on certain criteria as per: o Assets o Turnover o Borrowings (iv) Consolidated financial statements of companies. 6 IICA Forum on Financial Reporting and Disclosures

P April, P April, 3.4 Option to an entity for early adoption of IFRSs 3.4.1 A look into IFRS application in other countries shows that emphasis is being placed on ensuring the comparability of financial statements for investors and IFRS are fully introduced at once as mandatory standards. In the US, on the other hand, a scheme has been proposed whereby, early optional application to certain companies is accepted with confirmation that investors are assured of financial statement comparability and at the same time with explicit designation of the date for mandatory application. 3.4.2 In this regard, it may be pertinent to note the current framework for companies in India as prescribed under the Companies Act, 1956, according to which all companies have to follow a single framework of accounting standards as notified by the Central Government under Companies (Accounting Standards) Rules, 2006 in terms of Section 211 (3C) of the Companies Act, 1956. An issue would therefore arise as to whether it would be pertinent in India also to give choice to an entity for early adoption of IFRSs even before 1st April, 2011 given the shortage of time and the fact that any such move would entail necessary legislative amendments. 3.5 Transitional provisions for reconciliation of previous years accounts with IFRSs 3.5.1 As the IFRS are to be applied wef 1st April, 2011, for entities with a March 31 year end, the transition date for applying IFRS for many enterprises will be April 1, 2010, as this is the opening balance date for the first set of IFRS financial statements. Entities will need to restate their opening balance sheet and be in a position to report under both IFRS and Indian GAAP for the year 2010-11. The main options available to converters would involve either dual GAAP accounting throughout the transition period or some form of restatement from Indian GAAP to IFRS at each reporting date. In this regard, it needs to be examined that as a transitional measure whether companies may be permitted to report the comparative figures for the year 2010-11 based on the pre-converged Indian GAAP and only the 2011-12 figures may be as per IFRS and whether this would enable India to become IFRS-compliant by 1.4.2011 as per IASB guidelines. 3.6 Deviations in the Companies (Accounting Standards) Rules, 2006 from IFRSs 3.6.1 For the IFRS to be applied in India, it is essential that key differences between IFRS and Indian ASs as notified under Companies (Accounting Standards) Rules, 2006 are identified and they further converge. In this regard, it needs to be examined whether, the existing accounting standards should be revised to make them fully compliant with st st IFRSs by 1P 2011 or the IFRSs themselves may be adopted wef 1P 2011. 7 IICA Forum on Financial Reporting and Disclosures

P April, P 3.7 Regulatory and other changes needed for convergence with IFRSs in India 3.7.1 Changes needed in the Companies Act, 1956 and its subordinate legislations covering Rules, Schedules, Circulars etc. In order to achieve convergence with IFRSs in India wef 1 P 2011, certain changes would be needed to be made in the Companies Act, 1956 and its subordinate legislations covering Rules, Schedules, Circulars etc. and also might be incorporated in the Companies Bill assuming that the Bill may be enacted within a span of 2 to 3 years if st such changes are not necessarily required for meeting the convergence deadline of 1P April, 2011. These changes may relate to the following areas:- 1. Proposed Dividends There is no provision in the Act which requires that provision be made for proposed dividends. Therefore, convergence may be achieved if: o Schedule VI is amended o Circular No. 3/124/75.CL-V, dated 2.11.76, requiring proposed dividends to be shown under Current Liabilities & Provisions, is withdrawn. 2. Accounting for Depreciation So long as Section 205 provides for a minimum amount of depreciation, the divergence between the Companies Act and the IFRS will remain. However, the area of divergence may be significantly reduced if: o in all cases, Schedule XIV prescribes rates which are determined on the basis of useful life and residual value as provided in IFRS; o for this purpose, assets are classified into broad industry groups and rates determined in consultation with industry bodies; o Schedule XIV specifically recognises that depreciation can be separately provided for significant parts of an asset; o Schedule XIV specifically recognizes units of production method for specified classes of assets. 3. Retrospective application of change in Accounting Policy and Correction of Prior Period Errors There is no provision in the Act which requires this. Convergence may be effected if Circular No. 1/2003 dated 13.01.03, which prohibits reopening of st 8 IICA Forum on Financial Reporting and Disclosures

accounts except to comply with the requirements of taxation or any other law, is withdrawn. 4. Presentation of Financial Statements Convergence may be effected if: o Statement of Changes in Equity is made an Annexure to the Balance Sheet under Schedule VI. o Statement of Other Comprehensive Income is made an Annexure to the Balance Sheet under Schedule VI. o An additional column is added in the form of Balance Sheet in Schedule VI to present a third statement of financial position where retrospective application of accounting policies on restatement of items has been made. o Revise AS-11 to require preparation of accounts in functional currency in specified cases and for translation thereof into rupees (presentation currency). o Other revisions are made in Schedule VI to comply with IFRS. It may be noted that ICAI has already prepared revised Schedule VI for this purpose. 5. Financial Instruments Convergence cannot be achieved without change of law in respect of Section 78(2) regarding utilization of Securities Premium Account. However, it is possible to hold the view that this is a permissible section and therefore accounting standards which are mandated under section 211(3A) over-ride. In respect of preference shares and dividend on cumulative preference shares, it should be possible to amend Schedule VI. Premium/discount on debentures adjusted from Securities Premium Account and outstanding on date of issue can be covered by transition adjustments as in IFRS1. Adjustments through Court approved schemes which are contrary to IFRS will need change in law. 3.7.2 Changes needed in other legislations 1. Changes in Banking Laws and Regulations and circulars issued by RBI Revising the formats of financial statements prescribed in the Third Schedule to the Banking Regulation Act, 1949. 9 IICA Forum on Financial Reporting and Disclosures

Circulars issued by the RBI which refer to the existing accounting standards need to be revised when the accounting standards are revised to converge with IFRSs/new accounting standards are issued, e.g., master circular on disclosures in financial statements No. RBI/2008-09/37 DBOD.BP.BCNO. 3/21.04.018/2008-09 and the circulars issued by the RBI in relation to AS 11 The Effects of Changes in Foreign Exchange Rates and AS 17 Segment Reporting. Section 15(1) of the Banking Regulation Act, 1949 restricts payment of dividend by Indian banks until all intangibles are completely written off unless specifically permitted by RBI. At present, RBI grants permission on case-tocase basis. The RBI may consider issuing a notification stating that intangible assets allowed to be recognised under accounting standards will not disqualify for declaration of dividend. Section 9 of the Banking Regulation Act, 1949, states that assets in the nature of investment property can be acquired for a period of 7 years or for a further period of 5 years with the special extension from RBI. It is felt that the requirement of the section does not conflict with the requirements of IFRSs. Circulars of RBI related to financial instruments will need to be examined on the revision of IAS 39 as the International Accounting Standards Board (IASB) has issued Exposure Drafts revising IAS 39 Financial Instruments: Recognition and Measurement. Circular No. DBOD.No.BP.BC.37/21.04.018/2000 dated October 20, 2000 requires commercial banks to charge depreciation on computers at 33.3% per annum following the SLM basis. In case of banks, the regulator can prescribe the minimum rate keeping in view the useful life and prescribe the method and that it would not be in conflict with IAS 16, Property, Plant and Equipment. 2. Changes in SEBI Rules and Regulations for convergence with IFRSs Clause 41 may continue to require presentation of financial results instead of condensed or complete financial statements as required under IAS 34 Interim Financial Reporting. IAS 34 does not mandate presentation of complete or condensed financial statements. Therefore, the requirement by SEBI to present financial results would not amount to non-convergence with IFRSs. However, the clause would need to be amended wherever it gets affected by revision in existing ASs/new accounting standards to converge with IFRSs such as the following: 10 IICA Forum on Financial Reporting and Disclosures

o Removal of the requirements related to presentation of extraordinary items o Presentation of segment report in accordance with the requirements of IFRS 8 Operating Segments. SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines relating to accounting requirements would be withdrawn on the issuance of Indian Accounting Standard corresponding to IFRS 2 Share Based Payment. Clause 32 of the Listing Agreement may continue to require presentation of cash flow statement in accordance with the indirect method as at present since IAS 7 permits both direct as well as indirect method and adoption of one of the methods does not amount to non-convergence with IFRSs. 3. Changes in IRDA Regulations The specific issues involving amendments to IRDA regulations would cover the following:- o Presentation of financial statements; o Financial instruments: classification; o Financial instruments: Re-classification; o Financial instruments: Initial recognition; o Financial Instruments subsequent measurement; o Investment property; o Reserves for claims on contracts not in existence. 4. Others The specific issues involving amendments to Income Tax Act would cover the following:- o Unrealised fair value gains or losses; o Fair valuation of fixed assets; o MAT; o Agricultural income; o Taxes on business combination. The issue involving amendments to Payment of Bonus Act would relate to computation of available surplus for payment of bonus. 11 IICA Forum on Financial Reporting and Disclosures

3.8 Issues on Accounting Standards of Financial Instruments 3.8.1 The IASB plans to address the G20 Leaders call for reduced complexity of accounting standards for financial instruments through the development of three new standards, based on exposure drafts issued in 2009. The IASB plans to issue a final standard on classification and measurement of financial instruments by end 2009 for optional use in 2009 financial statements, and an exposure draft was issued in July 2009, which proposes to reduce the number of categories of financial assets and liabilities to two (fair value and amortised cost). Proposals on the remaining portions of IAS 39 covering an expected loss approach to provisioning and hedge accounting are to be issued by the end of 2009. 3.8.2 In India, the Institute of Chartered Accountants of India has issued the following Accounting Standards coming into effect in respect of accounting periods commencing on or after 1-4-2009 being recommendatory in nature and becoming mandatory in respect of accounting periods commencing on or after 1-4-2011:- AS 30 Financial Instruments: Recognition and Measurement AS 31 Financial Instruments: Presentation AS 32 Financial Instruments: Disclosures 3.8.3 However, the above standards, pending finalization by NACAS in view of the final position yet to be taken by the IASB, are not yet notified by the Central Government. The standard, when issued finally by IASB, would address issues arising from the financial crisis in a comprehensive manner. Implementation of the standard in the Indian context will arise after it is finalized by IASB and adopted by ICAI and NACAS as part of the convergence programme with IFRSs. However, implementation of the revised IAS 39, when issued finally by IASB, might entail changes not only in the ASs 30, 31, 32 yet to be notified under Companies (Accounting Standards) Rules, 2006 but also necessitate corresponding changes in other standards as well. 3.9 More active participation in the standard-setting process of IFRS 3.9.1 Close attention to the developments regarding the contents of IFRS and possible future changes in the standards is necessary, and the experts in India should actively express their views, while taking into account India s own domestic trade practices, business operations and other aspects. In this respect, in view of the fact that the international convergence of accounting standards is evolving around IFRS, its standard- 12 IICA Forum on Financial Reporting and Disclosures

setting processes need to be discussed extensively at various fora and Indian experts should work more actively to present their opinions and make their contributions to IFRSs and to their development process. 13 IICA Forum on Financial Reporting and Disclosures

II. ISSUES RELATING TO FAIR VALUE ACCOUNTING IN INDIA 1. Background 1.1 The International Accounting Standards Board (IASB) in May 2009 published for public comment an exposure draft of draft guidance on fair value measurement. If adopted, the proposals would replace fair value measurement guidance contained in individual International Financial Reporting Standards (IFRSs) with a single, unified definition of fair value, as well as further authoritative guidance on the application of fair value measurement in inactive markets. The proposals deal with how fair value should be measured when it is already required by existing standards. They do not extend its use in any way. 1.2 To ensure consistency between IFRSs and US generally accepted accounting principles (GAAP), the proposals incorporate recent guidance on fair value measurement published by the US Financial Accounting Standards Board (FASB) and are consistent with a report of the IASB s Expert Advisory Panel published in October 2008 on fair value measurement in illiquid markets. 1.3 This project forms part of a long-term programme by the IASB and the FASB to achieve convergence of IFRSs and US GAAP, as described in the boards Memorandum of Understanding published in September 2008. It is also consistent with requests from G20 leaders to align fair value measurement in IFRSs and US GAAP. The IASB s starting point in developing the exposure draft was the equivalent US standard, SFAS 157 Fair Value Measurements as amended. The proposed definition of fair value is identical to the definition in SFAS 157 and the supporting guidance is largely consistent with US GAAP. 1.4 This project will simplify IFRSs by precisely defining fair value and providing a single source of guidance that applies whenever another standard requires or permits the use of fair value. Guidance on how to measure fair value is spread across various standards and it is often incomplete there are situations and standards for which no fair value measurement guidance currently exists. All of this leads to inconsistency in application. The IASB believes that a precise definition of fair value and a single source of measurement guidance will provide preparers and auditors with a clearer measurement objective, which will improve consistency and comparability, and provide users with a better understanding of what a fair value measurement represents. The Fair Value Measurement exposure draft proposes a framework for measuring fair value and requires 14 IICA Forum on Financial Reporting and Disclosures

disclosures about fair value measurements. The exposure draft does not introduce new fair values and does not change the measurement objective in IFRSs. The comments received on the exposure draft will aid the IASB in developing an IFRS of fair value measurement guidance, which it plans to publish in 2010. 1.5 It needs to be assessed whether the exposure draft s proposed framework for measuring fair value: o provides appropriate and sufficient guidance for application in India; and o is an improvement compared to existing guidance in IFRSs. 2. Issues for consideration In view of the above, the following issues may be considered: Issue A Issue B Issue C Issue D Issue E Fair value as an exit price Fair value of liabilities Fair value of non-financial assets and liabilities Measuring fair value in inactive markets Measuring fair value in emerging and transition economies Issue A: Fair value as an exit price The exposure draft proposes to define fair value as: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The IASB believes that an exit price is always a relevant definition of fair value. An exit price of an asset or liability embodies expectations about the future cash inflows and outflows associated with the asset or liability from the perspective of market participants at the measurement date. In summary, fair value is a market-based measurement. It is an estimate of the price at which a transaction would take place between market participants at a particular date i.e. it is an estimate of a market price. A particular entity s intention to hold or sell an asset or fulfil or transfer a liability does not influence the market price of the asset or liability. It needs to be examined from the context of India as to could there be situation where a market-based exit price would not reflect the present value of the expected future cash inflows and outflows from an asset or a liability. 15 IICA Forum on Financial Reporting and Disclosures

Issue B: Fair value of liabilities The exposure draft proposes that the fair value of a liability is represented by the price at which it could be transferred to a market participant and provides guidance on measuring it. During the redeliberations, the IASB intends to discuss FASB Accounting Standards Update (ASU) No. 2009-5 Measuring Liabilities at Fair Value. ASU No. 2009-5 states that when a quoted price in an active market for an identical liability is not available, an entity measures fair value using the following techniques: (i) A valuation technique that uses: (a) the quoted price of the identical liability when traded as an asset (b) quoted prices for similar liabilities or similar liabilities when traded as assets (ii) Another valuation technique that is consistent with the principles in the FASB s fair value measurement guidance. Two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the entity would pay to transfer the identical liability or would receive to enter into the identical liability. It needs to be examined whether the above principles can be applied particularly in the Indian context. Issue C: Fair value of non-financial assets and liabilities The exposure draft provides proposed fair value measurement guidance for all assets and liabilities measured at fair value. It is meant to apply both to financial instruments and to non-financial assets and liabilities. Some have argued that the exposure draft is geared towards financial instruments and will not be sufficient for non-financial assets and liabilities (eg tangible and intangible assets, investment properties, agriculture, environmental cleanup obligations.). Are any of the proposals in the exposure draft inconsistent with measuring the fair value of non-financial assets and liabilities and what could be the additional guidance needed to measure the fair value of non-financial assets and liabilities. Issue D: Fair value in inactive markets The exposure draft contains proposed guidance for measuring fair value when markets are not active, particularly when the market for an asset or liability was active at one 16 IICA Forum on Financial Reporting and Disclosures

point and then becomes inactive (eg as a result of the recent financial crisis). The exposure draft provides guidance for: (i) Measuring fair value when the volume and level of activity for the asset or liability have significantly decreased; and (ii) Identifying circumstances that indicate a transaction is not orderly. Is the proposed guidance sufficient for measuring fair value when markets have become inactive. What could be additional guidance needed to measure fair value in inactive markets in the Indian context. Issue E: Fair value in emerging and transition economies In the context of India, it needs to be examined whether: (i) The proposed fair value measurement guidance is detailed enough to develop estimates of fair value on a consistent basis. (ii) There is sufficient availability of practitioners who have the skills to apply the guidance. (iii) There would be access to market data to develop fair value measurements because there are few deep and active markets and there are often few willing buyers and sellers and prices fluctuate considerably. ***** 17 IICA Forum on Financial Reporting and Disclosures