Summary: Ind AS 113 and IFRS 13 outline the framework for fair value measurement, commonly applied in financial reporting to assess the worth of assets. Two primary valuation methods are recognised under these standards: the market-based and income-based approaches. The market approach values assets based on actual transactions of comparable items in the open market. It is most effective for liquid assets like listed shares or commercial properties, where recent sales data is readily available. In contrast, the income approach estimates value by forecasting future cash flows generated by the asset and discounting them to their present value using appropriate rates. This method is commonly used for private businesses, intellectual property, and infrastructure assets where no active market exists. While the market approach is generally preferred due to its reliance on observable data, it is limited by the availability and relevance of comparable transactions. For instance, using outdated property sales may not accurately reflect current market trends. On the other hand, the income approach is flexible and considers the specific characteristics of an asset but depends heavily on assumptions about future performance, which can introduce subjectivity and uncertainty. Changes in discount rates, growth forecasts, or earnings projections can significantly impact the outcome. For example, a toll road may be valued using expected future toll revenues, but minor changes in traffic projections or rates can lead to major valuation differences. In practice, companies may use both methods to arrive at a balanced view, especially when market data is incomplete or asset characteristics are complex. The choice between approaches is driven by data availability, asset type, and the intended use of the valuation, with an emphasis on consistency and transparency in applying fair value measurements across reporting periods.
Understanding simple way- Market-Based vs. Income-Based Valuation Models as per Ind AS 113 and IFRS 13
Valuing assets sounds simple, but in reality, determining fair value for a private company, an illiquid investment, or a unique asset can be quite tricky. Ind AS 113 and IFRS 13 provide guidelines for fair value measurement, with two main methods: the market-based approach and the income-based approach. Each method has its strengths, weaknesses, and challenges, making valuation a mix of calculations and judgment.
| Evaluation Criteria | Valuation- Market Approach | Valuation-Income Approach |
| Valuation Basis | Determines value based on recent sales of similar assets in the market. | Estimates value by forecasting future cash flows and adjusting them for present value. |
| Source of Inputs | Relies on actual market prices and sales of comparable assets. | Uses future earnings projections, discount rates, and growth assumptions. |
| Best Use Case | Best for actively traded assets like stocks and real estate. | Suitable for assets without active markets, like private businesses and patents. |
| Key Limitations | If there are no recent sales, it can be hard to find the right value. | Small changes in future estimates can make a big difference in valuation. |
| Illustrative Scenario | Valuing a building by comparing recent sales of similar buildings. | Valuing a toll road based on projected income from traffic fees. |
| Uncertainty Drivers | Market conditions can change, making past sales less relevant. | Requires estimates that may be too optimistic or uncertain. |
| Standards Preference | Preferred when market prices are available. | Used when there are no market prices to rely on. |
| Drawbacks | Assumes past sales reflect current value, which may not always be true. | Sensitive to changes in assumptions, leading to inconsistent valuations. |
Ind AS 113 and IFRS 13 suggest using market data whenever possible, but when that is not available, experts must rely on careful estimates. The market-based approach is more objective but may not always be relevant. The income-based approach considers the unique aspects of an asset but involves more guesswork. In practice, companies often use both methods to get a fair and realistic value.
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