Financial Reporting Valuation

In an ecosystem of increasing complexities in fair value reporting standards including those under IndAS, and with an increase in regulatory scrutiny, we help our clients fulfill financial reporting valuation needs successfully. It is vital for user of any financial statement to get a fair value estimate using neutral data points, including but not limited to market-based information.  

Accounting and tax officials have a watchful eye on all corporate dealings. We understand the sensitivity of financial reporting and help approach the engagement in a systematic and methodical fashion.

Our offerings include Financial Reporting Valuation for –

    • Valuation of Convertible Securities/ Share Warrants 
    • Valuation of Guarantees 
    • Derivative Valuation

i. Valuation under Business Combination

Mergers, acquisitions and other types of business combinations are a common strategy among companies that wish to grow their businesses or diversify their risk. Entering into business combinations can help companies reach new geographic markets, expand product offerings or achieve various synergies. Business combinations offer a number of benefits to the parties involved, but the initial accounting for the business combination can be complicated and often requires extensive time and effort.

With the evolution of time, the types of restructuring undertaken by companies have also evolved. Ind AS 103 “Business Combinations” deals with the accounting for business combinations in standalone as well as consolidated financial statements. A set of assets acquired and liabilities assumed are typically regarded as a business if they can together run independently as a going concern (i.e. it consists of inputs and processes applied to those inputs, which has the ability to create an output). If they do not constitute business, the same shall be accounted as an asset acquisition. 

Ind AS 103 specifically provides for fair valuation of assets and liabilities including those not recognised previously, and also non-controlling interest that are acquired as part of the transaction. As part of a business combination, one typically values items like real estate, intangible assets such as trademarks, technology and customer relationships. In certain situations, inventory and deferred revenue may also be required to be revalued.


iI. Complex Financial Instruments

a. Valuation of Convertible Securities/ Share Warrants

Convertible securities like convertible debentures/ preference shares are hybrid securities with both debt-like and equity-like features. 

With Start-ups wanting to issue convertibles to Venture Capitalists, Private Equity investors, Angel investors and others, allowing the founders to defer establishing equity valuation for their startups. Convertible securities are also preferred in case of mismatch in Valuation between the investor and company at the time of fundraise. Given that issue of convertible securities has become very popular, it is all the more important to understand the terms of issue and value them accordingly.

There are three elements to the structure of a convertible security which is required to be bifurcated and fair valued as part of IndAS 109/ IFRS 9 requirements:

B. Derivative Valuation

A derivative is a financial contract with a value based on an underlying asset. The most common derivatives include futures, forwards, options and swaps.  

Failure to properly measure the fair value of a derivative can result in significant losses over the life of the instrument. Using outdated valuation modelling techniques or simply not understanding how derivative fair values are measured often leads to the need of additional scrutiny from management, auditors and regulators, further increasing costs to the company. 

Derivative valuations are based on many components that require significant judgement, more so in case such derivatives are thinly traded or when the derivatives are not on listed exchanges. 

We help entities precisely estimate all these components and arrive at a fair and just value of the derivative instrument for financial and internal reporting as well as for management decision making. 

Sr.No.ParticularsContentInd As 109
1FuturesFutures are an agreement between two parties for the purchase and delivery of an asset at an agreed upon price at a future date. Futures trade on an exchange, and the contracts are standardized.
Futures are priced on the Basis of Arbitrage
Entities shall also apply this Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the definition of an equity instrument of the entity in Ind AS 32 Financial Instruments: Presentation.
2ForwardsForwards are similar to futures, but do not trade on an exchange, only over-the-counter.
3OptionsOptions are similar to a futures contract in that it is an agreement between two parties to buy or sell an asset at a predetermined future date for a specific price. The key difference between options and futures is that, with an option, the buyer is not obliged to exercise their agreement to buy or sell. It is an opportunity only, not an obligation.

Options are priced using Black & Scholes Model, Binomial Model or Trinomial Model.

Binomial and Trinomial Models are based on Iterative procedure.
4SwapsSwaps are another common type of derivative, often used to exchange one kind of cash flow with another (eg. Interest Rate Swaps)

For Interest Rate Swap the valuation is the sum of Long Position and Short Position of Bond.

C. Valuation of Guarantees

Guarantee is defined as a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Corporate guarantees may have various legal forms, such as a guarantee, some types of letter of credit, a credit default contract, or an insurance contract. For the purpose of accounting, legal form of the guarantee is irrelevant. 

Guarantees are evaluated under the following standards – 

III. Impairment testing

Impairment is defined as a permanent reduction in the value of a company’s asset, usually a fixed asset or an intangible asset. The value of the reporting unit is compared with the carrying amount in impairment testing. This should be performed at least annually and at interim periods to prevent overstatement on the balance sheet. GAAP (Generally Accepted Accounting Principles) recommends that companies should also take into consideration any major events and economic conditions that occur between annual impairment tests in order to determine if the fair value of an asset has dropped below its carrying value. The impairment of assets is regulated in IndAS 36/ IAS 36 standards applicable to all assets except those under specific rules of regulation. 

IV. Employee Stock Option Plans (ESOPs) and Sweat Equity

An employee share-based Compensation arrangement is a form of compensation often offered as incentives or rewards by employers to their employees. This compensation is over and above the regular remunerations in the form of salaries, reimbursements, perks or any other form of cost to the employer. 

ESOPs are gaining popularity because they allow employees to become owners of the business – thus being invested in its success. 

Under Ind AS 102, a company is required to value the ESOPs as at the grant date. Estimating the value of share-based payments depends on a number of variables such as volatility, risk free interest rates etc., and often requires complex modelling to incorporate company specific unique terms and risks. 

Our Valuation models include use of Binomial Option Pricing Model and Black-Scholes Option Pricing Model, and are tailored to fit to the requirements of our clients and help them assess each and every parameter precisely. We are well placed to comply with all the requirements specified in IFRS 2/ IndAS 102, SEBI Regulations and Income Tax Act.

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