When Fair Value Cannot Be Measured Reliably
Chapter Thirteen
Syllabus topic 8, "Measurement"
Pages 27 to 29 of 110
The presumption
Paragraph 30, in bold, and it is the longest single rule in the standard. Read it in four parts.
There is a presumption that fair value can be measured reliably for a biological asset.
That is the starting point. The burden is on the entity to displace it, not on anyone to establish it.
However, that presumption can be rebutted only on initial recognition for a biological asset for which quoted market prices are not available and for which alternative fair value measurements are determined to be clearly unreliable.
Three conditions and all three must hold: only on initial recognition, no quoted market price, and alternative measurements clearly unreliable. Not merely difficult, not merely expensive, and not merely a matter of judgement. Clearly unreliable.
In such a case, that biological asset shall be measured at its cost less any accumulated depreciation and any accumulated impairment losses.
The fallback. Cost less accumulated depreciation less accumulated impairment, which is the Ind AS 16 cost model applied inside Ind AS 41.
Once the fair value of such a biological asset becomes reliably measurable, an entity shall measure it at its fair value less costs to sell.
The door back. When fair value becomes measurable, the entity must move, and paragraph 56 requires it to say so.
Paragraph 30 closes with one more rule:
Once a non-current biological asset meets the criteria to be classified as held for sale (or is included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations, it is presumed that fair value can be measured reliably.
An asset being marketed for sale has a price. The presumption returns.
Paragraph 31: the rebuttal is one way and one time
The presumption in paragraph 30 can be rebutted only on initial recognition. An entity that has previously measured a biological asset at its fair value less costs to sell continues to measure the biological asset at its fair value less costs to sell until disposal.
This is the trap, and it is asked. An entity that has once measured an asset at fair value less costs to sell may never revert to cost, however unreliable the fair value later becomes. Movement is permitted in one direction only.
| From | To | Permitted? |
|---|---|---|
| Cost less depreciation and impairment | Fair value less costs to sell | Yes, and required, once fair value becomes reliably measurable |
| Fair value less costs to sell | Cost less depreciation and impairment | No, never, paragraph 31 |
Paragraph 32: agricultural produce is never in this position
In all cases, an entity measures agricultural produce at the point of harvest at its fair value less costs to sell. This Standard reflects the view that the fair value of agricultural produce at the point of harvest can always be measured reliably.
When Fair Value Cannot Be Measured Reliably
Paragraph 30 applies to biological assets only. There is no cost model for agricultural produce, and there is no exception to look for.
Paragraph 33: which standards supply the cost mechanics
In determining cost, accumulated depreciation and accumulated impairment losses, an entity considers Ind AS 2, Ind AS 16 and Ind AS 36 Impairment of Assets.
Ind AS 2 for the cost of an asset that is inventory in character, Ind AS 16 for depreciation, and Ind AS 36 for impairment.
When the rebuttal actually happens
Rarely, and the examples are consistent.
- A plantation of an unusual species with no market in standing trees and no comparable transaction anywhere.
- A breeding animal of a rare line for which the only sales are of a different kind of animal.
- A biological asset in a location where no market exists at all and no comparable market can be substituted.
Difficulty is not unreliability. Where prices exist for a similar asset, or where a valuation technique produces a defensible range, the presumption stands and fair value must be used.
Worked
Sunehra Farms plants a small block of an experimental timber species on 1 April 2026 at a cost of Rs. 6,00,000. There is no market in standing trees of that species anywhere in India, no comparable species is close enough for a substitute price, and a discounted cash flow model produces a range so wide that it is clearly unreliable.
On initial recognition the presumption in paragraph 30 is rebutted. The block is carried at Rs. 6,00,000, cost, and depreciated over its useful life with impairment tested under Ind AS 36.
At 31 March 2029 a market develops: a plantation company begins buying standing blocks of that species and prices are quoted. Fair value less costs to sell is now Rs. 9,20,000, and the carrying amount under the cost model is Rs. 5,40,000.
The company must move to fair value less costs to sell. The difference of Rs. 3,80,000 goes to profit or loss under paragraph 26, and paragraph 56 requires disclosure of a description of the assets, an explanation of why fair value has become reliably measurable, and the effect of the change.
At 31 March 2031 the market for that species collapses and quotations cease. The company would like to revert to cost. It may not. Paragraph 31 permits no return, and the company must continue to measure the block at fair value less costs to sell until disposal, using whatever valuation technique Ind AS 113 permits.
When Fair Value Cannot Be Measured Reliably
The disclosures that follow
Measuring at cost brings its own disclosures, and they are substantial: paragraphs 54, 55 and 56 exist only for this case. They are taken up in their own chapter later in this module.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.