Intended Manipulation of Share Prices

ABC Ltd is a subsidiary of the XYZ Ltd which located in same business place & governed by same directors. The company had an investment of Rs. 62 Million in KLM PLC shares (one of their related company incorporated in Maldives). This investment was valued at active market price of 10 Maldives Rufiyaa each. In further inquiries it was noted that the active market has been manipulated by parties within the group with the intention of recording a gain from those shares and to make the company visible as a profit making body to the interested parties of its financials. During the year KLM shares reserve had been increased by Rs.49.5 Mn when compared to the prior year. This was due to the KLM share valuation as at reporting date. The company had purchased these shares at 2 Rufiyaa per share, but as at 31-12-2014 it was increased up to 10 Rufiyaa therefore XYZ Ltd has identified a capital gain of 8 Rufiyaa per share. It was noted the company has manipulated the active market. Further it was identified that these transactions were carried out by the parties within the group with the intention of manipulating the share price. Though we need to value these shares to the active market price which couldn’t clearly identify an active market in this scenario. So as per the requirement of LKAS 39 ‘Financial Instruments Recognition & Measurement’ standard, the best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, an entity establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. In this scenario because the market prices were manipulated as per the requirements of the standard it was suggested to move for valuation techniques to value these shares. As the valuation technique discounted prices were chosen and Company’s Internal Rate of Return was taken as the Discounting Factor for the calculation.