1. What IND AS 113 Covers — Objective and Scope
IND AS 113 is a measurement and disclosure standard, not a recognition standard. It defines fair value, sets out a single framework for measuring it, and prescribes the disclosures required — but it does not decide when an asset or liability should be measured at fair value in the first place. That decision is made by the specific standard that applies: IND AS 109 for many financial instruments, IND AS 40 for investment property under the fair value model, IND AS 103 for business combination purchase price allocations, IND AS 102 for share-based payments, and IND AS 36 for fair value less costs of disposal in impairment testing, among others.
Think of IND AS 113 as the common "measurement rulebook" that every other standard borrows from whenever it calls for a fair value number — a single, consistent definition and hierarchy instead of each standard defining fair value slightly differently.
2. Fair Value as an Exit Price
Fair value is 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. Three words carry the whole definition:
- Exit price — not an entry price. What the asset would fetch on sale (or what it would cost to be relieved of a liability), not what was originally paid for it.
- Orderly transaction — assumes exposure to the market for a period customary for such transactions, not a forced sale or distress liquidation.
- Market participants — independent, knowledgeable, willing and able buyers and sellers — fair value is a market-based measurement, not an entity-specific one reflecting management's own intentions, synergies, or planned use.
3. Principal Market vs Most Advantageous Market
Fair value is measured using the price in the principal market for the asset or liability — the market with the greatest volume and level of activity, assuming the entity has access to it. Transaction costs are not deducted when using the principal market's price, since they are not characteristic of the asset or liability itself.
Only in the absence of a principal market does the entity use the price in the most advantageous market — the market that maximises the amount receivable for an asset, or minimises the amount payable to transfer a liability, after considering both transaction costs and transport costs (though the final fair value figure is then adjusted only for transport costs, not transaction costs — transaction costs are excluded from fair value itself, but used only to identify which market is "most advantageous").
4. Highest and Best Use — Non-Financial Assets
For non-financial assets, fair value reflects a market participant's ability to generate economic benefit through the asset's highest and best use — the use that maximises its value, which must be:
- Physically possible — a market participant could actually use the asset that way,
- Legally permissible — zoning, contractual or legal restrictions allow it, and
- Financially feasible — the use generates adequate return to justify it.
This is assessed from a market participant's perspective, even if the entity itself intends a different use — a piece of land currently used for a warehouse might have a highest and best use as a residential development site if rezoning is realistically achievable, and that is the use fair value would reflect, regardless of the owner's actual plans.
5. The Three Valuation Approaches
IND AS 113 permits three valuation approaches, used individually or in combination depending on which best captures the relevant fair value with the information available:
Market approach
Uses prices and other relevant information from actual market transactions involving identical or comparable (similar) assets, liabilities, or a group of them — e.g. matrix pricing for bonds, or comparable transaction multiples.
Income approach
Converts future amounts (cash flows or income and expenses) into a single, current, discounted amount — e.g. a discounted cash flow model, an option-pricing model, or the multi-period excess earnings method for an acquired customer relationship.
Cost approach
Reflects the amount that would currently be required to replace the service capacity of an asset — current replacement cost, adjusted for physical deterioration and functional/economic obsolescence.
Whichever technique is used, the objective is to maximise the use of relevant observable inputs and minimise the use of unobservable inputs — this preference for observability is what drives the fair value hierarchy.
6. The Fair Value Hierarchy — Level 1, 2 and 3
IND AS 113 categorises the inputs to valuation techniques (not the assets themselves) into a three-level hierarchy, prioritising observable market data:
| Level | Nature of inputs | Typical example |
|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets or liabilities, used without adjustment | Listed equity shares, exchange-traded government bonds |
| Level 2 | Observable inputs other than Level 1 quoted prices, directly or indirectly observable | Quoted prices for similar assets in active markets; interest rates and yield curves observable at commonly quoted intervals; corroborated market data |
| Level 3 | Unobservable inputs, used only when relevant observable inputs are unavailable | An entity's own discounted cash flow forecast for an unlisted equity investment; an unobservable long-term growth or attrition assumption |
The fair value measurement takes the level of the lowest-level input that is significant to the entire measurement. A discounted cash flow valuation built mostly on observable market interest rates but relying on one significant unobservable growth assumption is a Level 3 measurement overall — a single meaningful unobservable input is enough to pull the whole measurement down to Level 3, however much of the rest of the model is market-sourced.
7. Fair Value of Liabilities and Own Equity
The fair value of a liability (or an entity's own equity instrument) assumes it is transferred to a market participant at the measurement date — it is not settled or extinguished, and continues with the same terms after the transfer. Where a quoted price for the transfer of an identical liability isn't available, the entity may use the quoted price of the identical item held as an asset by another party, if available, or another appropriate valuation technique.
Crucially, the fair value of a liability reflects the effect of non-performance risk — including the entity's own credit risk — and this must be consistent before and after the liability's transfer, since a market participant would demand compensation for taking on that risk.
8. Day-One Gains and Losses
If the transaction price for an asset or liability differs from the fair value determined by a valuation technique at initial recognition (a "day-one gain or loss"), the entity recognises that difference only if the fair value is evidenced by a quoted price in an active market for an identical item, or is based on a valuation technique using only observable market data. Otherwise, the day-one gain or loss is deferred and recognised as the relevant factors (including time) become observable, or when the transaction is closed out.
9. Worked Example — Classifying Three Assets in the Hierarchy
Scenario: Meridian Capital Ltd needs to fair-value three investments at its reporting date for IND AS 109 classification purposes.
| Investment | Valuation basis | Hierarchy level |
|---|---|---|
| Listed equity shares of a large-cap company, actively traded on the NSE | Closing quoted price on the measurement date, used without adjustment | Level 1 |
| A corporate bond that doesn't trade daily, but similar bonds from comparable issuers trade actively and a broker-corroborated matrix price is available | Interpolated/matrix pricing using observable yields for comparable, actively traded instruments | Level 2 |
| An unlisted start-up equity investment, valued using a discounted cash flow model with a significant unobservable long-term revenue growth assumption | Income approach — DCF, with a significant unobservable input driving the result | Level 3 |
The Level 3 investment requires the most extensive disclosure — a reconciliation of opening to closing balance, the valuation technique and unobservable inputs used, and a sensitivity analysis showing how the fair value would change if the significant unobservable input changed to a reasonably possible alternative amount.
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IND AS 113 is a cross-cutting standard — it gets invoked constantly across the rest of the IND AS framework:
- IND AS 109 — FVTPL and FVOCI financial instruments, and fair value less costs to sell for certain purposes
- IND AS 40 — investment property, where the fair value model is elected
- IND AS 103 — measuring identifiable assets acquired and liabilities assumed in a business combination
- IND AS 36 — fair value less costs of disposal, one of the two components of recoverable amount
- IND AS 102 — grant-date fair value of equity-settled share-based payments
- IND AS 116 — a lessor's classification test references the underlying asset's fair value
11. Disclosures Required
For assets and liabilities measured at fair value on a recurring or non-recurring basis, IND AS 113 requires disclosure of the fair value hierarchy level, the valuation technique(s) and inputs used, and any transfers between Level 1 and Level 2. For Level 3 measurements specifically, additional disclosures are required: a reconciliation of opening to closing balances (including purchases, sales, issues, settlements, and gains/losses recognised in P&L or OCI), a description of the valuation process, quantitative information about significant unobservable inputs, and a narrative sensitivity analysis of how the fair value would change with reasonably possible alternative unobservable inputs.
12. Common Mistakes CAs Make
Error 1 — Deducting transaction costs from the fair value itself. Transaction costs are used only to identify the most advantageous market when no principal market exists — they are never deducted from the resulting fair value figure, which represents the price in that market before any selling costs.
Error 2 — Classifying an entire measurement as Level 2 because "most of the inputs are observable." If even one significant input is unobservable, the whole measurement falls to Level 3 — there's no blended or weighted-average level.
Error 3 — Measuring highest and best use based on the entity's own plans rather than a market participant's perspective. Even if management has no intention of ever changing a property's use, fair value still reflects what a hypothetical market participant could achieve with it, if that use is physically possible, legally permissible and financially feasible.
Error 4 — Ignoring non-performance risk (including own credit risk) when fair-valuing a liability. A liability's fair value must reflect the risk that the obligor won't fulfil the obligation — omitting this, especially for an entity whose credit standing has deteriorated, understates the liability's true exit price.
Error 5 — Treating IND AS 113 as requiring fair value measurement on its own. IND AS 113 never mandates that an item be fair-valued — it only tells you how to do it once another standard has already required or permitted it.
13. FAQs
How does IND AS 113 define fair value?
Fair value is 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. It is an exit price — what the entity would receive on selling an asset, or pay to be relieved of a liability — not an entry price like the amount paid to acquire the asset, and it is a market-based measurement, not entity-specific.
What is the difference between the principal market and the most advantageous market?
The principal market is the market with the greatest volume and level of activity for the asset or liability, and fair value is measured using the price in that market (without adjustment for transaction costs), assuming the entity has access to it. Only if there is no principal market does the entity use the most advantageous market — the market that maximises the amount that would be received for an asset, or minimises the amount that would be paid to transfer a liability, after considering both transaction costs and transport costs.
What are the three levels of the fair value hierarchy?
Level 1 inputs are quoted prices in active markets for identical assets or liabilities, used without adjustment. Level 2 inputs are observable inputs other than quoted Level 1 prices, either directly or indirectly (e.g. quoted prices for similar assets, or interest rates observable at commonly quoted intervals). Level 3 inputs are unobservable inputs, used only when relevant observable inputs are not available, and require the most judgement and the most extensive disclosure.
What is "highest and best use" under IND AS 113?
For non-financial assets, fair value is measured based on the asset's highest and best use from a market participant's perspective — the use that maximises its value, which must be physically possible, legally permissible, and financially feasible — even if the entity itself intends a different use. This is assessed from the market's viewpoint, not management's actual plans for the asset.
Which valuation approaches does IND AS 113 permit?
Three valuation approaches are permitted, used individually or in combination as appropriate: the market approach (prices from actual market transactions in identical or comparable assets), the income approach (converting future cash flows or earnings to a single discounted present value), and the cost approach (the current replacement cost required to replace an asset's service capacity, adjusted for obsolescence). The technique used should maximise the use of relevant observable inputs and minimise unobservable inputs.
Does IND AS 113 apply to lease accounting under IND AS 116?
IND AS 113's fair value framework is referenced wherever another standard requires or permits a fair value measurement — this includes determining the fair value of the underlying asset for a lessor's lease classification test, and fair value disclosures for owned property that is subject to operating leases. It does not itself change how the lease liability or right-of-use asset is measured under IND AS 116, which uses present value of lease payments, not fair value.