Bases and Premises of Value
One asset can have four correct values. The basis and premise decide which one you report.
Before choosing a method, a valuer has to say what kind of value is being measured. The basis of value answers 'value to whom, under what kind of transaction?'. The premise of value answers 'in what state, and how will the asset be used or sold?'. The same factory can carry four different correct values depending on the answers.
ICAI Valuation Standard 102 defines three bases (fair value, participant specific value and liquidation value) and five premises. IVS and the IBC regulations add their own definitions, and the exam expects you to know which source says what.
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Bases of Value
- Fair value (ICAI VS 102)
- 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 valuation date. It is an exit price, is not adjusted for transaction costs, and ignores advantages available only to a particular buyer. VS 102 says it is usually synonymous with market value.
- Market value (IVS)
- The amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller at arm's length, after proper marketing, each acting knowledgeably, prudently and without compulsion.
- Participant specific value (ICAI) or investment value (IVS)
- Value that reflects advantages or disadvantages of the owner or an identified buyer, such as synergies only that buyer can capture. VS 102's example: a 2% stake sold to a holder of 49% is worth more to that buyer because it carries control.
- Liquidation value
- The amount realised on sale of an asset or group of assets when termination of the business is contemplated or assumed (ICAI), or on a piecemeal sale (IVS). It is net of the estimated cost of disposal, and the valuer must disclose whether an orderly or forced sale is assumed.
- Fair value under the IBC
- Regulation 2(1)(hb) of the CIRP Regulations: the estimated realisable value of the corporate debtor or its assets if exchanged on the insolvency commencement date between a willing buyer and willing seller at arm's length, after proper marketing. Since 25 February 2026 it covers the corporate debtor as a whole, including the underlying synergies of all its tangible and intangible assets.
Premises of Value (ICAI VS 102)
| Premise | What it assumes |
|---|---|
| Highest and best use | The use market participants would make that is physically possible, legally permissible and financially feasible. Current use is presumed to be highest and best unless market factors suggest otherwise. |
| Going concern | The business continues to operate. Its trained workforce, running plant, licences and systems carry value. |
| As-is-where-is | The asset's existing use, which may or may not be its highest and best use. |
| Orderly liquidation | Sale in liquidation after appropriate marketing and a reasonable period to market the asset. |
| Forced transaction | The seller must sell without an appropriate marketing period or effort. A sale in an inactive market is not automatically forced. |
Worked Example: One Factory, Four Values
Illustration only. A food-processing unit at Chakan, near Pune: land, building, plant and an operating business.
What would any market participant pay for the running business?
Basis and premise
Fair value, going concern
Illustrative value
₹120 crore
What is it worth to the competitor next door, who can share the cold chain?
Basis and premise
Participant specific value
Illustrative value
₹135 crore
What would a liquidator realise with six months to market each asset?
Basis and premise
Liquidation value, orderly
Illustrative value
₹80 crore
What would a lender realise in a 30-day distress sale?
Basis and premise
Liquidation value, forced
Illustrative value
₹60 crore
| Question asked | Basis and premise | Illustrative value |
|---|---|---|
| What would any market participant pay for the running business? | Fair value, going concern | ₹120 crore |
| What is it worth to the competitor next door, who can share the cold chain? | Participant specific value | ₹135 crore |
| What would a liquidator realise with six months to market each asset? | Liquidation value, orderly | ₹80 crore |
| What would a lender realise in a 30-day distress sale? | Liquidation value, forced | ₹60 crore |
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Reading the Example
The ₹15 crore gap between ₹120 crore and ₹135 crore is synergy that only one buyer can capture, so it belongs in participant specific value, not fair value. The gap between ₹120 crore and ₹80 crore is the loss of going-concern elements (workforce, licences, an operating plant) plus disposal costs, which liquidation value deducts. The gap between ₹80 crore and ₹60 crore is the cost of a shortened marketing period.
None of these is 'the' value. A report that states ₹120 crore without naming the basis and premise is incomplete.
How the Valuation Examination Tests This
- check_circleTransaction costs: deducted for liquidation value, not for fair value. Swapping these is the most common error.
- check_circleHighest and best use: the three tests are physically possible, legally permissible and financially feasible. 'Maximally productive' appears in some textbooks but not in VS 102's list.
- check_circleSynergies: fair value includes only synergies available to market participants in general. Buyer-specific synergies push you to participant specific or investment value.
- check_circleIBC fair value: since 25 February 2026 it is the realisable value of the corporate debtor including synergies, not just a sum of asset values. This change is within the 30 June 2026 law cut-off.
FAQs
What is the difference between fair value and liquidation value?expand_more
Fair value is the price in an orderly sale between market participants, usually on a going-concern footing, with no deduction for transaction costs. Liquidation value assumes the business is ending, values assets as they would be sold off, and deducts disposal costs.
What is the difference between basis of value and premise of value?expand_more
The basis says what type of value is measured and for whom (fair value, liquidation value). The premise says how the asset is deployed or sold (going concern, as-is-where-is, orderly liquidation, forced transaction).
Is fair value the same as market value?expand_more
Usually. ICAI VS 102 says fair value is usually synonymous with market value, except where an asset's characteristics give it a special value to particular parties.
What are the three tests of highest and best use?expand_more
The use must be physically possible, legally permissible and financially feasible, judged from the view of market participants even if the owner intends a different use.
Next steps
- Valuation Approachesarrow_forward
- Highest and Best Usearrow_forward
- Valuation Under IBCarrow_forward
- ICAI Standardsarrow_forward
Timed and scored, with negative marking.