Ind AS 113 Fair Value Measurement
Fair value is an exit price in the principal market, measured from the market participant's view, not the owner's.
Ind AS 113 is the Indian accounting standard that says how to measure fair value whenever another Ind AS requires or permits it: investment property disclosures, financial instruments under Ind AS 109, assets acquired in a business combination under Ind AS 103. It tells you how to measure fair value, not when to use it.
Its definition is an exit price: 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. ICAI Valuation Standard 102 uses the same definition for fair value as a valuation base, so registered valuers meet it in reporting and non-reporting work alike.
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The Building Blocks
- Exit price
- What you would get for selling, not what you would pay to buy. The entity's intention to hold or use the asset does not change it.
- Principal market
- The market with the greatest volume and level of activity for the asset. If one exists, fair value is measured there, even if another market offers a better price.
- Most advantageous market
- Used only when there is no principal market: the market that maximises the net amount received after transaction costs.
- Market participants
- Buyers and sellers who are independent, knowledgeable, able and willing (not forced) to transact. Their assumptions count, not the owner's.
- Highest and best use
- Applies to non-financial assets: the use market participants would make that is physically possible, legally permissible and financially feasible. It can differ from current use.
Worked Example: Transaction Costs and Market Choice
Illustrative. A listed holding is traded in two markets and neither is the principal market.
Quoted price
Market A
₹100
Market B
₹98
Transaction costs to sell
Market A
₹8
Market B
₹3
Net amount received
Market A
₹92
Market B
₹95
Most advantageous?
Market A
No
Market B
Yes
Fair value
Market A
Market B
₹98
| Market A | Market B | |
|---|---|---|
| Quoted price | ₹100 | ₹98 |
| Transaction costs to sell | ₹8 | ₹3 |
| Net amount received | ₹92 | ₹95 |
| Most advantageous? | No | Yes |
| Fair value | ₹98 |
Transaction costs decide which market is most advantageous, but they are not deducted from fair value itself: the answer is ₹98, not ₹95. VS 102 (para 22) states the same rule. If Market A had been the principal market, fair value would be ₹100 regardless of the better net amount in B.
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Techniques and the Fair Value Hierarchy
Level 1
Inputs
Unadjusted quoted prices in active markets for identical assets or liabilities
Example
A Nifty 50 share's closing price on the NSE
Level 2
Inputs
Observable inputs other than Level 1 prices: quoted prices for similar items, yield curves, observable credit spreads
Example
An unlisted corporate bond priced off a yield curve and comparable spreads
Level 3
Inputs
Unobservable inputs reflecting market participants' assumptions
Example
An unlisted start-up's equity valued by DCF on management projections
| Level | Inputs | Example |
|---|---|---|
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities | A Nifty 50 share's closing price on the NSE |
| Level 2 | Observable inputs other than Level 1 prices: quoted prices for similar items, yield curves, observable credit spreads | An unlisted corporate bond priced off a yield curve and comparable spreads |
| Level 3 | Unobservable inputs reflecting market participants' assumptions | An unlisted start-up's equity valued by DCF on management projections |
- check_circleThree valuation techniques are used: the market approach, the income approach and the cost approach, the same three the ICAI Valuation Standards use.
- check_circleTechniques should maximise relevant observable inputs and minimise unobservable ones, which is also the rule in ICAI VS 103 and VS 303.
- check_circleThe level is set by the lowest-level input that is significant to the whole measurement, so one significant unobservable input makes the measurement Level 3.
How the Valuation Examination Tests This
Ind AS carries a small block of the SFA paper, but fair value concepts also run through the Valuation Application module. Expect one-mark questions on the exit-price definition, which market to use, the level of a given input, and whether highest and best use applies to a financial asset (it does not). The classic trap is the example above: deducting transaction costs from the fair value after using them to pick the market.
FAQs
What is fair value under Ind AS 113?expand_more
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 based on market participants' assumptions, not the owner's.
What is the difference between Level 1, Level 2 and Level 3 fair value?expand_more
Level 1 uses unadjusted quoted prices for identical items in active markets. Level 2 uses other observable inputs. Level 3 uses unobservable inputs. The lowest level of any significant input decides the classification.
Are transaction costs deducted from fair value?expand_more
No. They are considered in identifying the most advantageous market, but the fair value is the price in that market before transaction costs.
Does highest and best use apply to shares and bonds?expand_more
No. Highest and best use applies to non-financial assets such as land, buildings and plant. Financial assets have no alternative use to consider.
Next steps
- Bases of Valuearrow_forward
- Intangible assetsarrow_forward
- Comparablesarrow_forward
- SFA mock testarrow_forward
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