Ind AS 113
Fair Value Measurement

October 2026 update: Ind AS 113: Fair Value Measurement - Hierarchy & Valuation Controls

2-Minute Summary

• Ind AS 113 defines how to measure fair value when another standard requires or permits it; it does not itself decide when fair value must be used.
• Fair value is a market-participant exit price in an orderly transaction at the measurement date.
• Use the principal market first; the most advantageous market is relevant only when no principal market exists.
• Hierarchy level follows the lowest-level significant input to the entire measurement, making Level 3 governance especially important.

Decision path

Start with the unit of account and the market - not the valuation model

The standard requiring fair value determines the unit of account. Ind AS 113 then asks what price would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Identify the principal market to which the entity has access. If no principal market exists, identify the most advantageous market. Transaction costs are not part of fair value, although transport costs can adjust the price when location is a characteristic of the asset. Entity-specific intentions do not replace market-participant assumptions.

Choose techniques that maximise observable inputs and explain why they fit the asset or liability

Market, income and cost approaches can all be appropriate depending on the facts. A valuation memo should state the technique, data sources, calibration, significant assumptions and why a change from the prior technique is justified. For a non-financial asset, highest and best use is physically possible, legally permissible and financially feasible; current use is presumed to satisfy the criterion unless market or other evidence suggests an alternative. A large holding of a quoted security is not automatically entitled to a blockage discount against an unadjusted Level 1 price.

Hierarchy and Level 3 disclosure are governance, not labelling exercises

Level 1 uses unadjusted quoted prices in active markets for identical items. Level 2 uses observable inputs other than Level 1 prices. Level 3 relies on significant unobservable inputs. Classification is driven by the lowest-level significant input used in the whole measurement. For recurring Level 3 values, maintain opening-to-closing reconciliations, valuation-process documentation, quantitative unobservable inputs and sensitivity information as required. Independent challenge should focus on assumptions that actually move the value, not merely reproduce the valuer’s report.

Worked example

A company values an unlisted investment using a discounted cash-flow model. Revenue growth, long-term margin and discount rate are significant unobservable inputs, so the measurement is not converted into Level 2 merely because some market data informs the discount rate. The finance file should document the market-participant assumptions, calibration to the transaction or prior valuation where relevant, sensitivity to the significant inputs and the disclosures required for a Level 3 measurement.

Close checklist

• Confirm the standard that requires or permits fair value.
• Identify the unit of account and principal market.
• Use market-participant, not entity-specific, assumptions.
• Document technique, inputs and calibration.
• Classify hierarchy by the lowest significant input.
• Prepare Level 3 reconciliation and sensitivity evidence where required.

Questions practitioners ask

Primary sources

• ICAI - Ind AS 113 text in the 2025-26 Compendium
• ICAI - Compendium of Indian Accounting Standards 2025-26

For periods affected by later notified amendments, read the compendium together with the applicable MCA notification listed by ICAI.

October 2026 update: Ind AS 113 Fair Value Measurement Hierarchy Explained

Finin2min 2-Minute Summary

• Fair value is a market-based exit price: the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• The measurement uses the principal market; only in the absence of a principal market does the entity use the most advantageous market.
• Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities accessible at the measurement date.
• Level 2 inputs are observable inputs other than Level 1 quoted prices; Level 3 inputs are unobservable inputs used when relevant observable inputs are unavailable.
• A fair-value measurement is categorised based on the lowest-level input that is significant to the entire measurement, so one unobservable significant adjustment can move a measurement into Level 3.

The hierarchy classifies inputs, not valuation methods

Finance should first identify the asset or liability, unit of account and market in which an orderly transaction would occur. The measurement assumes market-participant assumptions rather than the entity's private intention to hold an asset or avoid settling a liability. Transaction costs are not a characteristic of the asset or liability and are excluded from fair value, while transport costs can be relevant when location is an asset characteristic.

Choose a valuation technique - market, income or cost approach, or a suitable combination - that is appropriate in the circumstances and maximises observable inputs. The hierarchy is then determined by the inputs used, not by whether the model happens to be a discounted cash flow or market multiple.

Level 1 is strict; Level 3 needs governance

An unadjusted quoted price in an active market for an identical item is Level 1 and is ordinarily used without adjustment. Level 2 can include quoted prices for similar items, observable yield curves, implied volatilities and market-corroborated inputs. Level 3 uses significant unobservable assumptions such as entity-developed forecasts adjusted to market-participant assumptions.

When multiple inputs are used, classify the entire measurement by the lowest-level input that is significant to the result. A listed comparable price does not keep a valuation in Level 2 if a significant unobservable adjustment drives the final number. Level 3 also brings heavier disclosure expectations, including valuation-process and sensitivity information for relevant recurring measurements.

Worked example: unlisted preference shares

An entity values unlisted preference shares using observable government yields and credit spreads, but also applies a large entity-specific probability-of-conversion adjustment that is not observable and is significant to the result. The valuation technique may look market-based, yet the significant unobservable adjustment can make the overall fair-value measurement Level 3. The hierarchy conclusion should be documented alongside sensitivity to the conversion assumption.

Fair-value governance checklist

• Confirm the standard that requires or permits fair value before applying Ind AS 113.
• Identify principal market and market participants.
• Document valuation technique and why it is appropriate.
• Inventory every significant input and classify it as observable or unobservable.
• Assign hierarchy level using the lowest significant input.
• Maintain valuation approval, back-testing, model-change and Level 3 sensitivity evidence.

Is Level 3 automatically a poor-quality valuation?

No. Level 3 means significant unobservable inputs are used; it requires disciplined market-participant assumptions and stronger disclosure/governance.

Can a quoted market price be adjusted because the entity holds a very large block?

Ind AS 113 generally requires Level 1 quoted prices without a blockage adjustment for the size of a holding.

Is the most advantageous market always used?

No. The principal market is used when one exists; the most advantageous market is considered only when there is no principal market.

Do transaction costs reduce fair value?

No. Transaction costs are excluded from fair value, although transport costs can adjust the price when location is a characteristic of the asset.

Official sources

• ICAI - Ind AS 113 official 2025-26 compendium PDF
• ICAI - Compendium of Indian Accounting Standards 2025-26
• Finin2min Ind AS Hub - broader standard-level reference.