Fair value explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Ind AS 113 does not say what to measure at fair value; other standards do. It says how: fair value is an exit price in an orderly transaction between market participants, measured with valuation techniques that use as many observable inputs as possible, and every measurement is placed in a three-level hierarchy according to its least observable significant input. This guide works through three invented items, one at each level.
Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction at the measurement date (paragraph 9), taken from the principal market, or else the most advantageous market (paragraph 16), without deducting transaction costs (paragraph 25). Use techniques that maximise observable inputs (paragraph 61). A measurement sits in the level of its lowest-level input that is significant to the whole (paragraph 73).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). Amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. Valuation judgements of this kind also feed financial modeling work for impairment tests, business combinations and fundraising.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 9, 11-14 | Exit price for a particular asset or liability, reflecting its characteristics and the unit of account fixed by the standard that requires fair value | Condition, location and sale restrictions matter if market participants would price them |
| 15-19 | Assume a transaction in the principal market, or without one, the most advantageous market; the entity must have access; the market the entity normally uses is presumed to be principal | A higher price in another market does not displace the principal market (paragraph 18) |
| 22-23 | Use the assumptions market participants would use, acting in their own economic interest | No need to name specific participants |
| 24-26 | Price is not adjusted for transaction costs; transport costs are deducted where location is a characteristic | Transaction costs belong to other standards |
| 27-33 | For non-financial assets, the use that gives the highest value, judged as physically possible, legally permissible and financially feasible (the standard's defined test) | Use by market participants, even if the entity intends otherwise |
| 34-47 | Liabilities and own equity are measured as a transfer to a market participant, including non-performance risk | The entity's own credit standing counts |
| 61-66 | Appropriate techniques (market, cost, income approaches) used consistently; calibrate to the transaction price at initial recognition | A change of technique is a change in estimate |
| 67-71 | Maximise observable inputs; apply premiums and discounts only if consistent with the unit of account; no blockage factor | Quoted Level 1 prices are used unadjusted |
| 72-90 | Hierarchy: Level 1 quoted prices for identical items; Level 2 other observable inputs; Level 3 unobservable inputs | A discounted cash flow can be Level 2 or 3 depending on its inputs (paragraph 74) |
| 91-99 | Disclose techniques, inputs, level, transfers and for Level 3 a reconciliation and sensitivity | Class-wise disclosure |
The standard is outlined in Ind AS 113 Fair Value Measurement. Who may carry out company-law valuations is a separate question, covered in our guide to the Companies (Registered Valuers and Valuation) Rules, 2017. The Schedule III angle for quoted investments is in quoted investments under Schedule III.
The method
- Define the item and the unit of account (paragraphs 11 to 14).
- Identify the principal market, or the most advantageous market if there is none (paragraphs 16 to 19).
- Choose the technique or techniques (paragraphs 61 to 63): market, cost or income approach.
- Collect inputs and classify each as Level 1, 2 or 3.
- Measure; apply premiums or discounts only where market participants would and the unit of account allows (paragraph 69).
- Classify the whole measurement at the lowest level of an input that is significant to it (paragraph 73).
- Disclose by class (paragraphs 91 to 99).
Worked example
The entity and all figures in this example are invented for illustration. Prices, multiples, discounts and rates are assumed, for arithmetic only.
Tungabhadra Holdings Limited holds three items at the reporting date.
Item 1: quoted shares, two markets (paragraphs 16 to 19, 25 and 80). It holds 10,000 shares of a listed company that trade on Exchange A and Exchange B. Exchange A has the larger trading volume and is where Tungabhadra normally deals, so it is the principal market (paragraph 17).
| Exchange A (principal) | Exchange B | |
|---|---|---|
| Closing price per share (Rs) | 500 | 504 |
| Transaction costs per share (Rs) | 3 | 9 |
| Net amount per share (Rs) | 497 | 495 |
The fair value uses the price in the principal market, Rs 500, even though Exchange B shows a higher price (paragraph 18). It is not reduced by the Rs 3 transaction cost (paragraph 25). Fair value = 10,000 x Rs 500 = Rs 50,00,000. This is a quoted price for identical shares in an active market, used without adjustment, and the holding is the quantity times the price (paragraph 80): Level 1. Had there been no principal market, Exchange A would still be the most advantageous market because its net amount of Rs 497 beats Exchange B's Rs 495 (the standard defines the most advantageous market after transaction and transport costs); the fair value would nevertheless remain Rs 500.
Item 2: an unquoted 10 per cent equity stake (paragraphs 61, 69, 75, 87 and 89; B5 and B6). The investee has no quoted price. Tungabhadra uses the market approach with an enterprise value to EBITDA multiple of 9.0 derived from comparable listed companies (an observable input). Investee EBITDA is Rs 5,00,00,000 and its net debt is Rs 5,00,00,000. A market participant would apply a 20 per cent discount for the lack of marketability of a minority holding in an unlisted company; that discount is not observable and comes from the entity's own data adjusted for what other participants would use (paragraph 89).
| Step | Rs |
|---|---|
| Enterprise value: 9.0 x 5,00,00,000 | 45,00,00,000 |
| Less net debt | (5,00,00,000) |
| Equity value (100 per cent) | 40,00,00,000 |
| Less marketability discount at 20% | (8,00,00,000) |
| Discounted equity value | 32,00,00,000 |
| 10 per cent holding | 3,20,00,000 |
The multiple is observable (Level 2 in nature), but the 20 per cent discount is an unobservable adjustment that changes the result significantly, so the measurement is Level 3 (paragraph 75). Disclosures include quantitative information about the multiple and the discount, a reconciliation of the opening and closing balances and a narrative on sensitivity (paragraph 93(d), (e) and (h)).
Item 3: a deposit carrying no interest (paragraphs 61, 82 and B10 to B13). Tungabhadra has placed a deposit of Rs 10,00,000 with a landlord, refundable in three years, carrying no interest. It measures fair value with the income approach, discounting the single cash flow at an assumed market rate of 9 per cent a year. The rate comes from published rates for loans of the same term to counterparties of similar standing and is observable for the full term (paragraph 82).
| Year | Cash flow (Rs) | Factor at 9% | Present value (Rs) |
|---|---|---|---|
| 3 | 10,00,000 | 0.7722 | 7,72,183 |
(The present value is computed on the unrounded factor 0.772183.) Fair value = Rs 7,72,183. The inputs are observable and not significantly adjusted: Level 2. The difference from the nominal Rs 10,00,000, Rs 2,27,817, is dealt with under the standard that governs the deposit, as discussed in our Ind AS 109 classification article.
Summary and check.
| Item | Fair value (Rs) | Technique | Level |
|---|---|---|---|
| Quoted shares | 50,00,000 | Quoted price, principal market | 1 |
| Deposit carrying no interest | 7,72,183 | Income approach, observable rate | 2 |
| Unquoted stake | 3,20,00,000 | Market approach with unobservable discount | 3 |
| Total | 3,77,72,183 |
Check: 50,00,000 + 7,72,183 + 3,20,00,000 = 3,77,72,183. If the discount on item 2 were observable, say from a published study of similar transactions, the stake could move to Level 2; the hierarchy ranks inputs, not techniques (paragraph 74).
Presentation and disclosure
Fair value is a measurement basis used by other standards, so presentation follows them; Ind AS 113 itself requires, for each class measured at fair value after initial recognition, the amount, the level, and for Levels 2 and 3 the technique and inputs; for recurring Level 3 items it also requires a reconciliation, a description of the valuation process and a sensitivity narrative (paragraph 93). Transfers between levels are disclosed with the entity's policy for deciding when they occur. Quoted investment presentation is in investment classification under Ind AS 107 and Schedule III.
Common mistakes
- Using the highest price across exchanges instead of the principal market price.
- Deducting transaction costs from fair value (paragraph 25).
- Applying a blockage discount to a large quoted holding (paragraph 69).
- Treating a discounted cash flow as automatically Level 3, or a multiple as automatically Level 2: the hierarchy turns on the significant inputs.
- Applying a control premium or minority discount inconsistent with the unit of account.
- Skipping the calibration to the transaction price at initial recognition (paragraph 64).
Need help with valuation inputs and fair value workings?
If your fair values depend on a valuer's report you cannot yet reconcile to the standard's hierarchy, we can map the inputs, test the levels and prepare the disclosure tables. Our team does this as part of financial modeling engagements, using models that your auditors can trace.
Key takeaways
- Fair value is an exit price from the principal market, not adjusted for transaction costs.
- Maximise observable inputs; a quoted Level 1 price is used unadjusted.
- The level is that of the lowest significant input, and applies to the measurement as a whole.
- A significant unobservable adjustment moves a measurement to Level 3.
- Level 3 carries the heaviest disclosure: inputs, reconciliation and sensitivity.
Read next
- Classification and measurement of financial assets under Ind AS 109
- Impairment of assets under Ind AS 36: CGU, value in use and goodwill
- Quoted investments under Schedule III: market value and fair value
- Companies (Registered Valuers and Valuation) Rules, 2017
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.