Financial Reporting · Ind AS 113 Fair Value Measurement

Fair Value at Initial Recognition under Ind AS 113

Updated 5 October 2026 · Fact-checked

At initial recognition, the transaction price is the price you paid or received in the deal. Fair value is the exit price in an orderly transaction between market participants. They are often equal, but not always. If they differ, you measure at fair value and book the difference in profit or loss, unless another Ind AS requires otherwise.

Understand Fair Value at Initial Recognition

Start with two prices. The transaction price is the price paid to acquire an asset or received to assume a liability, in the actual deal. It is an entry price. Fair value is the price you would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price.

In many cases the two are the same on day one. A company buys a listed share at the market price, and the deal price is the fair value. So you record the asset at that amount and no gain or loss arises.

In some cases they differ. Ind AS 113 lists the situations where the transaction price may not represent fair value: the transaction is between related parties, it takes place under duress or the seller is forced to accept the price, the unit of account for the transaction differs from the unit of account for the asset or liability measured at fair value, or the transaction takes place in a market that is not the principal (or most advantageous) market.

This list is a warning, not a rule that fair value always differs. A related party deal can still be at market terms. You must assess the facts. If the price is a fair value, you use it.

When another Ind AS requires or permits fair value at initial recognition and the transaction price differs from fair value, the entity recognises the resulting gain or loss in profit or loss. This is the day-one gain or loss. The exception is where that Ind AS specifies otherwise. Ind AS 113 itself does not prescribe recognition. It only gives this default. The substance of the deal also matters. If the counterparty is the owner, a difference may be an owner transaction (a distribution or contribution) recognised in equity, not in profit or loss.

For financial instruments, Ind AS 109 is the standard that decides the treatment. It generally allows a day-one gain or loss only when fair value is evidenced by a Level 1 price or by a valuation technique using only observable market data. Otherwise the difference is deferred. Always check the specific standard before booking the gain.

Key rules to remember

Transaction price vs fair value: Transaction price = entry price; Fair value = exit price; They are different concepts. They may be equal at initial recognition, but you must test it.
Day-one gain or loss: Day-one gain or loss = Fair value − Transaction price (for an asset); For a liability, the sign reverses: gain if fair value of the liability is less than the proceeds received. Recognise in profit or loss unless the relevant Ind AS says otherwise or the difference is in substance an owner transaction.
Situations where transaction price may not equal fair value: Related party deal | Duress or forced sale | Different unit of account | Different market; These are indicators to assess. They do not automatically mean a difference exists.
Financial instruments (Ind AS 109 link): Fair value ≠ transaction price: gain or loss in P&L only if fair value is based on a Level 1 price or only observable inputs; else defer the difference; Deferred difference is recognised later only to the extent it arises from a change in a factor market participants would consider, such as time.

How to solve Fair Value at Initial Recognition questions

Use this sequence for any case on fair value at initial recognition.

1Identify the item and the standard that governs its initial measurement. Ask whether that standard requires fair value or cost at initial recognition.
2Write down the transaction price from the facts. Note what it includes, such as transaction costs, which are not part of fair value.
3Test whether the transaction price is a fair value. Check for related parties, duress, different unit of account and a different market.
4Determine fair value using the Ind AS 113 approach: principal market, market participant assumptions and an appropriate valuation technique.
5Compute the difference between fair value and transaction price. Mark it as gain or loss, remembering the direction differs for assets and liabilities.
6Identify who the counterparty is and what the difference represents. If the counterparty is the owner and the excess is in substance a distribution (or a shortfall a contribution), recognise it in equity. If it is a dealing with an unrelated party, recognise it in profit or loss unless the governing standard says otherwise or requires deferral.
7Pass the journal entry and state the conclusion in one line.

Quickest way: Three-question check

When to use it: Use when time is short and the question asks if a day-one gain or loss arises.

Q1: Is the price a deal between independent parties at market terms? If yes, fair value equals transaction price and no day-one gain or loss arises.
Q2: If not, what is the fair value, and how is it derived (Level 1, observable or unobservable inputs)?
Q3: What does the specific Ind AS say about the difference, and who is the counterparty? Book in profit or loss, defer, or treat as owner transaction in equity.

Common mistakes in Fair Value at Initial Recognition

Assuming transaction price is always fair value.
Most routine purchases are at market price, so students stop testing.
Fix: State the presumption, then check the four indicators from Ind AS 113 against the facts.
Assuming transaction price never equals fair value when parties are related.
Students overread the related party indicator.
Fix: Say that a related party deal may be at market terms. Look for evidence the price departs from market.
Booking every difference as profit or loss.
Ind AS 113 mentions profit or loss, so students forget other standards and the substance of an owner transaction can override it.
Fix: Add the phrase 'unless the relevant Ind AS requires otherwise' and check the counterparty. A difference with a parent or owner acting as owner goes to equity. Check Ind AS 109 for financial instruments.
Including transaction costs in fair value.
Costs are part of what was paid, so they seem part of the price.
Fix: Fair value is not adjusted for transaction costs. Treat them under the governing standard.
Getting the sign wrong for liabilities.
Students apply the asset formula to every item.
Fix: For a liability, if fair value is lower than proceeds received, the difference is a gain. Reason it through each time.

Worked examples

Example 1

A Ltd buys 1,000 equity shares of a listed company on the stock exchange on 1 April for ₹500 per share, paying ₹5,00,000 in total. The quoted price on that date at the exchange, the principal market, is ₹500 per share. The shares are to be measured at fair value. Is there a day-one gain or loss?

Show the solution

Transaction price = 1,000 × ₹500 = ₹5,00,000.
Fair value is the Level 1 quoted price in the principal market: 1,000 × ₹500 = ₹5,00,000.
Check indicators: a market transaction between independent parties, no duress, same unit of account, principal market used.
Transaction price equals fair value, so the difference is ₹5,00,000 − ₹5,00,000 = nil.

Answer: Transaction price equals fair value at ₹5,00,000. No day-one gain or loss arises.

Example 2

B Ltd, a wholly owned subsidiary, acquires a machine from its parent for ₹40,00,000 on 1 April. An independent valuer, using market participant assumptions, assesses the exit price of the same machine at ₹34,00,000. The machine is to be recorded at fair value. Show the treatment.

Show the solution

Transaction price = ₹40,00,000. The seller is the parent, a related party, so test the price against fair value.
Fair value from the valuer = ₹34,00,000. The price departs from market, so the transaction price is not fair value.
Difference = ₹40,00,000 − ₹34,00,000 = ₹6,00,000 paid in excess of fair value.
Measure the machine at ₹34,00,000.
Substance: the subsidiary pays its owner more than the asset is worth. The excess is in substance a distribution to the parent acting as owner, so it is recognised in equity, not as a loss in profit or loss.
Entry: Machine A/c Dr ₹34,00,000; Equity (deemed distribution to parent) Dr ₹6,00,000; To Cash/Payable ₹40,00,000.

Answer: Record the machine at ₹34,00,000 and treat the ₹6,00,000 excess as a deemed distribution to the parent, debited to equity. No loss is taken to profit or loss.

Exam tips

In case scenarios, find the one fact that signals a difference, such as a related party, forced sale or unusual market, and build your answer around it.
Always write the provision first, then the facts, then the conclusion. Use the phrase 'unless another Ind AS requires or permits otherwise'.
Check who the counterparty is. A difference with a parent or owner is usually an equity item. A difference with an unrelated party under duress is a profit or loss item.
For financial instruments, link to Ind AS 109 and state the Level 1 or observable inputs condition for recognising a day-one gain.
Show the computation of the difference and the journal entry. Marks often go to the working and the entry.

Practice questions from Ind AS 113 Fair Value Measurement

Fair Value at Initial Recognition in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fair Value at Initial Recognition: frequently asked questions

Is transaction price always equal to fair value at initial recognition?

No. They are often equal, but Ind AS 113 says you must check. Related party deals, duress, a different unit of account or a different market can make them differ.

Where do I record a day-one gain or loss?

Under Ind AS 113, you recognise it in profit or loss unless the Ind AS requiring fair value says otherwise. If the difference arises in a deal with an owner and is in substance a distribution or contribution, it goes to equity. For financial instruments, Ind AS 109 limits when you can recognise it and may require you to defer the difference.

Are transaction costs part of fair value?

No. Fair value is not adjusted for transaction costs. You account for them under the Ind AS that applies to the item.

What is the difference between an entry price and an exit price?

An entry price is what you pay to buy an asset or receive to take on a liability. An exit price is what you would receive to sell the asset or pay to transfer the liability. Fair value is an exit price.