Financial Reporting · Ind AS 113 Fair Value Measurement

Ind AS 113: Fair Value of Liabilities and Entity's Own Equity Instruments

Updated 5 October 2026

Under Ind AS 113, the fair value of a liability or own equity instrument is the price to transfer it to a market participant at the measurement date, while it stays outstanding. It is not the settlement price. Use the quoted price of the identical item, else the identical item held as an asset by another party, else a valuation technique from a market participant's perspective. Include non-performance risk. Make no separate adjustment for transfer restrictions.

Understand Fair Value of Liabilities and Entity's Own Equity Instruments

Fair value of an asset is an exit price: what you would receive on sale. For a liability, Ind AS 113 uses the same idea in mirror form. Fair value is the price you would pay to transfer the liability to a market participant. The liability is not settled or extinguished. It stays outstanding and the new party takes on the obligation.

The same transfer view applies to your own equity instruments, such as shares issued as consideration in a business combination. Fair value is what a market participant would pay to take over the instrument. It would take on the rights and obligations attached to it.

Often nobody trades the liability. Ind AS 113 then gives a fallback order. First, use the quoted price for the identical item as a liability or own equity instrument, if one exists. Second, if no such quoted price exists, but another party holds the identical item as an asset, measure fair value from that holder's perspective. Adjust the asset's price for any factor specific to the asset that does not apply to the liability, such as a third-party credit enhancement. Third, if neither exists, use a valuation technique from the perspective of a market participant that owes the liability or has issued the claim on equity, not entity-specific assumptions. One example is the present value of cash flows a market participant would expect to pay to fulfil the obligation. Another is the amount that a market participant would charge to assume the obligation, including the compensation for the risk and the return (profit margin) it would require.

Non-performance risk is the risk that the entity will not fulfil the obligation. It includes the entity's own credit risk. The fair value of a liability reflects it, and it is assumed to be the same before and after the transfer. A weaker credit standing lowers the fair value of a liability.

If a liability is issued with an inseparable third-party credit enhancement, such as a guarantee, the issuer should not include the effect of that enhancement in the liability's fair value. If the enhancement is accounted for separately, the liability's fair value reflects the issuer's own credit standing, not the guarantor's.

For restrictions on transferring a liability or own equity instrument, no separate input is used and no adjustment is made to other inputs. The effect of the restriction is already reflected in the price or in the other inputs. So you do not adjust again.

For financial liabilities there is a separate rule on demand features. The fair value of a financial liability with a demand feature, such as a demand deposit, is not less than the amount payable on demand, discounted from the first date it could be required to be paid.

For groups of financial assets and liabilities with offsetting market risks or offsetting credit risk of a particular counterparty, an entity can measure fair value on the basis of its net exposure to those risks. It applies if it manages the group that way and meets the stated conditions. This is an exception that permits measuring the group on a net-exposure basis when the conditions in the standard are met. It applies only to financial instruments within the scope of Ind AS 109 and Ind AS 32 and to other contracts they cover.

Key rules to remember

Liability fair value (transfer notion): Fair value = price paid to transfer the liability to a market participant at the measurement date; The liability stays outstanding. This is not the price to settle it with the counterparty.
Measurement hierarchy for liabilities and own equity: 1. Quoted price of the identical liability or own equity instrument → 2. If none, identical item held by another party as an asset, measured from that holder's perspective and adjusted for asset-specific factors → 3. Otherwise, valuation technique from the perspective of a market participant that owes the liability or issued the equity instrument; Maximise observable inputs. Use the lower-ranked option only when the higher ones are not available. Do not use entity-specific assumptions.
Non-performance risk: Fair value of liability reflects own credit risk; risk is assumed the same before and after transfer; Includes the entity's own credit risk. The effect of an inseparable third-party credit enhancement is not included in the issuer's liability fair value.
Restrictions on transfer: No separate input and no adjustment to other inputs for a restriction on transfer of the liability or own equity instrument; The effect of the restriction is already reflected in the price or other inputs. Do not deduct it again.
Financial liability with a demand feature: Fair value ≥ amount payable on demand, discounted from the first date payment could be required; A separate rule for financial liabilities, such as demand deposits.
Net exposure exception (offsetting positions): Fair value of the group = price to sell a net long position or transfer a net short position, for a particular risk exposure; Price to sell a net long position (an asset) or transfer a net short position (a liability) for a particular risk exposure, covering market risks or the credit risk of a particular counterparty, if the conditions are met. Applies to financial instruments only, when the entity manages the group on a net basis.

How to solve Fair Value of Liabilities and Entity's Own Equity Instruments questions

Use this order for any question on the fair value of a liability or own equity instrument. It keeps your answer in the provision-facts-conclusion form.

1Identify the item and the unit of account. State whether it is a liability, an own equity instrument, or a group of financial assets and liabilities.
2State the measurement basis: the price to transfer the item to a market participant at the measurement date. Say that the item stays outstanding.
3Check for a quoted price of the identical item as a liability or own equity instrument. If it exists, use it.
4If there is no such quoted price, check whether another party holds the identical item as an asset and measure from that holder's perspective, adjusting for any factor specific to the asset. Otherwise use a valuation technique from the perspective of a market participant that owes the liability or issued the equity instrument, not entity-specific assumptions.
5Include non-performance risk, including your own credit risk. Adjust for it only once and only in the right place.
6Do not make a separate input or adjustment for restrictions on transfer. Treat the price or other inputs as already reflecting them.
7If the question gives offsetting market risks in a managed portfolio, check the conditions and apply the net exposure exception.
8State the conclusion with the amount and the hierarchy level, if the data supports it.

Quickest way: Four-question check

When to use it: Use this when a case gives a fair value question on a liability or own shares and time is short.

Is the item transferred, not settled? Use the transfer notion.
Is there a quoted price for the identical liability or own equity instrument? If not, is there one for it held as an asset by another party? If yes, use it.
Does the case mention credit standing? Reflect it in the liability value.
Does the case mention a restriction on transfer? Do not adjust again. Does it mention a portfolio managed on a net basis? Use net exposure.

Common mistakes in Fair Value of Liabilities and Entity's Own Equity Instruments

Treating the fair value of a liability as the amount needed to settle it with the creditor.
Students link a liability to repayment and ignore the market participant view.
Fix: Write that the liability is transferred, not settled, and stays outstanding with the new party.
Ignoring own credit risk because the entity will repay in full.
Students think of the contractual amount rather than the market price.
Fix: Say non-performance risk is included in the fair value. A lower credit standing reduces the liability value.
Deducting a further discount for a restriction on transferring the liability or own equity instrument.
The asset-side logic of discounts for restricted assets is carried over wrongly.
Fix: State that no separate input or adjustment is made, because the effect is already reflected in the price or other inputs.
Applying the net exposure exception to non-financial items or to portfolios not managed on a net basis.
Students treat it as a general netting rule.
Fix: Limit it to financial instruments and check the entity manages the group by its net risk exposure.
Valuing a demand deposit liability below the amount payable on demand.
Students discount from the contractual maturity of the arrangement.
Fix: Remember the floor: not less than the amount payable on demand, discounted from the first date it could be required.

Worked examples

Example 1

Case: Meru Ltd has issued a 5-year bond. No quoted price exists for the bond as a liability. Another investor holds the identical bond as an asset, and its quoted price at the reporting date is ₹96 per ₹100 of face value. The bond's face value is ₹50,00,000. The quoted price already reflects Meru Ltd's credit risk, and no factor specific to the asset holder applies. How should Meru Ltd measure the fair value of the liability?

Show the solution

The liability is measured at the price to transfer it to a market participant, with the liability remaining outstanding.
There is no quoted price for the liability itself. The next step is to use the price of the identical item held by another party as an asset, measured from that holder's perspective.
The quoted asset price is ₹96 per ₹100, and it already reflects Meru Ltd's credit risk. No adjustment is needed for non-performance risk, because it is already in the price. If the price included a factor specific to the asset holder, such as a third-party credit enhancement that the liability does not have, it would have to be adjusted. Here no such factor applies, so no adjustment is needed.
The quoted price is for the identical item held as an asset, not a quoted price for the identical liability. So it is not a Level 1 input. It is an observable input other than a Level 1 quoted price, so the fair value is a Level 2 measurement.
Fair value = ₹50,00,000 × 96 ÷ 100 = ₹48,00,000.

Answer: The fair value of the bond liability is ₹48,00,000, based on the quoted price of the identical bond held as an asset. It is a Level 2 measurement, because the price is an observable input other than a Level 1 quoted price for the identical liability.

Example 2

Case: Nila Ltd has a liability that it could transfer only to another party with the prior consent of the creditor. The treasury head says the fair value must be reduced by ₹2,00,000 because of this restriction. Separately, Nila Ltd's credit standing has worsened during the year. Assess the treasury head's view and the effect of the credit standing on the liability's fair value.

Show the solution

The fair value is the price to transfer the liability to a market participant, with non-performance risk included.
No separate input or adjustment is made for a restriction on transfer, because its effect is already reflected in the price or other inputs. So the ₹2,00,000 reduction would double count and should not be made.
Worsening credit standing increases non-performance risk, which is part of the fair value. The liability's fair value is therefore lower than it would be at the earlier credit standing.
Conclusion: apply no separate adjustment for the restriction, and reflect the worsened credit standing in the fair value.

Answer: The treasury head's reduction of ₹2,00,000 is not allowed. The restriction's effect is already reflected in the price. The worsened credit standing is reflected, which lowers the liability's fair value.

Exam tips

Open every answer with the transfer notion in one line. State it clearly, using the terms market participant and remains outstanding.
In a case, underline words like credit rating, restriction on transfer, and portfolio managed on a net basis. Each maps to one rule above.
Use the three-step fallback order and name which step applies. Do not jump to a valuation technique if a quoted price exists.
When a number is asked, show the working in lines and state the conclusion in a final line.

Practice questions from Ind AS 113 Fair Value Measurement

Fair Value of Liabilities and Entity's Own Equity Instruments: frequently asked questions

Why does Ind AS 113 use a transfer notion for liabilities?

It keeps the fair value consistent with the exit price idea used for assets. The liability is assumed to stay outstanding and the market participant who takes it on becomes obliged to fulfil it.

Does a fall in my own credit rating reduce the fair value of my liability?

Yes, in measurement terms. Non-performance risk, including your own credit risk, is part of the fair value of a liability. A higher risk lowers the value.

Do restrictions on transfer reduce the fair value of my own equity instruments?

No separate input or adjustment is made. The effect of the restriction is already reflected in the price or other inputs. Adding a further discount would double count.

When can I measure fair value on a net exposure basis?

You can do so for a group of financial assets and financial liabilities when you manage the group on the basis of its net exposure to market risks or credit risk. The conditions in the standard must also be met. It does not apply to non-financial items.