Financial Reporting · Ind AS 113 Fair Value Measurement

Highest and Best Use and Valuation Premise for Non-Financial Assets (Ind AS 113)

Updated 5 October 2026 · Fact-checked

Under Ind AS 113, the fair value of a non-financial asset assumes its highest and best use by market participants: a use that is physically possible, legally permissible and financially feasible. The asset is valued either stand-alone or in combination with other assets. To solve, test the three conditions, pick the use giving maximum value, then value it on that premise.

Understand Highest and Best Use and Valuation Premise for Non-Financial Assets

Fair value is an exit price: what a market participant would pay to buy your asset today. For a non-financial asset such as land, a building or a brand, the price depends on how the buyer would use it. So Ind AS 113 asks you to measure fair value based on the highest and best use of the asset from the view of market participants.

A use qualifies only if it passes three tests in order. It must be physically possible (size, location, topography suit it). It must be legally permissible (zoning and other legal restrictions allow it, or are likely to be changed). It must be financially feasible (the income or cash flows from that use, after conversion costs, give the return that market participants require).

The highest and best use is taken from the market participants' view, even if the entity intends a different use. The entity's current use is presumed to be the highest and best use unless market or other factors suggest a different use by market participants would maximise value. The entity need not search exhaustively. Also, if the entity uses an asset differently from its best use, for example to protect a competitive position by not using it, fair value is still measured on the best use by market participants.

Next comes the valuation premise. The highest and best use may give maximum value in two ways. In combination: the asset gives value by working with other assets (for example installed machinery, or other assets and liabilities as a group). Fair value is the price for the asset assuming those other assets are available to market participants and that they would use it with them. Stand-alone: the asset gives maximum value on its own, so fair value is the price received in a current sale to a market participant who would use it stand-alone.

The premise affects the number but not the exit-price idea. Separately, fair value is the price in the principal (or most advantageous) market, adjusted for transport costs only where location is a characteristic of the asset. Transaction costs are not deducted. This price rule does not depend on the valuation premise.

Key rules to remember

Three tests of highest and best use: Physically possible → Legally permissible → Financially feasible; A use must pass all three. Choose, among passing uses, the one that maximises value to market participants.
Financial feasibility test: Income or cash flows from the alternative use, after conversion costs, must give the return market participants require; select the use giving the highest value; Conversion costs are taken into account in the cash flows of the alternative use. Compare the resulting value with the value under the current use.
Presumption: Current use = highest and best use, unless market factors suggest otherwise; Applies to the viewpoint of market participants, not the entity's intention.
Valuation premise: In combination with other assets / liabilities OR stand-alone; Choose the premise that gives maximum value to market participants.
Fair value adjustments: Fair value = price in principal (or most advantageous) market, adjusted for transport cost only where location is a characteristic of the asset; transaction costs not deducted; This is a price rule and is not linked to the valuation premise.

How to solve Highest and Best Use and Valuation Premise for Non-Financial Assets questions

Use this order for any case on highest and best use. Write each step as a separate line in the answer, since marks are given for the reasoning.

1Identify the asset and confirm it is non-financial and the measurement is at fair value (not value in use).
2State the entity's current use and note that it is presumed to be the highest and best use.
3List the alternative uses market participants could consider from the facts.
4Test each alternative: physically possible, then legally permissible, then financially feasible. Drop any that fail.
5For a feasible alternative, compare value after deducting conversion costs with value under current use, using market participant assumptions.
6Select the use giving maximum value and state the valuation premise: stand-alone or in combination.
7Conclude the fair value on that premise, ignoring the entity's intention, and note that transaction costs are not deducted.
8Mention the disclosure point if the best use differs from current use (Level 3 or otherwise, as applicable).

Quickest way: Three-gate filter and compare

When to use it: Short MCQs and case scenarios where you must say which use or value applies.

Ask who the buyer is: a market participant, not the entity.
Run the gates: possible, permissible, feasible. Cross out any failing use.
If two uses pass, choose the one with higher value after conversion costs.
If no value difference appears, current use stays.
Decide premise: does value need other assets to be in place? Yes means in combination; no means stand-alone.

Common mistakes in Highest and Best Use and Valuation Premise for Non-Financial Assets

Using the entity's intended use as the highest and best use.
The case describes management's plan, so it feels like the answer.
Fix: Always value from the market participants' viewpoint. Management's intention is irrelevant to the fair value.
Skipping the legal permissibility test, or treating a zoning restriction as absolute.
Students focus on the higher number from the alternative use.
Fix: Check the restriction. If it is reasonably likely to be changed, consider it, including the cost and time of change; otherwise reject the use.
Ignoring conversion costs in the financial feasibility test.
Students compare gross values of the two uses.
Fix: Deduct costs of converting the asset (demolition, approvals, building) and apply market participants' required return before comparing.
Deducting transaction costs from fair value.
Confusion with fair value less costs of disposal in Ind AS 36 or Ind AS 105.
Fix: Ind AS 113 fair value excludes transaction costs. Only transport cost is adjusted when location is a characteristic.
Treating stand-alone and in-combination as two different fair value definitions.
The word premise sounds like a different method.
Fix: Both give an exit price. The premise only states whether market participants obtain value from the asset alone or with other assets.
Concluding that a different best use changes the carrying basis of the asset.
Students link fair value with accounting for the asset as redeveloped.
Fix: The asset continues to be accounted for per its own standard. The best use only drives the fair value number.

Worked examples

Example 1

Case: Zenith Ltd owns a plot with a factory used for manufacturing. The plot is in an area that the local authority has zoned for industrial use only. Nearby, market participants are buying similar plots for residential towers, and a rezoning to residential is widely expected and has been granted for neighbouring plots. The value of the land as an industrial site is ₹8,00,000 thousand. The value of the land as a residential site, once rezoned, is ₹12,00,000 thousand. This is the value of the land only, not of a completed development. The conversion cost a market participant would incur is ₹2,50,000 thousand, covering only demolition of the factory and rezoning approvals. No construction cost is included. Both values already reflect the return market participants require. Management intends to continue the factory. What is the fair value basis and amount?

Show the solution

Asset: land with factory, a non-financial asset. Current use (industrial) is presumed best use unless market factors suggest otherwise. Here market factors suggest residential.
Physically possible: the plot is similar to neighbouring plots sold for residential towers, so the use is possible.
Legally permissible: current zoning is industrial only, but rezoning is widely expected and granted for neighbours, so a market participant would consider it reasonably likely. The cost of rezoning approvals is part of the single conversion cost of ₹2,50,000 thousand given in the problem, so it is not deducted again.
Financially feasible: the comparison is made on a net basis. The ₹12,00,000 thousand is the value of the land as a residential site. The market participant must first demolish the factory and obtain approvals, so deduct the conversion cost: ₹12,00,000 − ₹2,50,000 = ₹9,50,000 thousand.
Compare: ₹9,50,000 thousand (net) is greater than ₹8,00,000 thousand, so the residential use maximises the value of the land.
Management's intention to continue the factory is irrelevant. Premise: the land is valued stand-alone as a residential site, as its value does not depend on the factory's other assets.

Answer: Fair value of the land is ₹9,50,000 thousand (₹95 crore), based on residential use as highest and best use, measured stand-alone.

Example 2

Case: Orion Ltd has a specialised machine installed in its plant. Market participants would use it only together with the plant's other equipment as a production line. The price a market participant would pay for the machine alone, assuming that participant already holds the complementary equipment and uses the machine in the line, is ₹55,00,000. Selling brokerage on a sale would be ₹1,00,000. Which premise applies and what is the fair value?

Show the solution

Asset: machinery, a non-financial asset. Market participants would use it together with the other equipment as a production line, so the highest and best use is in combination with those assets.
Premise: in combination. The premise follows from how market participants would use the machine, not from comparing two prices.
Under this premise, fair value is the price for the machine alone, assuming the complementary assets are available to the market participant. That price is ₹55,00,000. It is not a price for the whole production line.
A stand-alone price is not the basis, because market participants would not use the machine on its own.
Brokerage of ₹1,00,000 is a transaction cost and is not deducted.
The premise only states how value arises (with other assets). The measure is still an exit price.

Answer: Premise is in combination with other assets, because market participants would use the machine with the other equipment. Fair value is ₹55,00,000 with no deduction for brokerage.

Exam tips

In case MCQs, look for the words market participants, zoning, rezoning, conversion cost. They signal a highest and best use test.
Write the three tests by name in written answers. Examiners give marks for each test applied to the facts.
If the case gives transaction costs, show that they are not deducted. This is a frequent trap.
Say explicitly which premise you use and why, in one line: value arises on its own or with other assets.
Do not confuse this with Ind AS 36 value in use. Value in use is entity-specific; fair value is market participant based.

Practice questions from Ind AS 113 Fair Value Measurement

Highest and Best Use and Valuation Premise for Non-Financial Assets in other exams

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

CMA FinalHighest and Best Use and Valuation Premise for Non-Financial Assets

Highest and Best Use and Valuation Premise for Non-Financial Assets: frequently asked questions

What is highest and best use in Ind AS 113?

It is the use of a non-financial asset by market participants that maximises the value of the asset. The use must be physically possible, legally permissible and financially feasible. Fair value is measured on this use.

Does the entity's own intended use matter for fair value?

No. Fair value is measured from the viewpoint of market participants. The entity's current use is presumed to be the best use unless market factors suggest another use gives higher value.

What is the difference between stand-alone and in-combination valuation premise?

In combination means the asset's value comes from use with other assets or liabilities that market participants would also have. Stand-alone means the asset gives maximum value on its own. The fair value is still an exit price in both cases.

Does highest and best use apply to financial assets?

No. It applies only to non-financial assets. Financial assets and liabilities are valued using the exit price approach with the relevant inputs and the fair value hierarchy.