Financial Reporting · Ind AS 113 Fair Value Measurement

Valuation Techniques in Ind AS 113: Market, Cost and Income Approaches

Updated 5 October 2026 · Fact-checked

Ind AS 113 requires you to use valuation techniques that suit the circumstances, have enough data, and maximise relevant observable inputs. The three approaches are market (prices of comparable items), cost (current replacement cost) and income (discounted future amounts). Pick the technique, identify inputs, calibrate if needed, apply consistently, and compute.

Understand Valuation Techniques: Market, Cost and Income Approaches

Fair value is an exit price. Often no quoted price exists for the exact asset or liability. So Ind AS 113 asks you to estimate the price using a valuation technique. The objective stays the same: the price at which an orderly transaction between market participants would take place at the measurement date.

You must use techniques that are appropriate in the circumstances and for which enough data is available. You must maximise the use of relevant observable inputs and minimise unobservable inputs. This links directly to the fair value hierarchy. More than one technique may be appropriate. If you use several, you should evaluate the results and weigh the range of values, choosing the point in the range that is most representative of fair value.

The market approach uses prices and other relevant information from market transactions involving identical or comparable assets, liabilities or groups of them. It often uses market multiples derived from a set of comparables. The multiple may differ for each comparable, so you must judge where in the range the subject falls, considering qualitative and quantitative factors. Matrix pricing is a market-approach method used for some debt securities.

The cost approach reflects the amount that would be required currently to replace the service capacity of an asset, called current replacement cost. It is based on what a buyer would pay for a substitute asset of comparable utility, adjusted for obsolescence. Obsolescence covers physical deterioration, functional (technological) and economic (external) obsolescence. It is wider than accounting depreciation.

The income approach converts future amounts (cash flows or income and expenses) into a single current discounted amount. Fair value reflects current market expectations about those future amounts. Methods include present value techniques, option pricing models (such as Black-Scholes-Merton or binomial) and the multi-period excess earnings method for some intangibles.

Finally, consistency: valuation techniques used should be applied consistently. A change in technique or its application is appropriate if it results in an equally or more representative measure. Such a change is accounted for as a change in accounting estimate under Ind AS 8, with the Ind AS 113 disclosures for changes.

Key rules to remember

Present value (discrete cash flows): PV = Σ [CFt ÷ (1 + r)^t]; CFt is the expected cash flow in period t and r is the discount rate. Cash flows and rate must be consistent in currency, nominal or real terms, pre- or post-tax, and risk treatment.
Discount rate adjustment technique: PV = Σ [Contractual or promised CF ÷ (1 + risk-adjusted r)^t]; Uses promised or most likely cash flows. The rate carries the risk premium, derived from observed rates for comparable instruments.
Method 1 expected present value: PV = Σ [Risk-adjusted expected CF ÷ (1 + risk-free r)^t]; Expected cash flows are probability-weighted and reduced by a cash-flow risk premium (certainty-equivalent). Discount at the risk-free rate.
Method 2 expected present value: PV = Σ [Probability-weighted expected CF ÷ (1 + risk-free r + risk premium)^t]; Expected cash flows are not risk-adjusted. The rate includes a risk premium.
Calibration rule: If transaction price = fair value at initial recognition and an unobservable-input technique is used, calibrate so the technique gives the transaction price at initial recognition.; Applies to the technique used later. Recalibrate to ensure it reflects current conditions.
Cost approach: Fair value = Current replacement cost − Physical, functional and economic obsolescence; Measures what a market participant buyer would pay, not the seller's historical cost.
Transaction costs: Fair value excludes transaction costs; Transaction costs are not a feature of the asset, so the price in the principal (or most advantageous) market is not adjusted for them. They are considered only when identifying the most advantageous market, which is the one that maximises the net amount received after transaction and transport costs. The resulting fair value is still not adjusted for transaction costs. Transport costs are different: if location is a characteristic of the asset, the market price is adjusted for the costs that would be incurred to transport the asset to that market.

How to solve Valuation Techniques: Market, Cost and Income Approaches questions

Use this order for any question on selecting or applying a valuation technique.

1Identify the asset or liability, the unit of account, the measurement date and the principal (or most advantageous) market.
2List the available data: quoted prices, comparable transactions, cost data, or forecast cash flows. This tells you which approaches are feasible.
3Choose the technique(s) that are appropriate and have sufficient data. State that you will maximise observable inputs and minimise unobservable inputs.
4Apply the approach: for market, adjust the comparable price or multiple for differences; for cost, take replacement cost less obsolescence; for income, discount cash flows at a rate consistent with them.
5For present value, decide the method: discount rate adjustment, or expected present value (Method 1 or 2). Match cash flows to the rate.
6Check calibration if the transaction price at initial recognition equals fair value and unobservable inputs are used.
7Exclude transaction costs. If several techniques are used, evaluate and weigh the results.
8Conclude with the value, its hierarchy level (the lowest significant input) and any consistency or estimate-change point.

Quickest way: Three-question shortcut

When to use it: Use this for MCQs and short theory parts where you must pick or justify an approach quickly.

Is there a price for the same or similar item? Use the market approach.
Is it a physical or operating asset where replacement is the natural benchmark? Use the cost approach, then deduct obsolescence.
Are future cash flows the main driver of value? Use the income approach, then match the discount rate with cash flows.
In any numerical, do not deduct transaction costs from the fair value.
Write the hierarchy level: any significant unobservable input makes it Level 3.

Common mistakes in Valuation Techniques: Market, Cost and Income Approaches

Treating the three approaches as a free choice or as a ranking.
Students assume one approach is always preferred.
Fix: Say that the technique must be appropriate and have enough data, and that observable inputs must be maximised. Several techniques may be used and weighed.
Deducting transaction costs from fair value.
It feels natural to use net proceeds.
Fix: Fair value is not adjusted for transaction costs. They are treated under the relevant Ind AS.
Using accounting depreciation as obsolescence in the cost approach.
Both reduce asset value over time.
Fix: Obsolescence is physical, functional and economic, estimated from a market participant's view, not a depreciation schedule.
Mixing expected cash flows with a risk-adjusted rate, double counting risk.
Students remember only that a discount rate has a risk premium.
Fix: Under the discount rate adjustment technique use promised or most likely cash flows with a risk-adjusted rate. Under expected present value Method 1, use risk-adjusted expected cash flows (reduced by a cash-flow risk premium) with the risk-free rate. Under Method 2, use unadjusted probability-weighted expected cash flows with a rate that includes a risk premium. Never put the risk premium in both the cash flows and the rate.
Ignoring calibration or applying it in the wrong case.
The rule is remembered only loosely.
Fix: Calibrate only when the transaction price is fair value at initial recognition and the later technique uses unobservable inputs.
Treating a change in technique as a prior period error.
Students link any change to Ind AS 8 errors.
Fix: A change to an equally or more representative technique is a change in accounting estimate.

Worked examples

Example 1

Case: Alpha Ltd holds an unquoted equity stake in a private company. Comparable listed companies trade at an average EV/EBITDA multiple of 8. The investee's EBITDA is ₹50 crore and its net debt is ₹120 crore. Alpha holds 10%. For simplicity only, assume no minority or marketability adjustment is needed. Which approach applies and what is the fair value of Alpha's stake on this assumption?

Show the solution

Comparable market multiples are available, so the market approach is appropriate.
Enterprise value = 8 × ₹50 crore = ₹400 crore.
Equity value = enterprise value − net debt = ₹400 crore − ₹120 crore = ₹280 crore.
Alpha's 10% stake = 10% × ₹280 crore = ₹28 crore.
The unit of account is the 10% stake Alpha holds. In practice, a market participant would normally consider minority and marketability adjustments for an unquoted 10% holding, so a plain pro-rata share is only a starting point. The ₹28 crore holds only on the simplifying assumption.
The investee is unquoted. Choosing comparable companies, normalising EBITDA and selecting the multiple (and any adjustments) involve significant unobservable judgement, so the measurement is Level 3.

Answer: Market approach using a multiple; on the stated simplifying assumption the fair value of the stake is ₹28 crore, classified Level 3. In practice, market participant adjustments for a minority, unquoted stake would usually apply.

Example 2

Case: Beta Ltd must fair value a receivable that will pay ₹10,00,000 at the end of year 1 and nothing else. Using the expected present value technique (Method 2), outcomes are: ₹10,00,000 with 80% probability and ₹5,00,000 with 20%. The risk-free rate is 5% and the risk premium for the uncertainty is 3%. Compute fair value.

Show the solution

Expected cash flow = (80% × ₹10,00,000) + (20% × ₹5,00,000) = ₹8,00,000 + ₹1,00,000 = ₹9,00,000.
Method 2 rate = 5% + 3% = 8%.
Fair value = ₹9,00,000 ÷ 1.08 = ₹8,33,333 (approx).
The cash flows are probability-weighted and not risk-adjusted, so the risk premium sits in the rate. This is consistent with Method 2.

Answer: Fair value under expected present value Method 2 is about ₹8,33,333.

Exam tips

Write the principle first: appropriate technique, sufficient data, maximise observable inputs. It earns marks in nearly every answer.
In numericals, state the approach in one line and show each step. Examiners award marks for method, not only the total.
In present value questions, check that the cash flows and the discount rate match in risk treatment, tax basis and currency.
For case MCQs, test the facts: observable comparable price points to market, replacement of capacity to cost, forecast cash flows to income.
Always link the answer to the hierarchy level and say that transaction costs are excluded.

Practice questions from Ind AS 113 Fair Value Measurement

Valuation Techniques: Market, Cost and Income Approaches in other exams

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

Valuation Techniques: Market, Cost and Income Approaches: frequently asked questions

What is the difference between the market approach and the income approach?

The market approach uses prices from transactions in identical or comparable items. The income approach discounts expected future cash flows or earnings to a present amount. One looks at what the market pays now, the other at what the item will generate.

Can I use more than one valuation technique under Ind AS 113?

Yes. If several techniques are appropriate, you evaluate the results and weigh the range of values. You select the point in the range most representative of fair value in the circumstances.

What is calibration in Ind AS 113?

If the transaction price is fair value at initial recognition and you will later use a technique with unobservable inputs, you calibrate the technique so it equals the transaction price at initial recognition. This ensures it reflects current market conditions afterwards.

Is a change in valuation technique a change in accounting policy?

No. It is accounted for as a change in accounting estimate under Ind AS 8, provided the new technique is equally or more representative of fair value. Ind AS 113 disclosures for the change also apply.