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CMA Final · Corporate Financial Reporting

Fair Value Measurement (Ind AS 113) for CMA Final

Ind AS 113 explains how to measure fair value, not when to use it. Fair value is the price at which an orderly transaction to sell an asset or transfer a liability would take place between market participants at the measurement date, under current market conditions. You solve questions by fixing the item, market, participants, premise and technique, then grading the inputs.

What this chapter covers

Ind AS 113 is a measurement standard. Other Ind AS, such as those on financial instruments, investment property, business combinations and impairment, tell you when an item must be measured at fair value. Ind AS 113 tells you how to arrive at that number and what to disclose about it.

The chapter follows a clear logic. You first fix what is being measured and from whose view. Paragraph B2 lists what an entity must determine: the asset or liability (consistent with its unit of account), the valuation premise for a non-financial asset (consistent with its highest and best use), the principal (or most advantageous) market, and the valuation technique(s) suited to the available data and the level of the fair value hierarchy. Then you choose a technique: market, cost or income approach. Finally you classify the inputs into Levels 1, 2 and 3 and disclose.

In Corporate Financial Reporting, this chapter links to almost every other standard you study. A question on a business combination, an investment property, a financial asset or an impairment test can hide a fair value step. If you know the Ind AS 113 logic, you can handle that step quickly and defend your answer in words.

Fair value shows up across the paper, in objective questions and in case-based written answers, so a clean grasp of this chapter pays off in many places. The ideas are compact and reasoning-based: highest and best use, the hierarchy and disclosure conditions are easy to test as MCQs and as short application answers. Students who learn the exact wording of the standard can pick up marks that others lose by guessing.

Fair Value Measurement (Ind AS 113): topics in the order to study them

  1. 1Scope and Objective of Ind AS 113Start here to know what the standard covers and what it leaves to other Ind AS.
  2. 2Fair Value Measurement Approach: Asset, Market, ParticipantsThis is the framework in paragraph B2 that every later topic plugs into.
  3. 3Highest and Best Use and Valuation Premise for Non-Financial AssetsIt builds directly on the participant view and is a favourite for case-based questions.
  4. 4Fair Value of Liabilities and Own Equity InstrumentsIt applies the same transfer-price idea to the other side of the balance sheet.
  5. 5Valuation Techniques: Market, Cost and Income ApproachesYou need the three approaches before you can talk about the quality of inputs.
  6. 6Fair Value Hierarchy: Level 1, 2 and 3 InputsThe hierarchy grades the inputs of the techniques you have just learned.
  7. 7Initial Recognition and Fair Value at Transaction PriceIt compares the transaction price with fair value, which needs the earlier topics.
  8. 8Disclosure Requirements under Ind AS 113Disclosures depend on the technique, the level and the highest and best use, so study them last.

How to prepare Fair Value Measurement (Ind AS 113)

This chapter is mostly concepts, so prepare it by reading carefully, linking each rule to a short example, and practising written application.

  1. Read the objective of fair value in your own words: an orderly sale or transfer between market participants at the measurement date under current market conditions. Note that it is an exit-price view, not an entity-specific one.
  2. Learn the four items of paragraph B2 as a checklist: the asset or liability and its unit of account, the valuation premise, the principal or most advantageous market, and the technique. Apply the checklist to every practice case.
  3. For non-financial assets, memorise the three tests of highest and best use: physically possible, legally permissible and financially feasible. Then practise deciding between the in-combination premise and the stand-alone premise.
  4. Practise the entity versus market participant point. If the entity plans a defensive or different use, the fair value still assumes the highest and best use by market participants.
  5. Tabulate the three techniques (market, cost, income) and the three levels of inputs. Then pick examples from Indian companies, such as a listed share, a land parcel or an unlisted investment, and place each one.
  6. Write short answers on disclosures, especially the Level 3 narrative sensitivity and the disclosure when highest and best use differs from current use.
  7. Finish with mixed MCQs and one timed written answer. State the rule first, apply it to the facts, then give a clear conclusion.

Common mistakes in Fair Value Measurement (Ind AS 113)

  • Valuing an asset at the entity's own intended use instead of the market participant's highest and best use.

    Fix: Always ask what a market participant would do to maximise value. Remember the defensive-use example, where fair value still assumes highest and best use.

  • Skipping the three tests of highest and best use.

    Fix: Check physical possibility, legal permissibility (such as zoning) and financial feasibility, including conversion costs, in that order.

  • Confusing when to measure at fair value with how to measure it.

    Fix: Use the other Ind AS to decide whether fair value applies, and use Ind AS 113 only for the measurement and disclosure steps.

  • Treating the in-combination premise as a sale of the whole group.

    Fix: Remember that the asset is still sold per its unit of account. The market participant is assumed to hold the complementary assets already.

  • Mixing up techniques with levels.

    Fix: Treat techniques as the method and levels as the quality of the inputs. One technique can use inputs from different levels.

  • Writing general disclosure lists without the conditions.

    Fix: Link each disclosure to its trigger, such as Level 3 for the sensitivity narrative, or a gap between current use and highest and best use.

Last-day revision: Fair Value Measurement (Ind AS 113)

  • Fair value is an exit price in an orderly transaction between market participants at the measurement date, under current market conditions.
  • Ind AS 113 says how to measure fair value; other Ind AS say when to use it.
  • Paragraph B2 checklist: asset or liability (unit of account), valuation premise, principal or most advantageous market, valuation technique.
  • Highest and best use is judged from the market participant's 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 another use would maximise value.
  • A use must be physically possible, legally permissible and financially feasible.
  • Valuation premise is either in combination with other assets or liabilities, or stand-alone.
  • Even with the in-combination premise, the asset is sold per its unit of account, assuming the market participant already holds the complementary assets and liabilities.
  • Three techniques: market approach, cost approach, income approach. Use one or more consistent with them.
  • An entity that holds an asset defensively still measures its fair value at its highest and best use by market participants.
  • Level 3 recurring measurements need a narrative on the sensitivity to unobservable inputs.
  • If highest and best use differs from current use, disclose that fact and why the asset is used differently.

Fair Value Measurement (Ind AS 113) practice questions

Fair Value Measurement (Ind AS 113) 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 Measurement (Ind AS 113): frequently asked questions

Is Ind AS 113 only about financial instruments?

No. It applies to fair value measurement across Ind AS where another standard requires or permits it, and it covers non-financial assets such as property as well as liabilities. Its rules on highest and best use apply only to non-financial assets.

What is the difference between a valuation technique and the fair value hierarchy?

A valuation technique is the method, such as the market, cost or income approach. The hierarchy grades the inputs used in that method as Level 1, 2 or 3 by how observable they are. You choose the technique first and then classify the inputs.

What if the entity does not plan to use an asset at its highest and best use?

It does not matter for measurement. The standard says the entity measures fair value assuming the highest and best use by market participants, even where it holds the asset defensively. If the use differs from the current use, a disclosure is needed.

Which parts of this chapter are most useful for MCQs?

Short rules score well: the objective of fair value, the B2 checklist, the three tests of highest and best use, the three approaches and the Level 3 disclosure triggers. Learn them in the exact wording and practise spotting traps in the options.