Corporate Financial Reporting · Fair Value Measurement (Ind AS 113)

Fair Value of Liabilities and Own Equity Instruments under Ind AS 113

Updated 11 October 2026 · Fact-checked

Ind AS 113 measures a liability as the price to transfer it to a market participant, not the price to settle it with the creditor. The measure reflects non-performance risk, including your own credit risk, which stays the same before and after transfer. A demand liability is never valued below the amount payable on demand, discounted from the first date it could be demanded.

Understand Fair Value of Liabilities and Own Equity Instruments

A liability is not valued by asking what you will pay to settle it. Ind AS 113 asks what a market participant would take to assume it. This is the transfer notion. The liability stays outstanding and the new party must fulfil it.

The price must include non-performance risk. This is the risk that an entity will not fulfil an obligation. It includes, but may not be limited to, your own credit risk. A weaker credit standing lowers the fair value of your liability. Non-performance risk is assumed to be the same before and after the transfer. The effect may differ by liability, for example between a cash obligation (a financial liability) and an obligation to deliver goods or services (a non-financial liability), and by the terms of any credit enhancement.

If a liability has an inseparable third-party credit enhancement that is accounted for separately, you do not include the guarantee in the fair value. You use your own credit standing, not the guarantor's.

A restriction that prevents transfer does not get a separate input or adjustment. Its effect is already included, implicitly or explicitly, in the other inputs. This applies to liabilities and to your own equity instruments.

Where no market price exists, as for a decommissioning liability, you use a present value technique. You estimate the cash outflows a market participant would expect, including the compensation it would require for undertaking the activity and for assuming the risk. You can reflect the risk premium in the cash flows or in the discount rate, but never both.

Key rules to remember

Transfer notion: Fair value of liability = price paid to transfer it to a market participant at the measurement date; The liability remains outstanding. The transferee must fulfil it. It is not the settlement price with the creditor.
Non-performance risk (para 42): Fair value reflects non-performance risk; risk is the same before and after transfer; Includes, but is not limited to, own credit risk.
Demand feature (para 47): Fair value ≥ amount payable on demand, discounted from the first date it could be required to be paid; Example: a demand deposit. This is a floor.
Transfer restrictions (para 45): No separate input or adjustment for a restriction preventing transfer; Applies to liabilities and own equity instruments.
Risk premium in present value (B33): Risk premium goes either in the cash flows (higher outflows) or in the discount rate (lower rate), not both; Prevents double-counting or omission of risk.
Credit enhancement (para 44): Separately accounted inseparable third-party enhancement is excluded; use own credit standing; Do not use the guarantor's credit standing.

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

Use this order for any question on the fair value of a liability or own equity instrument.

1Identify the item: financial or non-financial liability, or own equity instrument, and its unit of account.
2State the transfer notion: price to transfer to a market participant, not settlement with the creditor.
3Check for a quoted price of the identical item held by another party as an asset. If none, use a present value or other technique.
4Include non-performance risk using your own credit standing. Ignore any separately accounted third-party guarantee.
5Do not add a separate adjustment for a transfer restriction.
6If the liability has a demand feature, apply the floor: amount payable on demand, discounted from the first date it could be demanded.
7In a present value technique, put the risk premium in the cash flows or the discount rate, never both.
8Write the answer with the paragraph reason and a one-line conclusion.

Quickest way: Four-check scan

When to use it: Use it for MCQs and short theory-linked numerical questions.

Transfer, not settle: reject any option that uses the settlement price.
Whose credit risk? Your own, not the guarantor's.
Demand feature? Fair value cannot fall below the discounted amount payable on demand.
Restriction on transfer or risk premium? No separate adjustment for restriction; risk goes in cash flows or rate, not both.

Common mistakes in Fair Value of Liabilities and Own Equity Instruments

Valuing a liability at the amount needed to settle it with the creditor.
Settlement feels natural from an accounting viewpoint.
Fix: Ind AS 113 uses the transfer notion. The liability stays outstanding with the transferee.
Assuming own credit risk is ignored, or resets on transfer.
Students think credit risk applies only to assets.
Fix: Non-performance risk, including own credit risk, is reflected and assumed the same before and after transfer.
Including a third-party guarantee in the fair value of a liability when the guarantee is accounted for separately.
The guarantee seems to reduce risk.
Fix: Use your own credit standing, not the guarantor's (para 44).
Applying a discount for a restriction that prevents transfer of the liability or own equity instrument.
Restrictions reduce the value of assets, so students copy the logic.
Fix: Para 45 bars a separate input or adjustment. The effect is already in the other inputs.
Adding a risk premium to the cash flows and also lowering the discount rate.
Both seem to be valid ways to show risk.
Fix: Choose one. Doing both double-counts risk (B33).
Valuing a demand deposit below the amount payable on demand because of long expected duration.
Students discount from the expected repayment date.
Fix: Discount only from the first date payment could be required. Fair value is not less than that amount.

Worked examples

Example 1

Bharat Ltd has a demand deposit liability of ₹50,00,000 repayable on demand. Depositors have historically left funds for about three years. Can Bharat Ltd measure fair value at a lower present value of ₹40,00,000 using the expected three-year stay?

Show the solution

The liability has a demand feature.
Para 47: fair value is not less than the amount payable on demand, discounted from the first date it could be required to be paid.
Payment can be demanded immediately, so the first date is the measurement date and no discounting period applies.
The expected three-year stay is irrelevant to the floor.

Answer: No. Fair value cannot be less than ₹50,00,000, the amount payable on demand.

Example 2

Kaveri Ltd has a bank loan guaranteed by its parent, which has a stronger credit rating. The guarantee is an inseparable third-party credit enhancement accounted for separately from the liability. Which credit standing does Kaveri Ltd use in measuring the fair value of the loan, and does a contractual restriction preventing transfer of the loan require a separate discount?

Show the solution

Para 44: where the credit enhancement is accounted for separately, the issuer does not include its effect in the fair value of the liability.
Kaveri Ltd therefore takes into account its own credit standing, not the parent guarantor's.
Para 45: no separate input or adjustment is made for a restriction preventing transfer.
The restriction's effect is already implicitly or explicitly in the other inputs.

Answer: Kaveri Ltd uses its own credit standing, and makes no separate adjustment for the transfer restriction.

Exam tips

Open theory answers with the transfer notion in one line, then add non-performance risk.
For demand liabilities, quote the floor rule and say which date you discount from.
In case-scenario MCQs, look for the distractors: guarantor's credit rating, transfer restriction discount, and double-counting risk.
For decommissioning-type liabilities, state that market participants' outflows include compensation for the activity and for the risk, and that risk goes in either cash flows or rate.

Practice questions from Fair Value Measurement (Ind AS 113)

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

What is the transfer notion for liabilities in Ind AS 113?

It measures fair value as the price to transfer the liability to a market participant. The liability remains outstanding and the transferee must fulfil it. It is not the amount to settle with the creditor.

Does my own credit risk affect the fair value of my liability?

Yes. Fair value reflects non-performance risk, which includes your own credit risk. It is assumed the same before and after the transfer.

Is a discount allowed for a restriction on transferring a liability?

No. Para 45 prohibits a separate input or adjustment for such a restriction. Its effect is already included in the other inputs.

How is a demand deposit measured?

Its fair value is not less than the amount payable on demand, discounted from the first date that amount could be required to be paid.