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

Highest and Best Use and Valuation Premise under Ind AS 113

Updated 11 October 2026 · Fact-checked

Highest and best use is the use of a non-financial asset by market participants that maximises its value. It must be physically possible, legally permissible and financially feasible. That use sets the valuation premise: in combination with other assets, or stand-alone. You then measure fair value on that premise.

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

Ind AS 113 values an asset at the price market participants would pay in an orderly transaction. For a non-financial asset such as land, a plant or a brand, the price depends on how a buyer would use it. So you must first decide that use.

Highest and best use is the use by market participants that maximises the value of the asset, or of the group of assets and liabilities (for example a business) in which it would be used. It is judged from the market participant's view, not yours. Your intention does not change it.

The standard gives three tests. The use must be physically possible (size, location), legally permissible (zoning and other legal limits) and financially feasible (the income, after conversion costs, gives the return market participants require). Apply them in that order.

The use you find sets the valuation premise. If the asset gives most value together with other assets, the premise is in combination (often called in-use): you assume the buyer already holds the complementary assets and liabilities. If it gives most value alone, the premise is stand-alone (often called in-exchange): you assume a sale to a buyer who uses it on its own.

Two more rules matter. Your current use is presumed to be the highest and best use unless market or other factors show a different use would give more value. And even if you plan to use the asset defensively or not at all, you still measure fair value at its highest and best use by market participants. The unit of account stays as other Ind AS specify, which may be the single asset.

Key rules to remember

Three tests of highest and best use: Physically possible → Legally permissible → Financially feasible; Para 28. The use must pass all three. Financial feasibility includes the cost of converting the asset to that use.
Perspective rule: Highest and best use = market participants' view, not the entity's intention; Para 29. Current use is presumed to be highest and best use unless market or other factors suggest otherwise.
Valuation premise: in combination: Fair value = price to sell the asset assuming use with complementary assets and associated liabilities available to market participants; Para 31(a). Liabilities include those funding working capital, not those funding assets outside the group.
Valuation premise: stand-alone: Fair value = price received from market participants who would use the asset on a stand-alone basis; Para 31(b).
Defensive use rule: Measure at highest and best use even if entity does not use the asset actively; Para 30. Example: an acquired intangible held to block competitors.
Unit of account: Asset is sold consistent with the unit of account in other Ind AS, even under the in-combination premise; Para 32. The buyer is assumed to already hold the complementary assets.

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

Use this order for any question on highest and best use or valuation premise.

1Identify the non-financial asset and its unit of account under the relevant Ind AS.
2Note the entity's current use. Presume it is the highest and best use unless facts show otherwise.
3List alternative uses market participants could adopt. Ignore the entity's own intentions.
4Test each alternative: physically possible, then legally permissible, then financially feasible (include conversion costs and required return).
5Pick the permissible use that gives the maximum value to market participants.
6State the valuation premise: in combination with other assets and liabilities, or stand-alone.
7Measure fair value on that premise, using the technique and inputs given, and reflect complementary assets as in Appendix B guidance.
8Write a clear conclusion giving the fair value and the reason for the use chosen.

Quickest way: Three-gate screen, then compare values

When to use it: For MCQs and short case questions with two or more possible uses and given values.

Strike out any use that fails legal or physical limits, such as zoning that bars it.
For remaining uses, net off conversion costs from value.
Check that the net value gives the required return; drop uses that do not.
Choose the highest net value among the survivors; that is the premise and fair value.
Ignore what the entity plans to do.

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.
Students value the asset as the company will use it.
Fix: Use the market participant's view. Even defensive or idle holding is measured at highest and best use.
Choosing the highest-value use without checking legal permissibility.
The numbers look attractive, so the legal test is skipped.
Fix: Screen for physical and legal limits first. A use barred by zoning is not available.
Ignoring conversion costs in the financial feasibility test.
Students compare gross values only.
Fix: Deduct the cost of converting the asset to the new use, then check the return market participants require.
Assuming a change of use whenever another use gives a higher figure.
Forgetting the presumption in favour of current use.
Fix: Current use stands unless market or other factors suggest a different use would maximise value, and the other use passes all three tests.
Valuing an in-combination asset as if the buyer must also buy the complementary assets.
Confusing the premise with the unit of account.
Fix: Assume the market participant already holds the complementary assets and liabilities; the asset is still sold per its unit of account.
Applying different use assumptions to assets in the same group.
Each asset is valued separately.
Fix: Assumptions about highest and best use must be consistent for all relevant assets of the group.

Worked examples

Example 1

Alpha Industries owns a 2-acre plot in Pune, currently used as a factory. The plot is zoned for industrial use only. A buyer would pay ₹12 crore for it as a factory site. A developer says that as residential land it would be worth ₹20 crore, but residential use is not permitted under the zoning, and rezoning is uncertain. What is the highest and best use and fair value?

Show the solution

Current use is industrial. It is presumed to be the highest and best use unless another use is better.
Test residential use. It is physically possible, but it fails the legal test because zoning bars it.
A use that fails any test cannot be the highest and best use, so the ₹20 crore figure is not used.
Only industrial use remains. It is the existing use, and market participants would pay ₹12 crore for it.

Answer: Highest and best use is continued industrial use; fair value is ₹12 crore.

Example 2

Beta Ltd holds an old warehouse in Nashik. Its fair value as a warehouse is ₹5 crore. Market participants could demolish it and build a retail complex; the land would then be worth ₹9 crore after the conversion, and demolition and rebuilding cost is ₹3 crore. Retail use is legally permitted, and the net return meets market participants' required return. Beta plans to keep using it as a warehouse. Determine the fair value.

Show the solution

Beta's intention is irrelevant; use the market participant's view.
Retail use is physically possible and legally permitted.
Financial feasibility: net value = ₹9 crore − ₹3 crore = ₹6 crore. This exceeds ₹5 crore, and the return meets the required level.
So retail use gives more value than the current use and is the highest and best use.
Fair value is the price market participants would pay on that premise: ₹6 crore.

Answer: Highest and best use is redevelopment as retail; fair value is ₹6 crore.

Exam tips

In case-scenario MCQs, look first for a legal or zoning limit; it often removes the tempting option.
Always net off conversion costs before comparing uses.
Write the three tests by name in descriptive answers; examiners look for them.
State the premise explicitly: in combination or stand-alone, and why.
Mention para 30 when a question says the entity will hold an asset defensively.

Practice questions from Fair Value Measurement (Ind AS 113)

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.

CA 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 the difference between in-use and in-exchange premise?

Ind AS 113 speaks of use in combination with other assets, or on a stand-alone basis. In combination means the asset gives most value together with complementary assets and liabilities. Stand-alone means the asset gives most value on its own.

Does highest and best use apply to financial assets?

No. It applies only to non-financial assets. Financial assets and liabilities are measured under other parts of the standard.

Can the entity's current use differ from highest and best use?

Yes. Current use is only presumed to be the highest and best use. If market or other factors show a different use by market participants would maximise value, that use is applied.

What if the entity does not intend to use the asset at all?

You still measure fair value at its highest and best use by market participants. The entity's intention, such as defensive holding of an intangible, does not change the measurement.