Corporate Financial Reporting · Fair Value Measurement (Ind AS 113)
Ind AS 113 Fair Value at Initial Recognition and Transaction Price
Updated 11 October 2026 · Fact-checked
At initial recognition, the transaction price is an entry price and fair value is an exit price. Often they are equal, but not always. If another Ind AS requires fair value at initial recognition and the two differ, you recognise the difference in profit or loss, unless that Ind AS says otherwise.
Understand Initial Recognition and Fair Value at Transaction Price
When you buy an asset or assume a liability, you pay or receive a transaction price. This is an entry price. Ind AS 113 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is an exit price.
The standard says entities do not necessarily sell assets at the price they paid to acquire them. So the two prices can differ. In many cases they are equal, for example when you buy an asset in the same market in which you would sell it.
You cannot assume equality. You must look at factors specific to the transaction and to the asset or liability. Appendix B lists situations where the price may not be fair value: a related party transaction, a transaction under duress, a different unit of account, and a different market from the principal (or most advantageous) market.
If the transaction price differs from fair value and another Ind AS requires or permits initial measurement at fair value, the difference is a day-one gain or loss. Ind AS 113 says to recognise it in profit or loss unless that Ind AS specifies otherwise. Some standards do specify otherwise, so always check the standard that applies to the item.
If the transaction price is fair value and you will later use a technique with unobservable inputs, you calibrate the technique so that it gives the transaction price on day one. After that, the technique must reflect observable market data at each measurement date.
Key rules to remember
- Fair value definition
- Fair value = price received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants, at the measurement date
- This is an exit price. The transaction price is an entry price.
- Day-one gain or loss
- Day-one gain or loss = Fair value − Transaction price (for an asset acquired)
- For an asset, fair value above price paid is a gain. For a liability assumed, compare amount received with the fair value to transfer it. Recognise in profit or loss unless the applicable Ind AS says otherwise.
- Situations where price may not equal fair value
- Related parties; duress; different unit of account (including transaction costs in the price); different market
- These come from Appendix B (paragraph B4). They are examples of conditions, not a closed test.
- Transaction costs
- Fair value is not adjusted for transaction costs (paragraph 25)
- Account for transaction costs under other Ind AS. They are specific to the transaction, not a characteristic of the asset.
- Calibration
- At initial recognition: technique result = transaction price (when the price is fair value and unobservable inputs are used later)
- Paragraph 64.
How to solve Initial Recognition and Fair Value at Transaction Price questions
Use this sequence for any question on whether a price is fair value and where a difference goes.
- 1Identify the item and the Ind AS that governs its initial measurement. Check whether it requires or permits fair value at initial recognition.
- 2Note the transaction price: what was paid to acquire the asset or received to assume the liability.
- 3Test the Appendix B conditions: related parties, duress or financial difficulty, different unit of account, different market.
- 4If a condition applies, estimate fair value as an exit price from market evidence, valuation technique or evidence of market terms. Do not adjust it for transaction costs.
- 5Compute the difference between fair value and transaction price.
- 6Recognise the difference in profit or loss unless the applicable Ind AS specifies otherwise. State the other treatment if the question's standard gives one.
- 7If the price is fair value and unobservable inputs will be used later, state that the technique is calibrated to the price.
- 8Check disclosure: Level 2 and 3 techniques and inputs, and Level 3 reconciliation where recurring.
Quickest way: Four-question check
When to use it: Use in the MCQ section or when a written question gives little time.
- Is fair value required or permitted at initial recognition by the governing Ind AS? If not, there is no Ind AS 113 day-one issue.
- Is there a related party, duress, bundled elements or a different market? If none, the price is usually fair value.
- If yes, compute fair value minus price.
- Default answer: the difference goes to profit or loss, unless the specific Ind AS says otherwise.
Common mistakes in Initial Recognition and Fair Value at Transaction Price
Assuming transaction price always equals fair value.
In many everyday purchases the two are equal, so students generalise.
Fix: Always run the Appendix B checks. Paragraph 58 says only that in many cases they are equal.
Deducting transaction costs from fair value.
Students think net proceeds are the value.
Fix: Paragraph 25 says the price in the principal market is not adjusted for transaction costs. Account for the costs under other Ind AS.
Treating a related party price as always unreliable.
Students remember that related party prices may not be fair value.
Fix: The price may be used as an input if the entity has evidence the transaction was at market terms.
Taking the day-one difference to equity or deferring it automatically.
Students carry over rules from other frameworks.
Fix: Paragraph 60 says profit or loss, unless the Ind AS that applies specifies otherwise. Check that standard first.
Confusing entry price with exit price.
Both are called price, and both appear in the same transaction.
Fix: Write the labels: transaction price is entry, fair value is exit. Then compare.
Worked examples
Example 1
Aarav Ltd buys an unquoted investment for ₹10,00,000 from its promoter-director at the promoter's asking price. Independent market evidence shows its fair value at the date is ₹8,50,000. Assume the investment is a financial asset to be measured initially at fair value and the applicable Ind AS has no special rule for the difference. How should Aarav Ltd treat the difference?
Show the solution
- The transaction is between related parties, so the price may not be fair value (Appendix B, paragraph B4(a)).
- The entity has no evidence that the deal was at market terms. Independent evidence gives a fair value of ₹8,50,000.
- Difference = Fair value − Price paid = ₹8,50,000 − ₹10,00,000 = −₹1,50,000, a day-one loss.
- Paragraph 60 requires the loss to go to profit or loss unless the applicable Ind AS says otherwise. Here it has no special rule.
Answer: Recognise the investment at its fair value of ₹8,50,000 and charge the day-one loss of ₹1,50,000 to profit or loss.
Example 2
Bharat Ltd buys machinery for ₹40,00,000, which includes ₹1,20,000 of transaction costs. The exit price for the machinery in the principal market is ₹38,80,000. Explain how Ind AS 113 treats the transaction costs when measuring fair value, and state fair value.
Show the solution
- Fair value is the exit price in the principal market: ₹38,80,000.
- Paragraph 25 says the market price is not adjusted for transaction costs. So fair value stays ₹38,80,000 with no deduction or addition.
- Transaction costs are specific to the transaction and are accounted for under other Ind AS.
- The price includes transaction costs, so its unit of account differs from that of the asset measured at fair value (paragraph B4(c)). This is why the price and fair value can differ.
Answer: Fair value is ₹38,80,000. The ₹1,20,000 of transaction costs is not deducted from it. Account for the costs under the applicable Ind AS.
Exam tips
- Quote paragraph 60 for the treatment: profit or loss unless the specific Ind AS says otherwise. Add the carve-out phrase to earn the mark.
- Name the Appendix B condition in the scenario: related party, duress, unit of account or market. Examiners usually hide one in the case facts.
- In MCQs, watch for options saying the price is always fair value, or that the difference is always deferred. Both overstate the rule.
- In written answers, show the calculation as fair value minus transaction price with the sign explained as gain or loss.
Practice questions from Fair Value Measurement (Ind AS 113)
- Kaveri Textiles holds a machine. On 31 March, a market participant would pay Rs 40 lakh to buy it in an orderly transaction. Kaveri paid Rs …
- Under Ind AS 113, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly t…
- Under Ind AS 113, fair value is best described as:
- Under Ind AS 113, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction …
- Under the definition of fair value in Ind AS 113, the price for a liability is measured as the price that would be:
Initial Recognition and Fair Value at Transaction Price in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Initial Recognition and Fair Value at Transaction Price: frequently asked questions
When does transaction price equal fair value at initial recognition?
Often, but not always. Paragraph 58 gives the example of buying an asset in the market in which it would be sold. You must still check the factors in Appendix B before relying on it.
Where is a day-one gain or loss recognised under Ind AS 113?
In profit or loss, unless the Ind AS that requires or permits fair value at initial recognition specifies otherwise. Check that standard for any different treatment.
Can a related party transaction price be used as fair value?
Not automatically. It may be used as an input to a fair value measurement if the entity has evidence the transaction was at market terms.
Do transaction costs change fair value?
No. Fair value is not adjusted for transaction costs. They are accounted for under other Ind AS because they depend on how you enter the transaction.