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

Market, Cost and Income Approaches under Ind AS 113

Updated 11 October 2026 · Fact-checked

Ind AS 113 names three valuation techniques: the market approach (prices of identical or comparable items), the cost approach (current replacement cost adjusted for obsolescence) and the income approach (future amounts discounted to a present value). Pick the technique that fits the asset and the available inputs, use more than one where suitable, and choose the point in the range most representative of fair value.

Understand Valuation Techniques: Market, Cost and Income Approaches

Fair value is an exit price. The objective of any valuation technique is to estimate the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date, under current market conditions (para 62). So every technique is only a route to that one price.

Ina AS 113 describes three widely used approaches. You may use techniques consistent with one or more of them.

Market approach: uses prices and other relevant information from market transactions involving identical or comparable assets, liabilities or a group such as a business. It often uses market multiples derived from comparables. Choosing the multiple within a range needs judgement (B6).
Cost approach: reflects the amount required currently to replace the service capacity of an asset, often called current replacement cost (B8). A buyer would not pay more than it costs to replace that capacity. So the price is the cost of a substitute asset of comparable utility, adjusted for obsolescence (B9).
Income approach: converts future amounts, such as cash flows or income and expenses, to a single current (discounted) amount, based on current market expectations about those amounts. Examples are present value techniques, option pricing models such as Black-Scholes-Merton or binomial, and the multi-period excess earnings method for some intangibles (B11).

Obsolescence in the cost approach covers physical deterioration, functional (technological) obsolescence and economic (external) obsolescence. It is broader than accounting depreciation, which allocates historical cost, or tax depreciation, which uses specified lives (B9). This is why you cannot simply use the book depreciation figure.

One technique may be enough, for example quoted prices in an active market for identical assets. Sometimes several are appropriate, for example when valuing a cash-generating unit. Then you evaluate the results and the reasonableness of the range, and fair value is the point in the range most representative of fair value in the circumstances (para 63).

Two further rules matter. If the transaction price is fair value at initial recognition and you will later use a technique with unobservable inputs, calibrate it so the result at initial recognition equals the transaction price (para 64). Techniques must be applied consistently, but you may change a technique or its weighting if the change gives an equally or more representative measurement (para 65).

Key rules to remember

Objective of valuation techniques: Fair value = price in an orderly transaction between market participants at the measurement date, under current market conditions; Para 62. All three approaches aim at this exit price.
Cost approach (replacement cost): Fair value ≈ Current replacement cost of a substitute asset of comparable utility − Obsolescence (physical + functional + economic); Paras B8 and B9. Obsolescence is broader than book or tax depreciation.
Income approach (present value): Fair value = Σ [Expected cash flow in year t ÷ (1 + r)^t]; Converts future amounts to one discounted amount (Appendix A, B11). Use market participant expectations and a market-based rate.
Market approach (multiple): Fair value = Relevant metric of the subject × Selected multiple from comparables; B6. Selecting the multiple within the range needs judgement and adjustment for differences.
Multiple techniques: Fair value = point within the range of indications most representative of fair value; Para 63 and B40. Consider the reasonableness of the range. A wide range signals further analysis is needed.
Calibration: Technique result at initial recognition = Transaction price (where the transaction price is fair value); Para 64. Applies when unobservable inputs will be used in later periods.

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

Use this sequence for any question on valuation techniques under Ind AS 113.

1Identify the asset, liability or business and the measurement date. State that fair value is an exit price between market participants.
2Check what data exists. Quoted prices or comparable transactions point to the market approach. A replaceable physical asset points to the cost approach. Reliable forecast cash flows point to the income approach.
3Choose one or more techniques and justify the choice. A single technique suits quoted prices in an active market for identical items. Several suit a cash-generating unit.
4Apply each technique. For cost, take replacement cost and deduct all obsolescence. For income, discount market participant cash flows. For market, apply a selected multiple.
5If the transaction price is fair value and unobservable inputs will be used later, calibrate the technique so it reproduces the transaction price at initial recognition.
6If you have several results, assess the reasonableness of the range and pick the most representative point. Do not just average blindly unless the facts support it.
7Check consistency with earlier periods. A change is allowed only if it is equally or more representative, for example new information or changed market conditions.
8State the conclusion clearly with the fair value figure and the reason.

Quickest way: Match the data to the approach

When to use it: Use in MCQs and in the first lines of a descriptive answer, when you must pick or justify a technique quickly.

Prices of identical or comparable items given: market approach.
Cost to rebuild or replace given, with age or technology data: cost approach, then deduct obsolescence.
Future cash flows and a discount rate given: income approach.
More than one dataset given: use multiple techniques and select the most representative point in the range.
Unobservable inputs and a known transaction price: calibrate first.

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

Treating the cost approach as historical cost less book depreciation.
The word cost suggests the accounting records.
Fix: Use current replacement cost of a substitute with comparable utility, then deduct physical, functional and economic obsolescence.
Deducting only physical wear when computing replacement-cost-based fair value.
Students link obsolescence to age alone.
Fix: Check the question for technology change (functional) and falling demand or external factors (economic) and deduct those too.
Taking a simple average of results from different techniques.
Averaging feels neutral and easy.
Fix: Evaluate the reasonableness of the range and choose the point most representative of fair value. Weight on the basis of reliability of inputs.
Using entity-specific cash flows or rates in the income approach.
Students use the company's own budget directly.
Fix: The income approach reflects current market expectations. Use assumptions market participants would use.
Saying a change in valuation technique is never allowed.
The consistency rule is remembered but not its exception.
Fix: State that techniques are applied consistently, but a change is appropriate if it is equally or more representative, for example new markets, new information or changed market conditions.
Forgetting calibration when unobservable inputs are used.
Calibration is treated as a minor detail.
Fix: Mention that the technique must reproduce the transaction price at initial recognition when that price is fair value, and must reflect observable market data afterwards.

Worked examples

Example 1

Bharat Engineering Ltd holds a machine whose fair value must be measured. A new equivalent machine costs ₹80,00,000 today. Physical deterioration is assessed at ₹16,00,000, functional obsolescence at ₹6,00,000 and economic obsolescence at ₹3,00,000. Which approach applies and what is the fair value?

Show the solution

The asset is a tangible asset used with other assets, and replacement cost data is available. The cost approach (current replacement cost method) is suitable (B9).
Start with the replacement cost of a substitute of comparable utility: ₹80,00,000.
Total obsolescence = ₹16,00,000 + ₹6,00,000 + ₹3,00,000 = ₹25,00,000.
Fair value = ₹80,00,000 − ₹25,00,000 = ₹55,00,000.
Book depreciation is not used because obsolescence is broader than depreciation for reporting or tax.

Answer: Cost approach; fair value = ₹55,00,000.

Example 2

Kaveri Pharma Ltd values an intangible using the income approach. Market participants would expect net cash flows of ₹10,00,000 at the end of Year 1 and ₹12,10,000 at the end of Year 2, and nothing after. The market-based discount rate is 10%. Compute fair value and state what must be done if the market approach indicates ₹19,00,000 and the cost approach is not relevant.

Show the solution

Present value of Year 1 = 10,00,000 ÷ 1.10 = ₹9,09,091 (approx).
Present value of Year 2 = 12,10,000 ÷ (1.10)² = 12,10,000 ÷ 1.21 = ₹10,00,000.
Income approach value = ₹9,09,091 + ₹10,00,000 = ₹19,09,091 (approx).
Two techniques give ₹19,09,091 and ₹19,00,000. The range is narrow, so it is reasonable.
Under para 63, fair value is the point within the range most representative of fair value. A figure within ₹19,00,000 to ₹19,09,091 is acceptable, weighted towards the technique with more reliable inputs.

Answer: Income approach value ≈ ₹19,09,091. Fair value is the most representative point in the range of ₹19,00,000 to ₹19,09,091.

Exam tips

In theory questions, define each approach in one line using the standard's wording, then link it to an example asset.
For the cost approach, always show the obsolescence deduction by type. Marks are usually split across these components.
In case-scenario MCQs, look for clue words: comparable transactions, replacement cost, discounted cash flows.
When a question mentions several techniques, write the range reasonableness step. Examiners reward it.
Mention calibration and consistency in any question that talks about unobservable inputs or a change in technique.

Practice questions from Fair Value Measurement (Ind AS 113)

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 are the three valuation approaches in Ind AS 113?

They are the market approach, the cost approach and the income approach. You use techniques consistent with one or more of them to estimate fair value. The choice depends on the asset and the data available.

Is depreciated replacement cost the same as book value?

No. The cost approach starts with current replacement cost and deducts obsolescence, which covers physical, functional and economic factors. Book value is historical cost less depreciation, which is an allocation of cost.

Can I use more than one valuation technique?

Yes. Multiple techniques are appropriate in some cases, such as valuing a cash-generating unit. You evaluate the range of results for reasonableness and select the point most representative of fair value.

When can a company change its valuation technique?

Techniques are applied consistently. A change is appropriate if it gives a measurement equally or more representative of fair value, for example when new markets develop, new information becomes available or market conditions change.