Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities

Concept and Standards of Value in Valuation

Updated 11 October 2026 · Fact-checked

Value is an estimate of worth for a stated purpose, date and set of assumptions. Price is what was actually paid. The standard of value says which kind of value you measure, such as fair market value or investment value. The premise says how the asset is used, going concern or liquidation. Fix these first, then choose the method.

Understand Concept and Standards of Value

Start with a simple point. Value is an opinion of worth. Price is a fact: the amount a buyer and seller actually exchanged. A house may be valued at ₹80,00,000 but sold at ₹75,00,000 because the seller was in a hurry. The value did not change. The price did.

Value is never one number for all cases. It depends on who is asking, why, and on what date. So every valuation must state its purpose, the valuation date, the standard of value and the premise of value. Without these, two valuers can give different numbers and both can be right.

The standard of value is the type of value being measured. Common standards are:

Fair market value: the price between a hypothetical willing buyer and willing seller, both informed and neither under compulsion.
Fair value: under Ind AS 113, the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price.
Investment value: worth to a particular investor, based on that investor's own needs, synergies and required return.
Intrinsic value: worth based on the fundamentals of the asset, such as the present value of its cash flows.

The premise of value is the assumption about use. Going concern assumes the business continues. Liquidation assumes the assets are sold off, either in an orderly way with reasonable time or in a forced sale with little time. A related premise for assets is highest and best use, meaning the use that is physically possible, legally allowed and financially feasible and gives the highest value.

Valuation of assets and liabilities is done for many purposes: financial reporting, mergers and demergers, sale or purchase, insolvency, taxation, insurance, security for loans and share issue. The purpose guides the standard. A forced-sale value suits a lender looking at security in default. Fair value suits financial reporting. Investment value suits an acquirer pricing in its own synergies.

Some principles hold across all cases. Value is determined as on a specific date. It depends on the purpose. It rests on expected future benefits and risk. Market evidence should be used where it is available. The valuer must be independent and must document assumptions.

Key rules to remember

Value vs price: Value = estimated worth for a purpose and date; Price = amount actually paid; Price can differ from value because of urgency, negotiation, or special buyer motives.
Fair market value test: FMV = price between hypothetical willing, informed buyer and seller, neither under compulsion; It is a hypothetical, not a real, transaction. Buyer-specific synergies are excluded.
Fair value (Ind AS 113): Fair value = exit price in an orderly transaction between market participants at the measurement date; It is market-based, not entity-specific. Transaction costs are not deducted from the fair value.
Investment value: Investment value = worth to a specific investor given its own requirements and synergies; It can be higher than fair market value. It is not a market-participant view.
Premise link: Going concern ≥ orderly liquidation ≥ forced liquidation (usual order of value); This is a general tendency for an asset, not a guaranteed rule. For a loss-making business, liquidation value can exceed going-concern value.

How to solve Concept and Standards of Value questions

For any question on concept and standards of value, follow this sequence so that you earn marks for reasoning, not only for the final term.

1Read the facts and identify the purpose of the valuation, such as sale, reporting, lending, insolvency or merger.
2Note the valuation date and who the user of the valuation is.
3Choose the standard of value that fits the purpose: fair market value, fair value, investment value or intrinsic value. Give one line on why.
4Choose the premise: going concern, orderly liquidation or forced liquidation. Check whether the business can earn more than its break-up worth.
5Separate value from price if the question gives a deal figure. State that price is a transaction fact and value is an estimate.
6If synergies or buyer-specific benefits are given, include them only under investment value and exclude them from fair market value.
7Apply the method or comparison asked for, using the standard and premise chosen.
8State the conclusion in one sentence and name the assumptions that drive it.

Quickest way: Purpose, standard, premise in 30 seconds

When to use it: Use for MCQs and for short theory parts where you must pick or distinguish standards of value.

Underline the purpose word in the question: reporting, sale, lender, buyer-specific, forced.
Match it: reporting means fair value; hypothetical market sale means fair market value; one named buyer with synergies means investment value; distress or deadline means liquidation premise.
Check the keyword 'exit price' (fair value) or 'hypothetical' (fair market value).
Eliminate options that mix buyer synergies into fair market value.
Write the answer with one reason.

Common mistakes in Concept and Standards of Value

Treating value and price as the same thing.
In daily speech both words mean the amount of money involved.
Fix: Write one line each: value is an estimate for a purpose and date; price is the amount actually paid. Show the gap if the question gives both.
Adding buyer-specific synergies to fair market value.
Students remember that synergies create value and add them everywhere.
Fix: Include synergies only under investment value. Fair market value uses a hypothetical buyer and excludes them.
Calling fair value and fair market value identical.
The names look alike and both refer to a market view.
Fix: Link fair value to Ind AS 113 and exit price at the measurement date. Link fair market value to a hypothetical willing buyer and seller. Mention the difference in context and usage.
Ignoring the premise of value.
Students jump to a method such as DCF or net assets without stating the assumption of use.
Fix: State going concern or liquidation first. If the business loses money, compare break-up value with going-concern value.
Assuming liquidation value is always below going-concern value.
It is true for most healthy businesses, so students treat it as a rule.
Fix: Say 'usually' and test it. A business earning below its cost of capital may be worth more sold in parts.
Giving a value without a date or purpose.
Students focus on the number and forget the framing.
Fix: Open your answer with the purpose, valuation date, standard and premise. Then give the figure.

Worked examples

Example 1

Rohan Industries Ltd is being sold. A valuer estimates the business at ₹12 crore on a going-concern basis. Meera Pharma Ltd, a particular buyer, expects cost savings from the deal that add ₹2 crore to the worth of the business to it. The deal is finally signed at ₹13 crore. Identify the fair market value, the investment value and the price, and comment on the gap.

Show the solution

Fair market value uses a hypothetical willing buyer with no buyer-specific synergies. So fair market value = ₹12 crore.
Investment value is the worth to Meera Pharma, including its synergies. Investment value = ₹12 crore + ₹2 crore = ₹14 crore.
Price is the actual transaction amount = ₹13 crore.
Compare: price is ₹1 crore above fair market value and ₹1 crore below investment value.
Meaning: Meera Pharma pays ₹1 crore more than the market-based value but keeps ₹1 crore of its expected synergy gain. Rohan gets ₹1 crore more than fair market value.

Answer: Fair market value ₹12 crore; investment value to Meera Pharma ₹14 crore; price ₹13 crore. Price lies between the two, and it is a negotiated fact, not a measure of value.

Example 2

Kaveri Textiles Ltd has a going-concern value of ₹9 crore. Its plant and other assets would fetch ₹10.5 crore in an orderly sale over six months and ₹8 crore in a forced sale within a month. Liabilities are ignored. Which premise gives the highest value, and what should a lender who holds security and fears default consider?

Show the solution

List the values: going concern ₹9 crore; orderly liquidation ₹10.5 crore; forced liquidation ₹8 crore.
The highest figure is ₹10.5 crore under orderly liquidation.
So the business is worth more broken up in an orderly way than run as it is, by ₹10.5 crore − ₹9 crore = ₹1.5 crore. This shows that going concern is not always the highest premise.
A lender in default risk needs the amount recoverable under time pressure. That points to forced liquidation value of ₹8 crore.
Conclude that the lender should rely on ₹8 crore if a quick recovery is likely, and on ₹10.5 crore only if it can wait for an orderly sale.

Answer: Orderly liquidation gives the highest value at ₹10.5 crore, which exceeds going-concern value by ₹1.5 crore. A lender facing quick recovery should use the forced-sale value of ₹8 crore.

Exam tips

Open every theory answer with purpose, date, standard and premise. Examiners reward this framing.
In MCQs, watch the keywords: 'exit price' means fair value, 'hypothetical' means fair market value, 'specific investor' means investment value.
When a question gives both a price and a valuation, comment on the gap. Do not treat them as the same number.
Be careful with absolute words such as 'always'. Liquidation value can exceed going-concern value for weak businesses.
For case scenarios, name the standard you chose and give one line of reasoning. A clear recommendation earns more than a long list of definitions.

Practice questions from Valuation of Assets and Liabilities

Concept and Standards of Value in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ProfessionalPrinciples and Premises of Value

Concept and Standards of Value: frequently asked questions

What is the difference between value and price in valuation?

Value is an estimate of worth for a stated purpose and date. Price is the amount actually paid in a deal. Price can be higher or lower than value because of negotiation, urgency or buyer motives.

What is the difference between fair value, fair market value and investment value?

Fair value under Ind AS 113 is an exit price between market participants at the measurement date. Fair market value is the price between a hypothetical willing buyer and seller. Investment value is worth to one specific investor, so it can include that investor's own synergies.

What are the premises of value?

The main premises are going concern and liquidation. Liquidation can be orderly, with reasonable time to sell, or forced, with little time. For assets, highest and best use is also an important premise.

Why must the purpose of valuation be stated?

The purpose decides the standard and premise, and so the number. A valuation for a lender, a buyer and financial reporting can legitimately differ. Stating the purpose makes the figure meaningful and defensible.